RESOURCES CONNECTION, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and accompanying notes. This discussion and analysis contains
"forward-looking statements," within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements relate to
expectations concerning matters that are not historical facts. For example,
statements discussing, among other things, expected costs and liabilities,
business strategies, growth strategies and initiatives, acquisition strategies,
future revenues and future performance, are forward-looking statements. Such
forward-looking
17
-------------------------------------------------------------------------------- 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. The disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results included in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year endedMay 30, 2020 (File No. 0-32113) and our other public filings made with theSecurities and Exchange Commission ("SEC") should be reviewed carefully. 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 of 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 ," "Resources Global Professionals," the "Company," "we," "us," and "our" refer toResources Connection, Inc. and its subsidiaries. OverviewResources Connection 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 to our global client base, we support our clients' needs through both professional staffing and project execution in the areas of transactions, regulations, and transformations. Our pioneering approach to workforce strategy and our agile human capital model quickly align the right resources for the work at hand with speed and efficiency. Our engagements are designed to leverage human connection and collaboration to deliver practical solutions and more impactful results that power our clients', consultants' and partners' success. Our mission as an employer is to connect our employee consultants to meaningful opportunities that further their career ambitions within the context of a supportive talent community of dedicated professionals. Headquartered inIrvine, California , we are proud to have served 88 of the Fortune 100. With more than 3,500 professionals, we annually engage with over 2,400 clients around the world. We aim to be the premier provider of agile human capital solutions for companies facing transformation and workforce gaps while being the preferred employer to highly qualified and experienced consultants through our distinctive culture.
Fiscal 2021 Strategic Focus Areas
Our strategic focus areas in fiscal 2021 are:
?Furthering our digital expansion through the launch of our human cloud platform and expanded go-to-market penetration for the business we acquired fromVeracity Consulting Group, LLC ("Veracity")
?Growing our core business through our strategic client and industry vertical programs
?Right sizing our cost structure globally and monitoring and controlling our ongoing costs for optimal efficiency
Our primary area of focus for fiscal 2021 is digital expansion and we have made solid strides in this area. We are on track to bring our human cloud platform to market by the end of this fiscal year, which would introduce a new way for clients and talent alike to engage with us. Our efforts also include expanding the go-to-market penetration for Veracity by providing consulting services from strategy and roadmap to technical implementation. Our focus on introducing Veracity more broadly to our client base and integrating Veracity with the rest of the RGP business operations has generated positive returns through the first half of the fiscal year. We believe COVID-19 has and will continue to accelerate digital transformation agendas in our existing client base and will continue to create opportunities for us to engage with new clients. The second focus area for this fiscal year is building our core business, including through the growth of our strategic client and key industry vertical programs, particularly in healthcare. We are working to further penetrate these important accounts at a time when many are looking to reduce fixed costs by moving toward more flexible workforce strategies and building relationships with higher value partners for project execution needs. We are also actively extending our offerings to new buyers within these organizations - likeChief Digital ,Chief People and Chief Marketing Officers. We see strong growth momentum in our client programs and robust opportunity in the healthcare industry from pharmaceutical to medical device to payor and provider, including in practice areas such as revenue cycle optimization, clinical trials process redesign and supply chain transformation. We believe these client needs align well with the capabilities of our dedicated industry group. Finally, we made substantial progress in our transformation journey in fiscal 2021, with the execution of our restructuring plan inNorth America andAsia Pacific (the "North America and APAC Plan"), which we initiated in the fourth quarter of fiscal 2020, and inEurope (the "European Plan", collectively, the "Plans"), which we initiated in the second quarter of fiscal 2021, with the goal to 18
-------------------------------------------------------------------------------- strengthen the business and right size our cost structure globally. The Plans consisted of two key components: (i) an effort to streamline the management and organizational structure and eliminate certain positions as well as exit certain markets to focus on core solution offerings and core high growth clients; and (ii) a strategic rationalization of our physical geographic footprint and real estate spend to focus investment dollars in high growth core markets for greater impact. Through the first six months of fiscal 2021, we have substantially completed ourNorth America and APAC Plan with respect to headcount reduction. We have also substantially completed the consultation and negotiation with impacted employees under the European Plan as ofNovember 28, 2020 . We expect to substantially complete the reduction in force inEurope by the end of calendar 2021. We also made solid progress in executing our real estate exit strategy under the Plans, although the exact amount and timing of the expenses and resulting payments are subject to a number of variables which may not be within our control, such as the condition of the real estate/leasing market. See Note 9 - Restructuring Activities in Part I, Item 1 above and "Results of Operations" below for additional disclosures regarding the impact of theNorth America and APAC Plan and the European Plan on our results of operations and cash flows during the three and six months endedNovember 28, 2020 .
