NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and its Business
Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. The Company’s operating entities provide services primarily under the name Resources Global Professionals (“RGP” or the “Company”). RGP is a global consulting firm that enables rapid business outcomes by bringing together the right people to create transformative change. As a human capital partner for our clients, the Company specialize
s
in solving today’s most pressing business problems across the enterprise in the areas of Business Transformation, Governance, Risk and Compliance and Technology and Digital Innovation. The Company has offices in the United States (“U.S.”), Asia, Australia, Canada, Europe and Mexico.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2019, 2018 and 2017 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks (which next occurs for fiscal 2020), the first three quarters consist of 13 weeks each and the fourth quarter consists of 14 weeks.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements of the Company (“financial statements”) have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Effective May 27, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”), using the modified retrospective method, which allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous accounting
guidance
. The adoption of ASC 606 did not have a significant impact on revenue recognition; therefore, the Company did not have an opening retained earnings adjustment for the fiscal year ended May 25, 2019.
Revenues are recognized when control of the promised service is transferred to the Company’s clients, in an amount that reflects the consideration expected in exchange for the services. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to
taxing
authorities. Revenues from contracts are recognized over time, based on hours worked by the Company’s professionals. The performance of the agreed-to service over time is the single performance obligation for revenues. Certain clients may receive discounts (for example, volume discounts or rebates) to the amounts billed. These discounts or rebates are considered variable consideration. Management evaluates the facts and circumstances of each contract and client relationship to estimate the variable consideration assessing the most likely amount to recognize and considering management’s expectation of the volume of services to be provided over the applicable period. Rebates are the largest component of variable consideration and are estimated using the most likely amount method prescribed by ASC 606, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not occur in subsequent periods.
On a limited basis, the Company may have fixed-price contracts, for which revenues are recognized over time using the input method based on time incurred as a proportion of estimated total time. Time incurred represents work performed, which corresponds with, and therefore best depicts, the transfer of control to the client. Management uses significant judgments when estimating the total hours expected to complete the
contract
performance obligation. It is possible that updated estimates for consulting engagements may vary from initial estimates with such updates being recognized in the period of determination. Depending on the timing of billings and services rendered, the Company accrues or defers revenue as appropriate.
The Company recognizes revenues on a gross basis as it acts as a principal for primarily all of its revenue transactions. The Company has concluded that gross reporting is appropriate because the Company a) has the risk of identifying and hiring qualified consultants; b) has the discretion to select the consultants and establish the price and responsibilities for services to be provided; and c) bears the risk for services provided that are not fully paid for by clients. 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
$12.3
million,
$11.8
million and
$10.1
million for the years ended May 25, 2019, May 26, 2018 and May 27, 2017, respectively.
The Company’s clients are contractually obligated to pay the Company for all hours billed. We invoice the majority of our clients on a weekly basis or, in certain circumstances, on a monthly basis, in accordance with our typical arrangement of payment due within 30 days. To a much lesser extent, the Company also earns revenue if one of its consultants is hired by, or if the Company places an outside candidate with, its client. Conversion fees or permanent placement fees are recognized when one of the Company’s professionals, or a candidate identified by the Company, accepts an offer of permanent employment from a client and all requisite terms of the agreement have been met. Such conversion fees or permanent placement fees are recognized when the performance obligation is considered complete, which the Company considers a) when the consultant or candidate accepts the position; b) the consultant or candidate has notified either RGP or their current employer of their decision; and c) the start date is within the Company’s current quarter. Conversion fees were
0.5%
,
0.4%
and
0.5%
of revenue for the years ended May 25, 2019, May 26, 2018 and May 27, 2017, respectively. Permanent placement fees were
0.6%
,
0.3%
and
0.1%
of revenue for the years ended May 25, 2019, May 26, 2018 and May 27, 2017, respectively.
The Company’s contracts generally have termination for convenience provisions and do not have termination penalties. While our clients are contractually obligated to pay the Company for all hours billed, the Company does not have long-term agreements with its clients for the provision of
services
and the Company’s clients may terminate engagements at any time. All costs of compensating the Company’s professionals are the responsibility of the Company and are included in direct cost of services.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at current exchange rates, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are recorded as a component of comprehensive income or loss within stockholders’ equity. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Per Share Information
The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock options. Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and are excluded from the calculation.
The following table summarizes the calculation of net income per share for the years ended May 25, 2019, May 26, 2018 and May 27, 2017 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
31,470
|
|
$
|
18,826
|
|
$
|
18,651
|
Basic:
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
31,596
|
|
|
30,741
|
|
|
32,851
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
31,596
|
|
|
30,741
|
|
|
32,851
|
Potentially dilutive shares
|
|
|
611
|
|
|
469
|
|
|
620
|
Total dilutive shares
|
|
|
32,207
|
|
|
31,210
|
|
|
33,471
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
|
$
|
0.61
|
|
$
|
0.57
|
Dilutive
|
|
$
|
0.98
|
|
$
|
0.60
|
|
$
|
0.56
|
Anti-dilutive shares not included above
|
|
|
3,316
|
|
|
4,619
|
|
|
4,582
|
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents approximate the fair values due to the short maturities of these instruments.
Financial Instruments
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 – Unobservable inputs.
The following table shows the Company’s financial instruments that are measured and recorded in the consolidated financial statements at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 25, 2019
|
|
May 26, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
-
|
$
|
5,981
|
$
|
-
|
|
$
|
-
|
$
|
-
|
$
|
-
|
Total assets
|
$
|
-
|
$
|
5,981
|
$
|
-
|
|
$
|
-
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
$
|
-
|
$
|
-
|
$
|
2,195
|
|
$
|
-
|
$
|
-
|
$
|
4,289
|
Total liabilities
|
$
|
-
|
$
|
-
|
$
|
2,195
|
|
$
|
-
|
$
|
-
|
$
|
4,289
|
The Company’s short-term investments had original contractual maturities of between three months and one year and are considered “held-to-maturity” securities. The Company had no investments with a maturity in excess of one year as of the end of either fiscal year 2019 or 2018. The Company’s investments in commercial paper are measured using quoted prices in markets that are not active (Level 2). There were no unrealized holding gains or losses as of May 25, 2019.
