ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in
thousands, except par value per share)
|
|
|
|
|
|
|
|
|
|
|
August 26,
2017
|
|
|
May 27,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,607
|
|
|
$
|
62,329
|
|
Trade accounts receivable, net of allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$2,762 and $2,517 as of August 26, 2017 and May 27, 2017, respectively
|
|
|
98,984
|
|
|
|
98,222
|
|
Prepaid expenses and other current assets
|
|
|
5,520
|
|
|
|
4,395
|
|
Income taxes receivable
|
|
|
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
154,111
|
|
|
|
166,845
|
|
Goodwill
|
|
|
172,342
|
|
|
|
171,088
|
|
Property and equipment, net
|
|
|
22,856
|
|
|
|
23,354
|
|
Deferred income taxes
|
|
|
920
|
|
|
|
973
|
|
Other assets
|
|
|
1,846
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
352,075
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
14,501
|
|
|
$
|
14,102
|
|
Accrued salaries and related obligations
|
|
|
31,029
|
|
|
|
49,241
|
|
Other liabilities
|
|
|
9,043
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
54,573
|
|
|
|
71,771
|
|
Long-term debt
|
|
|
48,000
|
|
|
|
48,000
|
|
Deferred income taxes
|
|
|
991
|
|
|
|
1,280
|
|
Other long-term liabilities
|
|
|
4,719
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
108,283
|
|
|
|
125,986
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 70,000 shares authorized; 59,230 and 58,992 shares
issued, and 29,900 and 29,662 shares outstanding as of August 26, 2017 and May 27, 2017, respectively
|
|
|
592
|
|
|
|
590
|
|
Additional
paid-in
capital
|
|
|
403,227
|
|
|
|
398,828
|
|
Accumulated other comprehensive loss
|
|
|
(8,681
|
)
|
|
|
(11,396
|
)
|
Retained earnings
|
|
|
330,558
|
|
|
|
332,024
|
|
Treasury stock at cost, 29,330 shares as of both August 26, 2017 and May 27,
2017
|
|
|
(481,904
|
)
|
|
|
(481,904
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
243,792
|
|
|
|
238,142
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
352,075
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Revenue
|
|
$
|
141,186
|
|
|
$
|
143,389
|
|
Direct cost of services, primarily payroll and related taxes for professional services
employees
|
|
|
87,488
|
|
|
|
88,862
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
53,698
|
|
|
|
54,527
|
|
Selling, general and administrative expenses
|
|
|
47,415
|
|
|
|
43,614
|
|
Depreciation expense
|
|
|
940
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,343
|
|
|
|
10,119
|
|
Interest expense
|
|
|
337
|
|
|
|
|
|
Interest income
|
|
|
(28
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
5,034
|
|
|
|
10,189
|
|
Provision for income taxes
|
|
|
2,922
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,809
|
|
|
|
36,269
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,059
|
|
|
|
36,817
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
Foreign currency translation adjustment, net of tax
|
|
|
2,715
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
4,827
|
|
|
$
|
6,281
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury Stock
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Balances as of May 27, 2017
|
|
|
58,992
|
|
|
$
|
590
|
|
|
$
|
398,828
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(11,396
|
)
|
|
$
|
332,024
|
|
|
$
|
238,142
|
|
Exercise of stock options
|
|
|
44
|
|
|
|
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,612
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
194
|
|
|
|
2
|
|
|
|
2,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
Cash dividends declared ($0.12 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,578
|
)
|
|
|
(3,578
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,715
|
|
|
|
|
|
|
|
2,715
|
|
Net income for the three months ended August 26, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,112
|
|
|
|
2,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 26, 2017
|
|
|
59,230
|
|
|
$
|
592
|
|
|
$
|
403,227
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(8,681
|
)
|
|
$
|
330,558
|
|
|
$
|
243,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
940
|
|
|
|
794
|
|
Stock-based compensation expense
|
|
|
1,612
|
|
|
|
1,295
|
|
(Gain) loss on disposal of assets
|
|
|
(3
|
)
|
|
|
1
|
|
Bad debt expense
|
|
|
303
|
|
|
|
|
|
Deferred income taxes
|
|
|
(205
|
)
|
|
|
(37
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(30
|
)
|
|
|
1,511
|
|
Prepaid expenses and other current assets
|
|
|
(1,101
|
)
|
|
|
53
|
|
Income taxes
|
|
|
1,582
|
|
|
|
1,219
|
|
Other assets
|
|
|
45
|
|
|
|
120
|
|
Accounts payable and accrued expenses
|
|
|
36
|
|
|
|
(124
|
)
|
Accrued salaries and related obligations
|
|
|
(18,761
|
)
|
|
|
(18,244
|
)
|
Other liabilities
|
|
|
341
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,129
|
)
|
|
|
(7,055
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
|
|
|
|
14,973
|
|
Proceeds from sale of property and equipment
|
|
|
1
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(383
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(382
|
)
|
|
|
13,898
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
530
|
|
|
|
1,498
|
|
Proceeds from issuance of common stock under Employee Stock Purchase Plan
|
|
|
2,259
|
|
|
|
2,184
|
|
Purchase of common stock
|
|
|
|
|
|
|
(5,654
|
)
|
Cash dividends paid
|
|
|
(3,254
|
)
|
|
|
(3,623
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(465
|
)
|
|
|
(5,595
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
1,254
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(12,722
|
)
|
|
|
1,848
|
|
Cash and cash equivalents at beginning of period
|
|
|
62,329
|
|
|
|
91,089
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
49,607
|
|
|
$
|
92,937
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months
ended August 26, 2017 and August 27, 2016
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 provides agile consulting services to
its global client base utilizing experienced professionals in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply
chain management; and legal and regulatory. The Company has offices in the United States (U.S.), Asia, Australia, Canada, Europe and Mexico.