COVID-19 Impact and Outlook
Since the start of calendar 2020, the COVID-19 pandemic (the "Pandemic") has caused profound disruption in theU.S. and global economy. As a result of the disruptions caused by the Pandemic, we have experienced reduced demand for or delayed client decisions to procure our services and, in certain cases, cancellation of existing projects. We have taken precautions and steps to prevent or reduce infection among our employees, including the implementation of safety precautions and policies, limiting business travel and mandating or encouraging working from home in many of the countries in which we operate. During the first six months of fiscal 2021, our revenue declined 15.7% compared to the first six months of fiscal 2020. The full likely effects of the Pandemic remain uncertain and, among other things, we may continue to experience reduced demand for or delays in client decisions to procure our services or cancellation of existing projects. While the detrimental financial impact of the Pandemic is undeniable, it has also accelerated certain macro trends that we believe allow us to operate from a position of strength. These include the increased use of contingent talent, virtual or remote delivery becoming mainstream and new client attitudes toward borderless talent models. As CEO and other C-suite decision-makers increasingly value workforce flexibility and agility, additional opportunity is created for our business model. The move to virtual and borderless talent helps us manage supply and demand more efficiently, which should result in faster revenue generation and reduced turnover. In strengthening our core business, we expect to continue to evolve our client engagement and talent delivery model to take advantage of these important shifts. Additionally, we are encouraged by the revenue improvement in the second quarter of fiscal 2021. Weekly revenue grew steadily throughout the second quarter, reflecting improved buying patterns by our clients. Our pipeline, from both a volume and quality perspective, has continued to strengthen since the beginning of fiscal 2021. Until we have further visibility into the full impact of the Pandemic on the global economy, we will remain focused on the health of our balance sheet and liquidity, cost containment and strategic allocation of resources to drive key growth initiatives in core markets and the expansion of our digital capabilities. We believe theNorth America and APAC Plan that we initiated ahead of the Pandemic in fiscal 2020 better prepared us, and the European Plan we recently initiated will further prepare us to operate with agility and resilience and capitalize on the potential economic recovery as vaccine progress continues to mitigate uncertainty around key markets.
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 theU.S. ("GAAP"). The preparation of these financial statements in accordance with GAAP requires us to make estimates and judgments. As further discussed in Note 12 - Segment Information in Part I, Item 1 above and in the "Information about Segments" section below, effective in the second quarter of fiscal 2021, we changed our segment reporting and reallocated goodwill to the new reporting units on the relative fair value basis. Concurrent with the segment change, we completed a goodwill impairment assessment, and concluded that no goodwill impairment existed immediately before and after the change in segment reporting. With the exception of the change in segment and reporting units, there have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading "Critical Accounting Policies" in Item 7 of Part II of our Annual Report on Form 10-K for the year endedMay 30, 2020 . ? 19
--------------------------------------------------------------------------------
Results of Operations
The following tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.