The contingent consideration liability in the table above is for estimated future contingent consideration payments related to the prior acquisition of
taskforce
. The fair value measurement of this liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability are the Company’s measures of the estimated payouts based on internally generated financial projections and discount rates. The fair value of this contingent consideration liability is reassessed on a quarterly basis by the Company using additional information as it becomes available, and any change in the fair value estimates are recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. See Note 3 – Acquisitions.
The
Company's
financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and long-term debt are carried at cost, which approximates their fair value because of the short
‑term maturity of these instruments or because their stated interest rates are indicative of market interest rates.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from its clients’ failure to make required payments for services rendered. Management estimates this allowance based upon knowledge of the financial condition of the Company’s clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. If the financial condition of the Company’s clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.
The following table summarizes the activity in our allowance for doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
Beginning
|
|
Charged to
|
|
Rate
|
|
(Write-offs)/
|
|
Ending
|
|
|
Balance
|
|
Operations
|
|
Changes
|
|
Recoveries
|
|
Balance
|
Years Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 27, 2017
|
|
$
|
2,994
|
|
$
|
458
|
|
$
|
(20)
|
|
$
|
(915)
|
|
$
|
2,517
|
May 26, 2018
|
|
$
|
2,517
|
|
$
|
826
|
|
$
|
12
|
|
$
|
(1,715)
|
|
$
|
1,640
|
May 25, 2019
|
|
$
|
1,640
|
|
$
|
1,540
|
|
$
|
-
|
|
$
|
(660)
|
|
$
|
2,520
|
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives:
|
|
Building
|
30
years
|
Furniture
|
5
to
10
years
|
Leasehold improvements
|
Lesser of useful life of asset or term of lease
|
Computer, equipment and software
|
3
to
5
years
|
Costs for normal repairs and maintenance are expensed to operations as incurred, while renewals and major refurbishments are capitalized.
Assessments of whether there has been a permanent impairment in the value of property and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred.
Goodwill and Intangible Assets
Goodwill is recorded at the time of an acquisition and is calculated as the difference between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Goodwill is not subject to amortization but the carrying value is tested for impairment on an annual basis in the fourth quarter of our fiscal year, or more frequently if
the Company
believe
s
indicators of impairment exist. Impairment evaluations involve management’s assessment of qualitative factors to determine whether it is more likely than not that goodwill is impaired. If management concludes from its assessment of qualitative factors that it is more likely than not that impairment exists, then a quantitative impairment test will be performed involving management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in these evaluations. For application of this methodology the Company determined that it operates as a single reporting unit resulting from the combination of its practice offices.
The Company’s
annual goodwill impairment analysis indicated that there was
no
related impairment for the fiscal years ended May 25, 2019, May 26, 2018, and May 27, 2017.
The Company’s identifiable intangible assets include customer contracts and relationships, tradenames, consultant list, and non-compete agreements. These assets are amortized on a straight-line basis over lives ranging from
three
to
ten
years.
See Note 4 —
Intangible Assets and Goodwill
for a further description of the Company’s intangible assets.
Stock-Based Compensation
The Company recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases made via the Company’s Employee Stock Purchase Plan (the “ESPP”), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock options vest over
four
years and restricted stock award vesting is determined on an individual grant basis under the Company’s 2014 Performance Incentive Plan (“2014 Plan”). The Company determines the estimated value of stock options using the Black-Scholes valuation model and the estimated value of restricted stock awards using the closing price of
the Company’s
common stock on the date of grant. The Company recognizes stock-based compensation expense on a straight-line basis over the service period for options that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 11 —
Stock-Based Compensation Plans
for further information on the 2014 Plan and stock-based compensation.
Income Taxes
The Company recognizes deferred income taxes for the estimated tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted During Fiscal Year
2019
Effective the beginning of fiscal year 2019 (May 27, 2018), the Company adopted ASC 606,
Revenue from Contracts with Customers
, using the modified retrospective method. The adoption of ASC 606 did not have a significant impact on the Company’ revenue recognition; therefore, the Company did not have an opening retained earnings adjustment for the year ended May 25, 2019. See Note 2—
Summary of Significant Accounting Policies
for additional information.
Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
In August 2018, the
Financial Accounting Standards Board (“
FASB
”)
issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). An entity in a hosting arrangement that is a service contract must determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs that cannot be capitalized include training costs, certain data conversion costs, costs incurred during preliminary project and post implementation stages. Costs that are subject to evaluation for potential capitalization are incurred during the application development stage. The guidance also specifies factors to consider when developing the period over which to amortize the capitalized costs once the arrangement is deployed for usage by the entity and elements to consider in analyzing potential impairment of the asset.
The guidance is effective for financial statements for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021) and for
interim
periods within those fiscal years. However, early adoption is permitted. The Company adopted this guidance prospectively in the first quarter of fiscal 2019 as the Company has an initiative involving a cloud computing arrangement. The initiative is now complete and the amount capitalized during fiscal 2019 was approximately $0.8 million and is accounted for in Other Assets in the Company’s Consolidated Balance Sheet.
Accounting Pronouncements Pending Adoption
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. ASU 2016-02 w
as
effective for the Company beginning May 26, 2019. The Company will adopt this standard utilizing the optional transition method by recognizing a cumulative-effect adjustment to the opening balance of retained earnings on the adoption date without retrospective application to comparative periods. The Company will elect the package of practical expedients permitted under the transition guidance
within
the new standard. The Company will also elect the practical expedient to keep leases with an initial term of 12 months or less off of the balance sheet.