The Companys fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The first quarters of fiscal 2018 and 2017
each consisted of 13 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three months ended August 26, 2017 and August 27, 2016 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal 2017
year-end
balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted
accounting principles in the U.S. (GAAP) have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules or regulations; however, the Company believes the disclosures made are adequate to make the
information presented not misleading.
The results of operations for the interim periods presented are not necessarily indicative of the
results of operations to be expected for the fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 27, 2017, which are included in the Companys
Annual Report on Form
10-K
for the year then ended (File No.
0-32113).
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or
less to be cash and cash equivalents. The carrying amounts, if any, reflected in the consolidated balance sheets for cash, cash equivalents and short-term investments approximate their fair values due to the short maturities of these instruments.
Client Reimbursements of
Out-of-Pocket
Expenses
The Company recognizes all reimbursements received from clients for
out-of-pocket
expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $2.6 million and $2.4 million for the three months ended
August 26, 2017 and August 27, 2016, respectively.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are
recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.
Net Income Per Share Information
The Company presents both basic and diluted earnings per common share (EPS). Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock
options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost for future services that the Company has not yet recognized. Common equivalent
shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the
calculation.
8
The following table summarizes the calculation of net income per common share for the periods
indicated (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
29,809
|
|
|
|
36,269
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
29,809
|
|
|
|
36,269
|
|
Potentially dilutive shares
|
|
|
250
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
30,059
|
|
|
|
36,817
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
Dilutive
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
Anti-dilutive shares not included above
|
|
|
5,182
|
|
|
|
4,581
|
|
Stock-Based Compensation
The Company recognizes compensation expense for all share-based awards made to employees and directors, including employee stock options,
restricted stock grants and employee stock purchases made via the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock option awards vest over four years and restricted stock award vesting is determined on an individual grant basis under the Companys
2014 Performance Incentive Plan (the 2014 Plan). The Company determines the estimated value of stock option awards using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis
over the service period for options and restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 8
Stock-Based Compensation Plans
for further information on the 2014 Plan and stock-based compensation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates
and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Goodwill
The following table summarizes the activity in the Companys goodwill balance (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Goodwill, beginning of year
|
|
$
|
171,088
|
|
|
$
|
171,183
|
|
Impact of foreign currency exchange rate changes
|
|
|
1,254
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
172,342
|
|
|
$
|
171,259
|
|
|
|
|
|
|
|
|
|
|
4. Income Taxes
The Companys provision for income taxes was $2.9 million (effective tax rate of approximately 58%) and $4.6 million (effective
tax rate of approximately 45%) for the three months ended August 26, 2017 and August 27, 2016, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in
its international operations that span numerous tax jurisdictions.
9
The provision for income taxes in the three months ended August 26, 2017 and August 27,
2016 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for
losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate increased for the three months ended August 26, 2017 due to the lower profitability in the Companys domestic and foreign
operations, increasing the percentage impact of permanent differences between book and tax income.
The Company recognized a benefit of
approximately $387,000 and $457,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first quarter of fiscal 2018 and 2017, respectively.
5. Long-Term Debt
In October 2016,
the Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America, consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance
of standby letters of credit (Revolving Loan), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is
available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Companys obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by
essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option,
(i) a London Interbank Offered Rate (LIBOR) defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Companys
consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of Americas prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on
the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys consolidated leverage ratio. The Facility expires October 17, 2021.
The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Companys
and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make disposition of assets. In addition, the Facility requires us to comply with financial covenants
limiting the Companys total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants under the Facility as of August 26, 2017.
Upon the occurrence of an event of default under the Facility, the lender may cease making loans, terminate the Facility and declare all
amounts outstanding to be immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things,
non-payment
defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Companys borrowings on the Facility are $48.0 million as of August 26, 2017; the Company used the funds in fiscal 2017 to
fund a portion of the purchase price of its modified Dutch auction tender offer held in November 2016. In addition, the Company also has $1.0 million of outstanding letters of credit issued under the Facility. The Company has $41.0 million
remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of August 26, 2017. As of August 26, 2017, the interest rate on the Companys borrowings was 2.6% on one tranche of
$24.0 million based on a
3-month
LIBOR plus 1.25% and 2.5% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.25%.