Three Months Ended Six Months Ended
November 28, November 23, November 28, November 23,
2020 2019 2020 2019
(Amounts in thousands, except percentages)
Revenue $ 153,222 100.0 % $ 184,507 100.0 % $ 300,567 100.0 % $ 356,732 100.0 %
Direct cost of services 95,044 62.0 110,130 59.7 184,493 61.4 214,852 60.2
Gross margin 58,178 38.0 74,377 40.3 116,074 38.6 141,880 39.8
Selling, general and 54,552 35.6 53,755 29.1 105,707 35.2 110,733 31.1
administrative expenses
Amortization of 1,393 0.9 1,510 0.8 2,923 1.0 2,604 0.7
intangible assets
Depreciation expense 984 0.7 1,424 0.8 1,991 0.6 2,793 0.8
Income from operations 1,249 0.8 17,688 9.6 5,453 1.8 25,750 7.2
Interest expense, net 460 0.3 551 0.3 955 0.3 1,033 0.3
Other income (475) (0.3) (537) (0.3) (1,007) (0.3) (537) (0.2)
Income before provision 1,264 0.8 17,674 9.6 5,505 1.8 25,254 7.1
for income taxes
Provision for income 2,256 1.4 5,337 2.9 4,213 1.4 7,978 2.3
taxes
Net (loss) income $ (992) (0.6) % $ 12,337 6.7 % $ 1,292 0.4 % $ 17,276 4.8 %
Information about Segments
With the execution of the European Plan, discussed in Note 9-Restructuring
Activities, we changed our internal management structure and our reporting
structure of financial information used to assess performance and allocate
resources during the second quarter of fiscal 2021. We believe the new structure
creates enhanced visibility and focus to enable more rapid growth and effective
resource allocation. As a result, we revised our historical one segment position
and identified the following new operating segments effective in the second
quarter of fiscal 2021:
?RGP- a global business consulting practice which operates primarily under the
RGP brand and focuses on professional project consulting and staffing services
in areas such as finance and accounting, business strategy and transformation,
risk and compliance, and technology and digital;
?taskforce - a German professional services firm that operates under the
taskforce brand. It utilizes a distinct independent contractor/partner business
model and infrastructure and focuses on providing senior interim management and
project management services to middle market clients in the German market;
?Sitrick - a crisis communications and public relations firm which operates under the Sitrick brand, providing corporate, financial, transactional and crisis communication and management services.
RGP also includes the operations of Veracity, which is being integrated with the
rest of the RGP business operations. RGP is our only reportable segment.
taskforce and Sitrick do not individually meet the quantitative thresholds to
qualify as reportable segments. Therefore, they are combined and disclosed as
Other Segments.
20
--------------------------------------------------------------------------------
The following table presents our operating results by segment. All prior year
periods presented were recast to reflect the impact of the preceding segment
changes.
Three Months Ended Six Months Ended
November 28, November 23, November 28, November 23,
2020 2019 2020 2019
(Amounts in thousands, except percentages)
Revenues:
RGP $ 142,002 92.7 % $ 173,987 94.3 % $ 279,111 92.9 % $ 335,997 94.2 %
Other Segments 11,220 7.3 10,520 5.7 21,456 7.1
20,735 5.8
Total revenues
Gross margin: RGP$ 54,079 93.0 %$ 70,206 94.4 %$ 108,026 93.1 %$ 133,466 94.1 % Other Segments 4,099 7.0 4,171 5.6 8,048 6.9 8,414 5.9 Total gross $ $ $ $ margin 58,178 100.0 % 74,377 100.0 % 116,074 100.0 %
141,880 100.0 %
Adjusted
EBITDA:
RGP$ 18,401 148.5 %$ 28,598 126.2 %$ 34,859 154.2 %$ 48,068 139.0 % Other Segments 1,251 10.1 868 3.8 2,417 10.7 2,099 6.1 Reconciling Items (1) (7,257) (58.6) (6,795) (30.0) (14,664) (64.9) (15,587) (45.1) Total Adjusted $ $ $ $ EBITDA 12,395 100.0 % 22,671 100.0 % 22,612 100.0 % 34,580 100.0 % (1) Reconciling items are generally comprised of unallocated corporate administrative costs, including management and board compensation, back office support function costs and other general corporate costs that are not allocated to segments. Non-GAAP Financial Measures We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable GAAP measure so calculated and presented.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.