While we are currently finalizing our implementation of new policies, processes and internal controls to comply with the new rules, we anticipate that the adoption of the new standard will result in the recognition of right of use assets and lease liabilities on our consolidated balance sheet of between $4
5
million and $50 million as of the beginning of the first quarter of fiscal 2020. The adoption of the new standard will not have a material impact on
the Company’s
consolidated statement of operations or consolidated statement of cash flows.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations, financial position or cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Acquisitions
During fiscal 2018, the Company completed
two
acquisitions. The first acquisition, completed August 31, 2017 (the second quarter of fiscal 2018), was of
taskforce
– Management on Demand AG
(“taskforce”)
, a German based professional services firm founded in 2007, that provided clients with senior interim management and project management expertise. Subsequent to the acquisition,
taskforce
continues to operate as a separate brand. The Company paid initial consideration of
€5.8
million (approximately
$6.9
million at the date of acquisition) in a combination of cash and restricted stock.
The following table summarizes the consideration for the acquisition of
taskforce
and the amounts of the identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration Transferred (in thousands, except share and per share amounts):
|
|
|
|
|
|
Cash
|
$
|
4,384
|
Working capital adjustment -receivable
|
|
(123)
|
Common stock -
226,628
shares @
$11.48
(closing price on acquisition date discounted for restriction on sale)
|
|
2,602
|
Estimated initial contingent consideration
|
|
6,514
|
Total
|
$
|
13,377
|
Recognized amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
974
|
Accounts receivable
|
|
1,930
|
Prepaid expenses and other current assets
|
|
45
|
Intangible assets
|
|
5,727
|
Property and equipment
|
|
39
|
Total identifiable assets
|
|
8,715
|
Accounts payable and accrued expenses
|
|
2,116
|
Accrued salaries and related obligations
|
|
16
|
Other current liabilities
|
|
140
|
Total liabilities assumed
|
|
2,272
|
Net identifiable assets acquired
|
|
6,443
|
Deferred tax liability
|
|
(1,815)
|
Goodwill
|
|
8,749
|
Net assets acquired
|
$
|
13,377
|
In addition, the purchase agreement for
taskforce
requires additional earn-out payments to be made based on performance in calendar years 2017, 2018 and 2019. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the occurrence of one or more future events are recorded as a discounted liability on the Company’s balance sheet. The Company was obligated to pay the sellers in Euros as follows: for calendar year 2017, Adjusted EBITDA times
6.1
times
20%
; and for both calendar years 2018 and 2019, Adjusted EBITDA times
6.1
times
15%
; (Adjusted EBITDA is calculated as defined in the purchase agreement). The payment for calendar year 2017 of
€2.1
million (approximately
$2.6
million) was made on March 28, 2018. The payment for calendar year 2018 of
€1.6
million (approximately
$1.9
million) was made on March 27, 2019. The Company estimated the fair value of the obligation to pay the remaining contingent consideration for calendar year 2019 based on a number of different projections of the estimated Adjusted EBITDA for the year. The Company recorded this future obligation using a discount rate of
approximately
11.0%
, representing the Company’s weighted average cost of capital. The current estimated fair value of the contractual obligation to pay the contingent consideration for calendar year
2019
totals
€2.0
million (approximately
$2.2
million based on the exchange rate on the last day of fiscal
2019) as of
May 25, 2019
. Each
reporting period, the Company will estimate changes in the fair value of contingent consideration and any change in fair value will be recognized in the Company’s Consolidated Statements of Operations. The estimate of fair value of contingent consideration requires very subjective assumptions to be made of various potential Adjusted EBITDA results and discount rates. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore could materially affect the Company’s future operating results. During the year ended May 25, 2019, the Company decreased the remaining estimated contingent consideration for calendar year 2019 by
€523,000
(
$590,000
) and also recognized accretion expense on the discounted liability. These amounts are included in S, G & A for the respective periods. Results of operations of
taskforce
are included in the Consolidated Statements of Operations from the date of acquisition.
The second acquisition occurred December 4, 2017 (the third quarter of fiscal 2018) when the Company acquired substantially all of the assets and assumed certain liabilities of Accretive Solutions, Inc. (“Accretive”). Accretive was a professional services firm that provided expertise in accounting and finance, enterprise governance, business technology and business transformation solutions to a wide variety of organizations in the U.S. and supported startups through its Countsy suite of back office services. The Company paid consideration of $20.0 million in cash and issued 1,072,000 shares of Resources Connection, Inc. common stock restricted for sale for four years; additional cash and shares of Company
common
stock will be due after settlement of working capital adjustments.
Further
, additional amounts may be paid to the sellers at the end of a certain period of time if there are no claims or may be used to satisfy any preacquisition claims in favor of the
buyers. As of the end of fiscal 2019, the amounts due based on initial estimates of the resolution of these items are
$0.1
million in cash and
108,000
in additional shares of common stock and are accrued as a liability on the balance sheet as of May 25, 2019.