6. Stockholders Equity
Stock Repurchase Program
In July 2015, the Companys board of directors approved a stock repurchase program (the July 2015 program), authorizing the
repurchase, at the discretion of the Companys senior executives, of the Companys common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market or in privately
negotiated transactions and may be made pursuant to a Rule
10b5-1
plan. The Company did not purchase any common stock on the open market during the three months ended August 26, 2017. As of
August 26, 2017, approximately $125.1 million remained available for future repurchases of the Companys common stock under the July 2015 program.
10
7. Supplemental Disclosure of Cash Flow Information
The following table presents information regarding income taxes paid, interest paid and
non-cash
investing and financing activities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Income taxes paid
|
|
$
|
1,575
|
|
|
$
|
3,441
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
332
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
Dividends declared, not paid
|
|
$
|
3,578
|
|
|
$
|
3,977
|
|
|
|
|
|
|
|
|
|
|
8. Stock-Based Compensation Plans
Stock Options and Restricted Stock
The maximum number of shares of the Companys common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals
the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the Prior Stock Plans) and
outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to
restricted stock, restricted stock unit and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that
date without having become vested. As of August 26, 2017, 2,881,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as
then-outstanding awards expire or terminate without having become vested or exercised, as applicable.
Awards under the 2014 Plan may
include, but are not limited to, stock options and restricted stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined
on an individual grant basis. Awards of restricted stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Companys policy is to
issue shares from its authorized shares upon the exercise of stock options.
The following table summarizes the stock option activity for
the three months ended August 26, 2017 (number of shares under option and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at May 27, 2017
|
|
|
7,164
|
|
|
$
|
15.08
|
|
|
|
5.56
|
|
|
$
|
1,696
|
|
Exercised
|
|
|
(44
|
)
|
|
$
|
12.16
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(58
|
)
|
|
$
|
14.58
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(55
|
)
|
|
$
|
21.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 26, 2017
|
|
|
7,007
|
|
|
$
|
15.06
|
|
|
|
5.30
|
|
|
$
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 26, 2017
|
|
|
5,000
|
|
|
$
|
15.21
|
|
|
|
4.07
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at August 26, 2017
|
|
|
6,860
|
|
|
$
|
15.07
|
|
|
|
5.23
|
|
|
$
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the
difference between the Companys closing stock price on the last trading day of the first quarter of fiscal 2018 and the exercise price multiplied by the number of shares that would have been received by the option holders if they had exercised
their in the money options on August 26, 2017. This amount will change based on changes in the fair market value of the Companys common stock. The total
pre-tax
intrinsic value related
to stock options exercised during the three months ended August 26, 2017 and August 27, 2016 was $73,000 and $369,000, respectively.
11
Stock-Based Compensation Expense
As of August 26, 2017, there was $5.9 million of total unrecognized compensation cost related to unvested employee stock options
granted. That cost is expected to be recognized over a weighted-average period of 28 months. Stock-based compensation expense included in selling, general and administrative expenses was $1.6 million and $1.3 million for the three
months ended August 26, 2017 and August 27, 2016, respectively; this consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the ESPP and restricted stock awards. Included in
stock-based compensation expense for the three months ended August 26, 2017 was
non-cash
stock-based compensation expense of approximately $140,000 related to the accelerated vesting of options previously
granted to a senior executive in connection with his departure from the Company. There were no capitalized share-based compensation costs during the three months ended August 26, 2017 or August 27, 2016.
The Company granted no shares of restricted stock during either the three months ended August 26, 2017 or August 27, 2016.
Stock-based compensation expense for existing restricted stock awards for the three months ended August 26, 2017 and August 27, 2016 was $341,000 and $155,000, respectively. As of August 26, 2017, there were 188,770 unvested
restricted shares, with approximately $2.3 million of remaining unrecognized compensation cost.
The Company recognizes compensation
expense for only the portion of stock options and restricted stock that is expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to
compensation expense may be required in future periods.
Employee Stock Purchase Plan
The ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Companys common stock at a price equal
to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPPs term expires October 16, 2024. A total of 5,900,000 shares of common stock may be issued under
the ESPP. The Company issued 194,000 and 359,000 shares of common stock pursuant to the ESPP during the three months ended August 26, 2017 and the year ended May 27, 2017, respectively. There were 724,000 shares of common stock
available for issuance under the ESPP as of August 26, 2017.