The following table summarizes the consideration paid for Accretive and the amounts of the identified assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
|
Cash
|
$
|
20,047
|
Common stock -
1,072,474
shares @
$10.96
(closing price on acquisition date discounted for restriction on sale)
|
|
11,754
|
Total
|
$
|
31,801
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
Accounts receivable
|
$
|
11,360
|
Prepaid expenses and other current assets
|
|
1,084
|
Intangible assets
|
|
15,200
|
Property and equipment
|
|
979
|
Total identifiable assets
|
|
28,623
|
Accounts payable and accrued expenses
|
|
3,637
|
Accrued salaries and related obligations
|
|
4,562
|
Other current liabilities
|
|
148
|
Total liabilities assumed
|
|
8,347
|
Net identifiable assets acquired
|
|
20,276
|
Goodwill
|
|
11,525
|
Net assets acquired
|
$
|
31,801
|
4. Intangible Assets and Goodwill
The following table presents details of our intangible assets, estimated lives and related accumulated amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 25, 2019
|
|
As of May 26, 2018
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Gross
|
|
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and relationships (3-8 years)
|
$
|
14,495
|
|
$
|
(3,439)
|
|
$
|
11,056
|
|
$
|
14,565
|
|
$
|
(1,263)
|
|
$
|
13,302
|
|
Tradenames (
3-10
years)
|
|
4,407
|
|
|
(1,563)
|
|
|
2,844
|
|
|
4,481
|
|
|
(560)
|
|
|
3,921
|
|
Consultant list (
3
years)
|
|
783
|
|
|
(462)
|
|
|
321
|
|
|
815
|
|
|
(205)
|
|
|
610
|
|
Non-compete agreements (
3
years)
|
|
896
|
|
|
(528)
|
|
|
368
|
|
|
932
|
|
|
(234)
|
|
|
698
|
|
Total
|
$
|
20,581
|
|
$
|
(5,992)
|
|
$
|
14,589
|
|
$
|
20,793
|
|
$
|
(2,262)
|
|
$
|
18,531
|
|
The weighted-average useful lives of the customer contracts and relationships and other are
approximately
5.2
and
1.5
years, respectively.
The following table summarizes amortization expense for the years
stated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
3,799
|
|
$
|
2,298
|
|
$
|
-
|
The following table presents future estimated amortization expense based on existing intangible assets for the years presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
Expected amortization expense
|
|
$
|
3,770
|
|
$
|
2,484
|
|
$
|
1,778
|
|
$
|
1,778
|
|
$
|
1,778
|
The following table summarizes the activity in the Company’s goodwill balance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
May 25,
|
|
May 26,
|
|
2019
|
|
2018
|
Goodwill, beginning of year
|
$
|
191,950
|
|
$
|
171,088
|
Acquisitions-
taskforce
(see Note 3)
|
|
-
|
|
|
8,749
|
Acquisitions-Accretive
(see Note 3)
|
|
-
|
|
|
11,525
|
Impact of foreign currency exchange rate changes
|
|
(1,135)
|
|
|
588
|
Goodwill, end of period
|
$
|
190,815
|
|
$
|
191,950
|
5
.
Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
May 25, 2019
|
|
May 26, 2018
|
Building and land
|
|
$
|
14,227
|
|
$
|
14,198
|
Computers, equipment and software
|
|
|
20,042
|
|
|
18,965
|
Leasehold improvements
|
|
|
22,074
|
|
|
19,802
|
Furniture
|
|
|
11,260
|
|
|
10,427
|
|
|
|
67,603
|
|
|
63,392
|
Less accumulated depreciation and amortization
|
|
|
(40,971)
|
|
|
(40,979)
|
|
|
$
|
26,632
|
|
$
|
22,413
|
6
.
Long-Term Debt
The Company has a
$120
million secured revolving credit facility (“Facility”) with Bank of America, consisting of (i) a
$90
million revolving loan facility (“Revolving Loan”), which includes a
$5
million sublimit for the issuance of standby letters of credit, and (ii) a
$30
million reducing revolving loan facility (“Reducing Revolving Loan”), any amounts of which may not be reborrowed after being repaid.
The
Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Company’s obligations under the Facility are guaranteed by all of the Company’s domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) defined in the Facility plus a margin of
1.25%
or
1.50%
or (ii) an alternate base rate, plus margin of
0.25%
or
0.50%
with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus
0.50%
and (iii) the Eurodollar rate plus
1.0%
. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of
0.15%
to
0.25%
depending upon on the Company’s consolidated leverage ratio. The Facility expires
October 17, 2021
.
The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Company’s and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. In addition, the Facility requires the Company to comply with financial covenants limiting the Company’s total funded debt, minimum interest coverage ratio and maximum leverage ratio.
Upon the occurrence of an event of default under the Facility, the lender may cease making loans, terminate the Facility and declare all amounts outstanding to
be
immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Company’s borrowings on the Facility were
$43.0
million and $6
3
.0 million as of
May 25, 2019 and
May 26, 2018,
respectively.
In addition, the
Company
has
$1.3
million
and $1.0 million
of outstanding letters of credit issued under the Facility
as of
May 25, 2019 and May 26, 2018, respectively. There
was
$47.0
million
remaining to borrow under the Revolving Loan and
$30.0
million
remaining under the Reducing Revolving Loan as of
May 25, 2019
. As
of
May 25, 2019
, the interest
rates on the Company’s
borrowings
w
ere
4.1%
on
each of the three
tranche
s
of
the Company’s borrowings of
$24.0
million
, $10.0 million
and $
9
.0 million, respectively,
based on a
3
-month LIBOR plus
1.5%
.
Subsequent to year
end, on June 28, 2019, the Company made a $5.0 million principal payment on the Facility.