9. Segment Information and Enterprise Reporting
The Company discloses information regarding operations outside of the U.S. The Company operates as one segment. The accounting
policies for the domestic and international operations are the same as those described in Note 2
Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements included in the Companys
Annual Report on Form
10-K
for the fiscal year ended May 27, 2017. Summarized information regarding the Companys domestic and international operations is shown in the following table (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
Long-Lived Assets (1) as of
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 26,
2017
|
|
|
May 27,
2017
|
|
United States
|
|
$
|
113,125
|
|
|
$
|
115,640
|
|
|
$
|
173,161
|
|
|
$
|
173,781
|
|
The Netherlands
|
|
|
3,768
|
|
|
|
3,930
|
|
|
|
19,215
|
|
|
|
18,036
|
|
Other
|
|
|
24,293
|
|
|
|
23,819
|
|
|
|
2,822
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141,186
|
|
|
$
|
143,389
|
|
|
$
|
195,198
|
|
|
$
|
194,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Long-lived assets are comprised of goodwill and property and equipment.
10. Legal Proceedings
The Company is
involved in certain legal matters arising in the ordinary course of business. In the opinion of management, all such matters, if disposed of unfavorably, would not have a material adverse effect on the Companys financial position, cash flows
or results of operations.
12
11. Subsequent Event
On August 31, 2017, the Company completed the acquisition of
taskforce Management on Demand AG
(
taskforce
), a German-based professional services firm founded in 2007 that provides clients with senior interim management and project management expertise. The Company paid initial consideration of 6.0 million
(approximately $7.1 million) for all of the outstanding shares of
taskforce
in a combination of cash and restricted stock, and agreed to make additional
earn-out
payments based upon performance for
calendar years 2017, 2018 and 2019. For the twelve months ended December 31, 2016,
taskforce
revenues were approximately 12 million ($13.3 million). Results of operations of
taskforce
will be included in the
Companys consolidated statement of operations beginning in the quarter ending November 25, 2017.
12. Recent Accounting Pronouncements
Accounting Pronouncements Adopted During Current Fiscal Year
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
In March 2016, the
Financial Accounting Standards Board (FASB) issued ASU
2016-09.
The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax
accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period (record
forfeitures as they occur or estimate over the vesting period). The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 and was adopted by the Company
on a prospective basis effective May 28, 2017. The Company has elected to account for forfeitures based on previous guidance and will make an estimate of the number of awards that are expected to vest with a subsequent true up to actual
forfeitures. As a result of the adoption, excess income tax benefits and deficiencies from stock-based compensation are now recognized as a discrete item with the provision for income taxes in the Consolidated Statement of Operations rather than
additional
paid-in
capital in the Consolidated Balance Sheets and amounted to $29,000 for the three months ended August 26, 2017. In future quarters, when tranches of unexercised options expire, there
could be a potentially significant impact on the Companys income tax expense and income tax percentage.
Accounting
Pronouncements Pending Adoption
Compensation Stock Compensation (Topic 718): Scope of Modification Accounting.
In May 2017, the FASB issued ASU
2017-09,
which clarifies when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance,
modification accounting is only required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The new standard is
effective for financial statements for annual periods beginning after December 15, 2017 (for the Company, fiscal 2019). Early adoption is permitted. The guidance must be applied prospectively to awards modified on or after the adoption date.
The future impact of ASU
2017-09
will be dependent on the nature of future stock award modifications.
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
In January 2017, the FASB issued
ASU
2017-04,
which provides guidance regarding the goodwill impairment testing process. The new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill
impairment test that the carrying value of goodwill is greater than the fair value, an impairment for that difference must be recorded in the income statement, rather than proceeding to Step 2. The new standard is effective for financial statements
for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021). Early adoption is permitted for interim or annual goodwill impairments tests performed on testing dates after January 1, 2017. Based on the Companys
most recent annual goodwill impairment test completed in fiscal 2017, the Company expects no initial impact on adoption.
Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
In August 2016, the FASB issued ASU
2016-15,
which provides guidance designed to address diversity in how certain cash
receipts and cash payments are presented and classified in the statement of cash flows. Examples include cash payments for debt prepayment or debt extinguishment; contingent consideration payments made after a business combination; and proceeds from
the settlement of corporate-owned life insurance policies.
The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2017 (for the Company, fiscal
2019). Early adoption is permitted. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
Leases (Topic 842): Leases.
In February 2016, the FASB issued ASU
2016-02,
which amends the
existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and
interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU
2016-02
will have on its consolidated financial statements and believes that it will have a significant impact on the Companys reported balance sheet assets and liabilities. Under current accounting
guidelines, the Companys 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 the related obligation to
the lessor as a liability.
13
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 current 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, with early adoption permitted for fiscal 2018. The Company has elected to adopt the guidance beginning in fiscal 2019. The standard allows for either full
retrospective adoption, meaning the standard is applied to all periods presented, or cumulative effect adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in
March 2016, the FASB issued
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The
effective date for this ASU is the same as the effective date for
ASU 2014-09.
We intend to implement the standard using the modified retrospective approach, which recognizes the cumulative effect (if
any) of application recognized on that date. The Company is currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon our current analysis, does not expect a significant impact on processes, systems
or controls. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.