7
. Income Taxes
The following table represents the current and deferred income tax provision for federal
,
state
and foreign
income taxes attributable to operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,068
|
|
$
|
10,785
|
|
$
|
10,901
|
State
|
|
|
2,278
|
|
|
2,829
|
|
|
2,551
|
Foreign
|
|
|
2,690
|
|
|
(392)
|
|
|
1,472
|
|
|
|
10,036
|
|
|
13,222
|
|
|
14,924
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,890
|
|
|
(3,011)
|
|
|
259
|
State
|
|
|
619
|
|
|
367
|
|
|
62
|
Foreign
|
|
|
(46)
|
|
|
(515)
|
|
|
(123)
|
|
|
|
6,463
|
|
|
(3,159)
|
|
|
198
|
|
|
$
|
16,499
|
|
$
|
10,063
|
|
$
|
15,122
|
Income before provision for income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
|
$
|
41,828
|
|
$
|
26,774
|
|
$
|
32,390
|
Foreign
|
|
|
6,141
|
|
|
2,115
|
|
|
1,383
|
|
|
$
|
47,969
|
|
$
|
28,889
|
|
$
|
33,773
|
The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory tax rate
|
|
21.0
|
%
|
|
29.4
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
4.9
|
|
|
7.9
|
|
|
5.0
|
|
Non-U.S. rate adjustments
|
|
1.3
|
|
|
(0.8)
|
|
|
0.1
|
|
Stock-based compensation
|
|
2.8
|
|
|
4.5
|
|
|
0.7
|
|
Long-term net capital gains
|
|
(6.1)
|
|
|
10.1
|
|
|
-
|
|
Foreign tax credit
|
|
9.3
|
|
|
(16.5)
|
|
|
(0.1)
|
|
Valuation allowance
|
|
(2.8)
|
|
|
(4.3)
|
|
|
1.2
|
|
Global Intangible Low-Taxed Income ("GILTI")
|
|
1.1
|
|
|
-
|
|
|
-
|
|
Permanent items, primarily meals and entertainment
|
|
1.4
|
|
|
3.2
|
|
|
2.2
|
|
Deferred tax impact of U.S. federal rate changes
|
|
0.1
|
|
|
(2.8)
|
|
|
-
|
|
Deferred tax impact of foreign rate changes
|
|
1.2
|
|
|
3.9
|
|
|
0.5
|
|
Other, net
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Effective tax rate
|
|
34.4
|
%
|
|
34.8
|
%
|
|
44.8
|
%
|
The impact of state taxes, net of federal benefit, and foreign income taxed at other than U.S. rates fluctuates year over year due to the changes in the mix of operating income and losses amongst the various states and foreign jurisdictions in which the Company operates.
The components of the net deferred tax asset
(liability)
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
May 25,
|
|
May 26,
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,108
|
|
$
|
854
|
Accrued compensation
|
|
|
3,347
|
|
|
3,210
|
Accrued expenses
|
|
|
2,418
|
|
|
2,311
|
Stock options and restricted stock
|
|
|
5,541
|
|
|
7,326
|
Foreign tax credit
|
|
|
498
|
|
|
5,596
|
Net operating losses
|
|
|
14,489
|
|
|
15,563
|
Property and equipment
|
|
|
-
|
|
|
1,017
|
State taxes
|
|
|
208
|
|
|
138
|
Gross deferred tax asset
|
|
|
27,609
|
|
|
36,015
|
Valuation allowance
|
|
|
(13,190)
|
|
|
(15,298)
|
Gross deferred tax asset, net of valuation allowance
|
|
|
14,419
|
|
|
20,717
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property and equipment
|
|
|
(77)
|
|
|
-
|
Goodwill and intangibles
|
|
|
(17,991)
|
|
|
(17,867)
|
Net deferred tax asset (liability)
|
|
$
|
(3,649)
|
|
$
|
2,850
|
The Company
had a net income tax
receivable of
$1.0
million and income tax payable of
$3.3
million
as of
May 25, 2019
and
May 26, 2018
, respectively.
The tax benefit associated with the exercise of nonqualified stock options and the disqualifying dispositions by employees of incentive stock options, restricted stock awards and shares issued under the Company’s ESPP reduced income taxes payable by
$1.8
million
and
$1.1
million for the years ended
May 25, 2019
and
May 26, 2018, respectively
.
The Company has foreign net operating loss carryforwards of $6
3.5
million and foreign tax credit carryforwards of
$0.5
million. The foreign tax credits will expire beginning in fiscal 2023. The following table summarizes the net operating loss expiration periods.
|
|
|
Expiration Periods
|
Amount of Net Operating Losses
|
Fiscal Years Ending:
|
(in thousands)
|
2020
|
$
|
1,600
|
2021
|
|
4,200
|
2022
|
|
300
|
2023
|
|
300
|
2024
|
|
2,300
|
2025-2029
|
|
1,200
|
Unlimited
|
|
53,600
|
|
$
|
63,500
|
The following table summarizes the activity in our valuation allowance accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
Beginning
|
|
Charged to
|
|
Rate
|
|
Ending
|
|
|
Balance
|
|
Operations
|
|
Changes
|
|
Balance
|
Years Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 27, 2017
|
|
$
|
15,714
|
|
$
|
438
|
|
$
|
(181)
|
|
$
|
15,971
|
May 26, 2018
|
|
$
|
15,971
|
|
$
|
(1,181)
|
|
$
|
508
|
|
$
|
15,298
|
May 25, 2019
|
|
$
|
15,298
|
|
$
|
(1,440)
|
|
$
|
(668)
|
|
$
|
13,190
|
Realization of the deferred tax assets is dependent upon generating sufficient future taxable income. Management believes that it is more likely than not that all other remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies.
Deferred income taxes have not been provided on the undistributed earnings of approximately
$17.6
million from the Company’s foreign subsidiaries as of May 25, 2019 since these amounts are intended to be indefinitely reinvested in foreign operations. If the earnings of the Company’s foreign subsidiaries were to be distributed, management estimates that the income tax impact would
be immaterial as a result of
the
transition tax and federal dividends received deduction for foreign source earnings provided under
the
US
Tax Cuts and Jobs Act of 2017
.
The following table summarizes the activity related to the gross unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
|
2019
|
|
2018
|
Unrecognized tax benefits, beginning of year
|
|
$
|
42
|
|
$
|
42
|
Gross increases-tax positions in prior period
|
|
|
-
|
|
|
-
|
Gross decreases-tax positions in prior period
|
|
|
-
|
|
|
-
|
Gross increases-current period tax positions
|
|
|
-
|
|
|
42
|
Settlements
|
|
|
-
|
|
|
-
|
Lapse of statute of limitations
|
|
|
-
|
|
|
(42)
|
Unrecognized tax benefits, end of year
|
|
$
|
42
|
|
$
|
42
|
T
he Company’s total liability for unrecognized gross tax benefits
was
$42,000
as of both
May 25, 2019
and
May 26, 2018
, which, if ultimately recognized
,
would impact the effective tax rate in future periods. The unrecognized tax benefits include long-term liabilities of
$42,000
as of both
May 25, 2019
and
May 26, 2018
; none
of the unrecognized tax benefits are
short-term liabilities due to
the
closing
of the
statute of limitations.