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 Companys results of operations, financial position or cash flows.
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and accompanying notes. This discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as anticipates, believes,
can, continue, could, estimates, expects, intends, may, plans, potential, predicts, remain, should, or
will or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors that could cause our actual results, levels
of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to carefully review the disclosures we make concerning risks, uncertainties
and other factors that may affect our business or operating results, including those identified in Part II, Item 1A. Risk Factors below and in our Annual Report on Form
10-K
for the year ended
May 27, 2017 (File
No. 0-32113).
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are
cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to reflect
events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to Resources Connection, RGP, Resources Global
Professionals, Resources Global, the Company, we, us, and our refer to Resources Connection, Inc. and its subsidiaries.
Overview
RGP is a multinational
consulting firm that provides agile consulting services to its global client base who are faced with disruption and business transformation issues. We bring functional competencies in the areas of accounting; finance; governance, risk and compliance
management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:
|
|
|
Finance and accounting process transformation and optimization; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence and integration; audit response;
implementation of new accounting standards such as the revenue recognition pronouncement and lease accounting standard; and remediation support
|
|
|
|
Information management services including program and project management; business and technology integration; data strategy, including governance, security and privacy; and business performance management (such as core
planning and consolidation systems)
|
|
|
|
Corporate advisory, strategic communications and restructuring services
|
|
|
|
Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of
2002 (Sarbanes); Enterprise Risk Management; internal controls management; and operation and IT audits
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14
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Supply chain management services including 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; compensation and incentive plan strategies and design; and optimization of human resources technology and operations
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Legal and regulatory services supporting commercial transactions; global compliance initiatives; and law department operations, business strategy and analytics
|
We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our
founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a
management-led
buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the
NASDAQ Global Select Market under the ticker symbol RECN. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.
We operated solely in the United States (U.S.) 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 August 26, 2017, we served clients from offices in 21 countries, including 24 international offices and 43 offices in the United States.
Our global footprint allows the Company to support the global initiatives of our multinational client base.
On April 5, 2017, the
Company announced implementation of three strategic initiatives to help improve its performance in cost containment and revenue generation. The initiatives include (1) reducing existing selling, general and administrative expenses by
approximately $7.0 million per year; (2) improving the sales culture and business development process and practices (requiring additional investment to accomplish our goals); and (3) redesigning the business model to enhance client
offerings.
The first initiative, which included a clear and actionable plan for reducing costs in low growth markets, will streamline the
Companys field and back office operations to better match current and anticipated demand in certain geographies. The implementation of this plan resulted in a reduction of existing overhead expenses and head count, and was completed at the end
of fiscal 2017.
The second initiative focuses on driving sales on an enterprise level to advance the account development, account
penetration and management activities in local markets, and will support a more sophisticated and robust sales culture. The initiative includes four major components: the implementation of Salesforce as a global Customer Relationship Management tool
and the alignment of the Companys sales process, the establishment of an enterprise-wide Business Development function, the creation of a Strategic Client Program dedicated to expanding service to and revenue from the Companys highest
level clients and the evolution of the Companys incentive compensation plans to prioritize growth. These transition activities will involve multi-step changes that are expected to be completed in the fourth quarter of fiscal 2018 or the first
quarter of fiscal 2019. Costs related to these activities will be incurred through the end of the initiative.
Finally, the Companys
decision to redesign its operating model is expected to enhance its client offerings, providing insightful business solutions as well as industry-leading project execution. For example, the Company will build deeper capabilities in project support
for M&A transactions and data governance, security & analytics solutions. The shift will also enable stronger inter-office collaboration and allow the Company to deliver improved solutions, expertise and talent to all of its clients
around the globe, regardless of their location.
Subsequent to the end of the first quarter of fiscal 2018, the Company announced the
acquisition of
taskforce Management on Demand AG
(
taskforce
), a German based professional services firm founded in 2007 that provides clients with senior interim management and project management expertise. The
Company paid initial consideration of 6.0 million (approximately $7.1 million) for all of the outstanding shares of
taskforce
in a combination of cash and restricted stock, and agreed to make additional
earn-out
payments based upon performance for calendar years 2017, 2018 and 2019. For the twelve months ended December 31, 2016,
taskforce
revenues were approximately 12 million ($13.3
million). Results of operations of
taskforce
will be included in the Companys consolidated statement of operations beginning in the quarter ending November 25, 2017.
Critical Accounting Policies
The
following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States
(GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
15
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 managements 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 27, 2017.
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 Companys 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
Companys 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 Companys future
financial results. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect
the Companys future financial results and financial condition.
Revenue recognition
We primarily charge our clients on
an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international
offices are billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually
non-refundable
revenue is recognized at the time our client completes the hiring process.