The
Company’s major income tax jurisdiction is the U.S., with federal statute of limitations remaining open for fiscal 201
6
and thereafter. For states within the U.S. in which the Company does significant business, the Company remains subject to examination for fiscal 201
5
and thereafter. Major foreign jurisdictions in Europe remain open for fiscal years ended 201
4
and thereafter.
The Company continues to recognize interest expense and penalties related to income tax as a part of its provision for income taxes. During the current fiscal year, the Company did not accrue for any interest and penalties as a component of the liability for unrecognized tax benefits.
8
. Accrued Salaries and Related Obligations
Accrued salaries and related obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
May 25,
|
|
May 26,
|
|
|
2019
|
|
2018
|
Accrued salaries and related obligations
|
|
$
|
19,667
|
|
$
|
22,613
|
Accrued bonuses
|
|
|
20,645
|
|
|
18,506
|
Accrued vacation
|
|
|
18,316
|
|
|
17,299
|
|
|
$
|
58,628
|
|
$
|
58,418
|
9
. Concentrations of Credit Risk
The Company
currently
maintains cash
,
cash equivalent
s
and
short-term investments in commercial paper
.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables. However, concentrations of credit risk are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. The Company monitors its exposure to credit losses and maintains an allowance for anticipated losses. A significant change in the liquidity or financial position of one or more of the Company’s customers could result in an increase in the allowance for anticipated losses.
No
single customer accounted for more
than 10% of r
evenue for the years ended
May 25, 2019, May 26, 2018 and
May 27, 2017
.
10
. Stockholders’ Equity
The Company has
70,000,000
authorized shares of common stock with a
$0.01
par value. At
May 25, 2019
and
May 26, 2018
, there
were
31,
588,000
and
31,614,000
shares of common stock outstanding, respectively, all of which provide the holders with voting rights.
The Company has authorized for issuance
5,000,000
shares of preferred stock with a
$0.01
par value per share. The board of directors has the authority to issue preferred stock in one or more series and to determine the related rights and preferences.
No
shares of preferred stock were outstanding as of
May 25, 2019
and
May 26, 2018
.
Stock Repurchase Program
The Company’s board of directors has periodically approved a stock repurchase program authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s common stock for a designated aggregate dollar limit. The current program was authorized in July 2015 (the “July 2015 program”) and set an aggregate dollar limit not to exceed
$150
million. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan. During the years ended
May 25, 2019
and
May 26, 2018
, the Company purchased on the open market
approximately
1
.
8
million and
0.
3
million shares of its common stock, respectively, at an average price
of
$1
6
.
17
and
$15.9
5
per share, respectively, for approximately
$
29.9
million and
$
5
.
1
million, respectively. As of
May 25, 2019
, approximately
$
9
0.
1
million
remains available for future repurchases of
the Company’s
common stock under the July 2015 program.
Quarterly Dividend
Subject to approval each quarter by its
board of directors
, the Company
pays
a
regular
dividend. On April
1
8
, 201
9
, the board of directors declared a regular quarterly dividend of
$0.1
3
per share of
the Company’s
common stock. The dividend,
paid
on
June 1
3
, 201
9
, was accrued in the Consolidated Balance Sheet as of
May 25, 2019
for approximately
$
4.1
million. Continuation
of the quarterly dividend
is
at the discretion of the board of directors and depend
s
upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in
the Company’s
current credit agreements and other agreements, and other factors deemed relevant by the board of directors.
1
1
. Stock
-
Based Compensation Plans
2014 Performance Incentive Plan
On October 23, 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan replaced the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the “Prior Stock Plans”). The effective date of the 2014 Plan is September 3, 2014 and, unless terminated earlier by the
b
oard of
d
irectors, will terminate on September 2, 2024. Under the terms of the 2014 Plan, the Company’s board of directors or one or more committees appointed by the board of directors will administer the 2014 Plan. The board of directors has delegated general administrative authority for the 2014 Plan to the Compensation Committee of the board of directors.
The administrator of the 2014 Plan has broad authority to, among other things, select participants and determine the type(s) of award(s) that they are to receive, and determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award. Persons eligible to receive awards under the 2014 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, and certain consultants and advisors to the Company or any of its subsidiaries.
The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals the sum of:
(1)
2,400,000
shares, plus (2) the number of shares subject to stock options granted under the Prior Stock Plans and outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to restricted stock, restricted stock units and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without having become vested.
As of
May 2
5
, 201
9
,
1,59
5
,000
shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as then-outstanding awards expire or terminate without having become vested or exercised, as applicable.
The types of awards that may be granted under the 2014 Plan include stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as certain cash bonus awards. Under the terms of the 2014 Plan, the option price for the incentive stock options (“ISOs”) and nonqualified stock options (“NQSO”) may not be less than the fair market value of the shares of the Company’s stock on the date of the grant. For ISOs, the exercise price per share may not be less than
110%
of the fair market value of a share of common stock on the grant date for any individual possessing more than
10%
of the total outstanding stock of the Company. Stock options granted under the 2014 Plan and the Prior Stock Plans generally become exercisable over periods of
one
to
four
years and expire not more than
ten
years from the date of grant. The Company predominantly grants NQSOs to employees in the U.S. The Company
granted
21
,5
37
and
1
1
7,
588
shares of restricted stock during the fiscal years ended
May 2
5
, 201
9
and May
2
6
, 201
8
, respectively.