Stock-based compensation
Under our 2014 Performance Incentive Plan, officers, employees, and outside directors have received or
may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our Employee Stock Purchase Plan (the 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. We have adopted the Financial Accounting Standards Boards (FASB) pronouncement
Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting
in the current quarter and have elected to continue accounting for forfeitures as described historically; the pronouncement offered the opportunity to switch to accounting for
forfeitures as they occurred.
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 ($0.12 per share in the first
quarter of fiscal 2018 and $0.11 per share in each quarter of fiscal 2017) 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
Companys expected life of stock option grants is 5.6 years for non- officers and 8.1 years for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility
of the price of its common stock. The Company reviews the underlying assumptions related to stock-based compensation at least annually.
16
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.
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
141,186
|
|
|
$
|
143,389
|
|
Direct cost of services
|
|
|
87,488
|
|
|
|
88,862
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
53,698
|
|
|
|
54,527
|
|
Selling, general and administrative expenses
|
|
|
47,415
|
|
|
|
43,614
|
|
Depreciation expense
|
|
|
940
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,343
|
|
|
|
10,119
|
|
Interest expense
|
|
|
337
|
|
|
|
|
|
Interest income
|
|
|
(28
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
5,034
|
|
|
|
10,189
|
|
Provision for income taxes
|
|
|
2,922
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
|
|
|
|
|
|
|
|
|
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA
is defined as earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures
assist management in assessing our core operating performance and the Company believes they are also useful to investors as an alternative measure of our operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA
Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
2,112
|
|
|
$
|
5,638
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
940
|
|
|
|
794
|
|
Interest expense
|
|
|
337
|
|
|
|
|
|
Interest income
|
|
|
(28
|
)
|
|
|
(70
|
)
|
Provision for income taxes
|
|
|
2,922
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
6,283
|
|
|
|
10,913
|
|
Stock-based compensation expense
|
|
|
1,612
|
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
7,895
|
|
|
$
|
12,208
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
141,186
|
|
|
$
|
143,389
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin
|
|
|
5.6
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
17
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 companys financial performance that
(i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or
(ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are
non-GAAP
financial measures. We believe that
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, which are used by management to assess the core performance of our Company, provide useful information to our investors because they are alternative financial measures that investors can also use
to assess the core performance of the Company and compare it to the Companys peers. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in
isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for,
net income, earnings per share, cash flows or other measures of financial performance prepared in conformity with GAAP.
Further, EBITDA,
Adjusted EBITDA and Adjusted EBITDA Margin have the following limitations:
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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;
|
|
|
|
Stock-based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular
period; and
|
|
|
|
Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
|
Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures
calculated in accordance with GAAP.
Three Months Ended August 26, 2017 Compared to Three Months Ended August 27, 2016
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue decreased $2.2 million, or 1.5%, to $141.2 million for the three months ended August 26,
2017 from $143.4 million for the three months ended August 27, 2016. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Bill rates improved 1.7% (no difference in constant
currency) but hours worked decreased 3.6% between the two periods. The revenue decrease is primarily attributable to ineffective client development efforts in financial services in the first quarter of fiscal 2018 compared to the prior year first
quarter. The timing of efforts to improve our client penetration in the financial services industry is uncertain. As presented in the table below, revenue increased in the first quarter of fiscal 2018 compared to the same quarter of fiscal 2017 in
Europe but declined in North America and Asia Pacific.
The number of consultants on assignment as of August 26, 2017 was 2,495
compared to 2,570 consultants engaged as of August 27, 2016.
We operated 67 (24 abroad) offices as of August 26, 2017 and 68
(23 abroad) as of August 27, 2016. 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 Companys major geographies across the globe consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
%
Change
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
North America
|
|
$
|
115,937
|
|
|
$
|
117,976
|
|
|
|
(1.7
|
)%
|
|
|
82.1
|
%
|
|
|
82.3
|
%
|
Europe
|
|
|
15,149
|
|
|
|
14,108
|
|
|
|
7.4
|
%
|
|
|
10.7
|
|
|
|
9.8
|
|
Asia Pacific
|
|
|
10,100
|
|
|
|
11,305
|
|
|
|
(10.7
|
)%
|
|
|
7.2
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141,186
|
|
|
$
|
143,389
|
|
|
|
(1.5
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in
relation to the United States dollar (U.S. dollar). Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar
strengthens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the
currencies of our
non-United
States based operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2017 first quarter conversion rates, international revenues would have
been higher than reported under GAAP by approximately $0.2 million in the first quarter of fiscal 2018. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in
Europe by 7.1%, while decreasing in North America and Asia Pacific by 1.8% and 8.3%, respectively.
Direct Cost of
Services
.
Direct cost of services decreased $1.4 million, or 1.5%, to $87.5 million for the three months ended August 26, 2017 from $88.9 million for the three months ended August 27, 2016. The decrease in the
amount of direct cost of services between the periods was primarily attributable to a decrease of 3.6% in the number of hours worked discussed under the caption
Revenue
; the average pay rate was constant between the two quarters
and the impact of currency fluctuations was insignificant.