On January 1, 2018, the Company adopted the Directors Deferred Compensation Plan, which provides the members of
the Company’s
board of directors who are not officers or employees of the Company the opportunity to defer certain compensation and equity awards paid or granted for their service in the form of stock units (“Stock Units”). The Stock Units are used solely as a device for determining the amount of cash benefit to eventually be paid to the director. Each has the same value as one share of Resources Connection, Inc. common stock. Stock Units must be retained until the director leaves the board of directors, at which time the cash value of the Stock Units are paid out. Additional Stock Units are credited to reflect dividends paid on shares of Resources Connection, Inc. common stock. Stock Units credited to a director pursuant to an election to defer compensation (and any dividend equivalents credited thereon) are fully vested at all times. Stock Units credited to a director pursuant to an election to defer an equity award are subject to the vesting conditions applicable to the equity award, except that dividend equivalents credited to a director with respect to such Stock Units are vested at all times. These liability classified awards are re-measured at each reporting date and on settlement using the closing price of the Company’s common stock on that date. Any change in fair value is recorded as stock-based compensation expense in the period.
We recognize stock-based compensation on these Stock Units using the straight-line method over the requisite service period.
A summary of the share-based award activity under the 2014 Plan and the Prior Stock Plans follows (amounts in thousands, except weighted average exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
|
|
Number of
|
|
|
Weighted
|
|
Weighted Average
|
|
|
|
|
|
Awards
|
|
Shares
|
|
|
Average
|
|
Remaining
|
|
|
Aggregate
|
|
|
Available
|
|
Under
|
|
|
Exercise
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
for Grant
|
|
Option
|
|
|
Price
|
|
(in years)
|
|
|
Value
|
Options outstanding at May 26, 2018
|
|
2,252
|
|
6,869
|
|
$
|
15.10
|
|
5.50
|
|
$
|
12,310
|
Granted, at fair market value
|
|
(1,290)
|
|
1,290
|
|
|
18.96
|
|
|
|
|
|
Restricted stock (1)
|
|
(54)
|
|
-
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
-
|
|
(1,444)
|
|
|
13.72
|
|
|
|
|
|
Forfeited (2)
|
|
241
|
|
(240)
|
|
|
15.91
|
|
|
|
|
|
Expired
|
|
446
|
|
(446)
|
|
|
18.85
|
|
|
|
|
|
Options outstanding at May 25, 2019
|
|
1,595
|
|
6,029
|
|
$
|
15.95
|
|
6.06
|
|
$
|
5,482
|
Exercisable at May 25, 2019
|
|
|
|
3,547
|
|
$
|
15.09
|
|
4.30
|
|
$
|
5,051
|
Vested and expected to vest at May 25, 2019 (3)
|
|
|
|
5,789
|
|
$
|
15.86
|
|
5.93
|
|
$
|
5,472
|
(1)
Amounts represent restricted shares granted. Share-based awards available for grant are reduced by
2.5
shares for each share awarded as stock grants from the 2014 Plan.
(2)
Amounts represent both stock options and restricted share awards forfeited.
(3)
The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to options not yet vested
of
2,
481,959
and
2,
366
,
237
as of May 2
5
, 201
9
and May 2
6
, 201
8
, respectively.
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of
$1
5
.
56
as of May 2
4
, 201
9
(the last actual trading day of fiscal 201
9
), which would have been received by the option holders had all option holders exercised their options as of that date.
The total pre-tax intrinsic value related to stock options exercised during the years ended
May 2
5
, 201
9
, May 2
6
, 201
8
and
May
2
7
, 201
7
was
$
5
.
2
million,
$1.
7
million
and
$1.
1
million
, respectively. The total estimated fair value of stock options that vested during the years ended
May 2
5
, 201
9
, May 2
6
, 201
8
and
May
2
7
, 201
7
was
$5.
4
million,
$
5
.
1
million and
$
3
.
6
million, respectively.
Valuation and Expense Information for Stock Based Compensation Plans
The following table summarizes the impact of the Company’s stock-based compensation plans. Stock-based compensation expense is included in selling, general and administrative expenses and consists of stock-based compensation expense related to employee stock options, ESPP stock purchase rights and restricted stock (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
|
2019
|
|
2018
|
|
2017
|
Income before income taxes
|
|
$
|
(6,570)
|
|
$
|
(6,033)
|
|
$
|
(6,068)
|
Net income
|
|
$
|
(6,539)
|
|
$
|
(5,697)
|
|
$
|
(3,962)
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21)
|
|
$
|
(0.19)
|
|
$
|
(0.12)
|
Diluted
|
|
$
|
(0.20)
|
|
$
|
(0.18)
|
|
$
|
(0.12)
|
The weighted average estimated fair value per share of employee stock options granted during the years ended
May 2
5
, 201
9
, May 2
6
, 201
8
and
May
2
7
, 201
7
was
$
4
.
74
,
$3.61
and
$
3
.
61
, respectively, using the Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
May 25, 2019
|
|
May 26, 2018
|
|
May 27, 2017
|
Expected volatility
|
31.6%
-
34.7%
|
|
30.3%
-
34.5%
|
|
34.6%
-
38.4%
|
Risk-free interest rate
|
3.1%
-
3.2%
|
|
2.1%
-
2.4%
|
|
1.3%
-
1.6%
|
Expected dividends
|
3.2%
|
|
3.1%
|
|
3.0%
|
Expected life
|
5.7
-
8.3
years
|
|
5.7
-
8.2
years
|
|
5.6
-
8.1
years
|
As of
May 2
5
, 201
9
, there was
$
8
.
3
million of total unrecognized compensation cost related to non-vested employee stock options granted. That cost is expected to be recognized over a weighted-average period of
1.83 years
.
|
|
|
|
|
Total Number
|
|
|
Total Number of Shares
|
Unvested restricted shares outstanding at May 26, 2018
|
|
234,858
|
Granted
|
|
21,537
|
Vested
|
|
(97,017)
|
Forfeited
|
|
(452)
|
Unvested restricted shares outstanding at May 25, 2019
|
|
158,926
|
Stock-based
compensation expense in the tables above includes compensation for restricted shares of
$1.
7
million,
$
1
.
4
million and
$0.