Direct cost of services as a percentage of revenue was 62.0% for both the
three months ended August 26, 2017 and August 27, 2016. Although the direct cost of services as a percentage of revenue was the same in both quarters, there were components that shifted; principally, the improvement in the bill rate/pay
rate ratio between the two quarters was offset by higher medical coverage expenses in the fiscal 2018 quarter.
Our target direct cost of
services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses
.
Selling, general
and administrative expense (S, G & A) as a percentage of revenue was 33.6% and 30.4% for the quarters ended August 26, 2017 and August 27, 2016, respectively. The higher current quarter percentage is partially the
result of reduced leverage from the lower revenue in the first quarter of fiscal 2018 combined with an increase in overall S, G & A spend in the current quarter. S, G & A increased to $47.4 million for the first quarter of
fiscal 2018 from $43.6 million for the same period in the prior year. The primary cause of the $3.8 million increase in S, G & A during the first quarter of fiscal 2018 was approximately $2.1 million related to severance
expenses ($1.4 million) and acquisition related costs ($0.7 million). The remaining increase of $1.7 million is related primarily to investments in the first quarter of 2018 as part of the Companys ongoing transformation in accordance
with its strategic initiatives to drive revenue growth and improve cost containment.
Management and administrative headcount decreased to
726 at the end of the first quarter of fiscal 2018 from 770 at the end of the first quarter of fiscal 2017.
Sequential
Operations
.
On a sequential quarter basis, fiscal 2018 first quarter revenues decreased approximately 5.0% (5.6% constant currency), from $148.6 million to $141.2 million. Comparing the two quarters, hours worked decreased
5.8% while average bill rates improved 0.8%. The decrease in revenue is partially attributable to the Memorial Day and July Fourth holidays which occurred in the first quarter of fiscal 2018 as well as the overall summer holiday season. There were
no compensated holidays in the fourth quarter of fiscal 2017. The Companys sequential revenue decreased in North America (5.1%), Europe (5.5%) and Asia Pacific (3.7%). On a constant currency basis, using the comparable fourth quarter fiscal
2017 conversion rates, sequential revenue decreased in North America (5.2%), Europe (10.0%) and Asia Pacific (4.6%).
Direct cost of
services as a percentage of revenue was 62.0% and 60.9% in the first quarter of fiscal 2018 and fourth quarter of fiscal 2017, respectively; the higher direct cost of services percentage in the first quarter is primarily the result of two
compensated holidays in the U.S., while the fourth quarter had no compensated holidays.
The ratio of S, G & A to revenue
increased from 32.6% for the quarter ended May 27, 2017 to 33.6% for the quarter ended August 26, 2017. The ratio changed unfavorably because decreased revenue in the first quarter lowered leverage. Total spend in the first quarter of
fiscal 2018 declined to $47.4 million from $48.4 million in the previous quarter. The $1.0 million decrease sequentially is a combination of factors. The first quarter of fiscal 2018 includes severance costs of $1.4 million; acquisition related
costs of $0.7 million; increased payroll taxes from the payment of fiscal 2017 related bonuses of $0.7 million; and increased healthcare costs of $0.3 million. These additional costs of $3.1 million were offset by approximately $1.7 million in
compensation and related benefit cost reductions realized from the actions taken in April 2017 to reduce headcount (the net of these items is an addition of $1.4 million in costs in the first quarter). The fourth quarter of fiscal 2017 included $2.4
million of restructuring costs related to the reduction in force in April 2017.
Depreciation Expense.
Depreciation expense
was $0.9 million for the three months ended August 26, 2017 compared to $0.8 million for the three months ended August 27, 2016.
Interest Expense (Income)
.
The Company entered into a $120 million secured revolving credit facility
(Facility) with Bank of America in October 2016. The Facility consists of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (Revolving
Loan), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is available for working capital and general
19
corporate purposes, including potential acquisitions and stock repurchases. Our obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by
essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option,
(i) a LIBOR rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Companys consolidated leverage ratio. The alternate
base rate is the highest of (i) Bank of Americas prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the
Facility at a rate of 0.15% to 0.25% depending upon on the Companys consolidated leverage ratio. The Facility expires October 17, 2021.
Total interest expense for the first quarter of fiscal 2018, including commitment fees, was approximately $337,000. The Company incurred no
interest expense during the first quarter of fiscal 2017. As of August 26, 2017, the interest rate on the Companys borrowings was 2.6% on one tranche of $24.0 million based on a
3-month
LIBOR
plus 1.25% and 2.5% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.25%.
The Companys interest income was $28,000 in the first quarter of fiscal 2018 compared to $70,000 for the same period of fiscal 2017.
Although rates have generally improved in the first quarter of fiscal 2018 compared to the same period in the prior year, interest income declined between the two periods as a result of the use of cash in the Dutch auction tender offer in November
2016, reducing amounts available for investment.
Income Taxes.
The Companys provision for income taxes was
$2.9 million (effective tax rate of approximately 58%) and $4.6 million (effective tax rate of approximately 45%) for the three months ended August 26, 2017 and August 27, 2016, respectively. The Company records tax expense based
upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes in both the first quarter of fiscal 2018 and 2017 resulted from taxes on income in the United States and
certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax
rates lower than the United States statutory rates. The effective tax rate increased for the three months ended August 26, 2017 due to the lower profitability in the Companys domestic and foreign operations, increasing the percentage
impact of permanent differences between book and tax income. 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 Companys effective
tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions and the limitation on the benefit for losses in jurisdictions in which a valuation allowance
for operating loss carryforwards has previously been established.
The Company 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 Companys provision for income taxes may fluctuate from these factors for the foreseeable
future. The Company recognized a benefit of approximately $387,000 and $457,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first quarter of fiscal 2018 and
2017, 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 disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying transactions under the ESPP cannot be predicted. The Company predominantly grants
nonqualified stock options to employees in the United States.
Comparability of Quarterly Results
.
Our quarterly
results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.Risk Factors. Due to these and other
factors, we believe that
quarter-to-quarter
comparisons of our results of operations may not be meaningful indicators of future performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP
purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement in global
economic conditions. As of August 26, 2017, the Company had $49.6 million of cash and cash equivalents.
In October 2016, we
entered into a $120 million Facility with Bank of America. The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Facility allows the Company to choose the
interest rate applicable to advances. See Note 5
Long-Term Debt
in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q
for
further information on the Facility. As of August 26, 2017, the Company had borrowings of approximately $48.0 million under the Facility and approximately $1.0 million of outstanding letters of credit for the benefit of third parties
related to operating leases and guarantees. As of August 26, 2017, the Company was in compliance with the financial covenants in the Facility.
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Operating Activities
Operating activities used $13.1 million in cash for the three months ended August 26, 2017 compared to $7.1 million for the
three months ended August 27, 2016. Cash used in operations in the first three months of fiscal 2018 resulted from net income of $2.1 million and
non-cash
items of $2.6 million, offset by net
unfavorable changes in operating assets and liabilities of $17.9 million. In the first three months of fiscal 2017, cash used in operations resulted from net income of $5.6 million and
non-cash
items
of $2.1 million, offset by net unfavorable changes in operating assets and liabilities of $14.7 million. The primary driver of the change in cash used in operations between the two quarters was the decrease in net income in fiscal 2018.
Operating activities are typically a use of cash in the first quarter each year because of the settlement of the Companys bonus obligations from the previous fiscal year in the first quarter.
Non-cash
items in both fiscal 2018 and fiscal 2017 include depreciation and stock-based compensation expense. These charges do not reflect an actual cash outflow from the Company.
Investing Activities
Net cash used in investing activities was $0.4 million for the first three months of fiscal 2018, compared to a source of cash of
$13.9 million in the comparable prior year period. The Company did not have money invested short-term during the first quarter of fiscal 2018, while redemptions of short-term investments were $15.0 million in the prior year period.
Purchases of property and equipment decreased approximately $0.7 million between the two periods as the Company had limited office relocation/refurbishment activities in the current year quarter.
Financing Activities
Net cash used in financing activities totaled $0.5 million and $5.6 million for the three months ended August 26, 2017 and
August 27, 2016, respectively. Net cash used in financing activities for the three months ended August 26, 2017 included dividends paid on the Companys common stock of $3.3 million, approximately $300,000 lower than in the
comparable period of the prior year. The Companys dividend rate was $0.12 per common share in the first quarter of fiscal 2018, compared to $0.11 per common share in the same quarter of fiscal 2017. However, the dividend paid in fiscal 2018
was lower because of the reduced number of outstanding shares of common stock after the Companys modified Dutch auction tender offer in November 2016. The Companys board of directors declared a quarterly cash dividend of $0.12 per common
share on July 27, 2017. The dividend of approximately $3.6 million, paid on September 21, 2017, is accrued in the Companys Consolidated Balance Sheet as of August 26, 2017. Proceeds from the exercise of employee stock
options and issuance of shares via the ESPP were approximately $0.9 million lower in the first three months of fiscal 2018 as compared to the comparable period of fiscal 2017. The Company did not purchase any of its common stock on the open
market during the current quarter, while it purchased approximately 375,000 shares for approximately $5.7 million in the prior year quarter.
Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in
office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe that our current cash, ongoing cash flows from our operations and funding available
under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to
sell additional equity securities or to increase our use of our Facility. In addition, if we decide to do additional share repurchases, we may fund these through existing cash balances or use of our Facility. The sale of additional equity securities
or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional
financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our operations, market position and competitiveness.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 12
Recent Accounting Pronouncements
in the Notes
to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
Off-Balance
Sheet Arrangements
The Company has no
off-balance
sheet arrangements.
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