8
million
for the
years ended May 2
5
, 201
9
,
May 2
6
, 201
8
and May 2
7
, 201
7
respectively.
At May 2
5
,
201
9
, the
re was
approximately
$
2
.
9
million of total unrecognized compensation cost related to restricted shares, which is expected to be recognized over a weighted-average period of
1.59
years
.
The Company recognizes compensation expense for only the portion of stock options and restricted
shares
that are expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.
Excess income tax benefits and deficiencies from stock-based compensation are now recognized as a discrete item within the provision for income taxes in the Consolidated Statement of Operations rather than additional paid-in capital in the Consolidated Balance Sheets.
Employee Stock Purchase Plan
On October 23, 2014, the Company’s stockholders approved an amendment to the ESPP to extend the term of the ESPP through October 16, 2024, and to increase the maximum number of shares of the Company’s common stock authorized for issuance under the ESPP by an additional
1.5
million shares
to
a
total of
5.9
million shares
.
The Company’s ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s common stock at a price equal to
85%
of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The Company
issued
3
5
8
,000
,
3
3
9
,000
and
3
59
,000
shares of common stock pursuant to the ESPP for the years ended
May 2
5
, 201
9
, May 2
6
, 201
8
and
May
2
7
, 201
7
, respectively. There are
22
1
,000
shares of common stock available for issuance under the ESPP as of
May 2
5
, 201
9
.
1
2
. Benefit Plan
The Company has a defined contribution 401(k) plan (“the plan”) which covers all employees in the U.S. who have completed 90 days of service and are age 21 or older. Participants may contribute up to
50%
of their annual salary up to the maximum amount allowed by statute. As defined in the plan agreement, the Company may make matching contributions in such amount, if any, up to a maximum of
6%
of individual employees’ annual compensation. The Company, at its sole discretion, determines the matching contribution made from quarter to quarter. To receive matching contributions, the employee must be employed on the last business day of the fiscal quarter. For the years ended
May 25, 2019, May 26, 2018 and
May 27, 2017
, the Company contributed
approximately
$6
.
4
m
illion
,
$5.6
million and
$5.1
million, respectively, to the plan as Company matching contributions.
1
3
. Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flows is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
$
|
14,229
|
|
$
|
10,601
|
|
$
|
16,756
|
Interest paid
|
$
|
2,440
|
|
$
|
1,769
|
|
$
|
628
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
$
|
2,312
|
|
$
|
65
|
|
$
|
1,026
|
Acquisition of
taskforce
:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
$
|
-
|
|
$
|
2,602
|
|
$
|
-
|
Liability for contingent consideration
|
$
|
2,195
|
|
$
|
4,289
|
|
$
|
-
|
Acquisition of Accretive:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
$
|
-
|
|
$
|
11,754
|
|
$
|
-
|
Dividends declared, not paid
|
$
|
4,105
|
|
$
|
3,791
|
|
$
|
3,253
|
|
|
|
|
|
|
|
|
|
1
4
. Commitments and Contingencies
Lease Commitments
At
May 25, 2019
, the Company had operating leases, expiring at various dates
through March 202
8
,
primarily
for office premises
,
vehicle
s
and equipment
. At
May 25, 2019
, the Company had
no
capital leases. Future minimum rental commitments under operating leases as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating
|
Years Ending:
|
|
Leases
|
May 30, 2020
|
|
$
|
12,828
|
May 29, 2021
|
|
|
11,737
|
May 28, 2022
|
|
|
9,811
|
May 27, 2023
|
|
|
7,934
|
May 25, 2024
|
|
|
6,352
|
Thereafter
|
|
|
6,043
|
Total
|
|
$
|
54,705
|
Rent expense for the years ended
May 25, 2019, May 26, 2018 and
May 27, 2017
totaled
$1
5.5
million,
$13.7
million and
$12.9
million, respectively. Rent expense is recognized on a straight-line basis over the term of the lease, including during any rent holiday periods.
The Company leases
approximately
1
3
,000
square feet of the approximately
5
7,0
00
square foot Company owned building located in Irvine, California to independent third parties and has operating lease agreements for sub-let space with independent third parties expiring
through
fiscal 2025.
Rent
incom
e for the years ended
May 25, 2019, May 26, 2018 and
May 27, 2017
totaled
$240,0
0
0
,
$305,000
and
$332,000
million, respectively.
Under the terms of these operating lease agreements, rental income from such third
-
party leases is expected to be
$
414
,000
,
$3
6
8,000
,
$30
6
,000
,
$2
26
,000
and
$
232
,000
in fiscal 20
20
through 202
4
, respectively
,
and
$
78
,000
thereafter.
Legal Proceedings
The Company is involved in certain legal matters in the ordinary course of business. In the opinion of management, all such matters, if disposed of unfavorably, would not have a material adverse effect on the Company’s financial position, cash flows or results of operations.
1
5
. Segment Information and Enterprise Reporting
The Company discloses information regarding operations outside of the U.S. The Company operates as
one
segment. The accounting policies for the domestic and international operations are the same as those described in Note 2
- Summary of Significant Accounting Policies
. Summarized information regarding the Company’s domestic and international operations is shown in the following table. Amounts are stated in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
|
|
|
|
|
|
|
|
Years Ended
|
|
Long-Lived Assets (1) as of
|
|
May 25,
|
|
May 26,
|
|
May 27,
|
|
May 25,
|
|
May 26,
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
United States
|
$
|
575,641
|
|
$
|
510,935
|
|
$
|
469,846
|
|
$
|
200,385
|
|
$
|
198,280
|
International
|
|
153,358
|
|
|
143,194
|
|
|
113,565
|
|
|
31,651
|
|
|
34,614
|
Total
|
$
|
728,999
|
|
$
|
654,129
|
|
$
|
583,411
|
|
$
|
232,036
|
|
$
|
232,894
|
(1)
Long-lived assets are comprised of goodwill, intangible assets and property and equipment.