?Same day constant currency revenue is adjusted for the following items:
oCurrency impact. In order to remove the impact of fluctuations in foreign currency exchange rates, we calculate constant currency revenue, which represents the outcome that would have resulted had exchange rates in the current period been the same as those in effect in the comparable prior period.
oBusiness days impact. In order to remove the fluctuations caused by comparable periods having a different number of business days, we calculate same day revenue as current period revenue (adjusted for currency impact) divided by the number of business days in the current period, multiplied by the number of business days in the comparable prior period. The number of business days in each respective period is provided in the "Number of Business Days" section in the table below.
?Adjusted EBITDA is calculated as net (loss) income before amortization of intangible assets, depreciation expense, interest and income taxes plus stock-based compensation expense, restructuring costs, and plus or minus contingent consideration adjustments. Adjusted EBITDA at the segment level excludes certain shared corporate administrative costs that are not practical to allocate.
?Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue.
Same day constant currency revenue
Same day constant currency revenue assists management in evaluating revenue trends on a more comparable and consistent basis. We believe this measure also provides more clarity to our investors in evaluating our core operating performance and facilitates a comparison of such performance from period to period. The following table presents a reconciliation of same day constant currency revenue to revenue, the most directly comparable GAAP financial measure, by geography.
?
21
--------------------------------------------------------------------------------
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
Three Months Ended Six Months Ended
Revenue by Geography November 28, November 23,
2020 2019 2020 2019
(Amounts in thousands, except (Unaudited) (Unaudited)
number of business days)North America As reported (GAAP)$ 122,732 $ 152,422 $ 243,346 $ 292,798 Currency impact 115 307 Business days impact 3,963 1,934 Same day constant currency revenue$ 126,810 $ 245,587 Europe As reported (GAAP)$ 19,082 $ 19,369 $ 35,374 $ 38,132 Currency impact (1,096) (1,482) Business days impact (139) (263) Same day constant currency revenue$ 17,847 $ 33,629 Asia Pacific As reported (GAAP)$ 11,408 $ 12,716 $ 21,847 $ 25,802 Currency impact (344) (323) Business days impact - 175 Same day constant currency revenue$ 11,064 $ 21,699 Total Consolidated As reported (GAAP)$ 153,222 $ 184,507 $ 300,567 $ 356,732 Currency impact (1,325) (1,498) Business days impact 3,824 1,846 Same day constant currency revenue$ 155,721 $ 300,915 Number of Business Days North America (1) 62 64 126 127 Europe (2) 65 64 129 128 Asia Pacific (2) 61 61 124 125
(1) This represents the number of business days in the
?
22
--------------------------------------------------------------------------------
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin assist management in assessing our
core operating performance. We also believe these measures provide investors
with useful perspective on underlying business results and trends and facilitate
a comparison of our performance from period to period. The following table
presents Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated
and includes a reconciliation of such measures to net (loss) income, the most
directly comparable GAAP financial measure:
Three Months Ended Six Months Ended
November 28, November 23, November 28, November 23,
2020 2019 2020 2019
(Amounts in thousands, except percentages)
Net (loss) income $ (992) $ 12,337 $ 1,292 $ 17,276
Adjustments:
Amortization of 1,393 1,510 2,923 2,604
intangible assets
Depreciation expense 984 1,424 1,991 2,793
Interest expense, net 460 551 955 1,033
Provision for income 2,256 5,337 4,213 7,978
taxes
Stock-based compensation 1,708 1,643
expense 3,105 3,158
Restructuring costs 6,775 - 7,791 -
Contingent consideration (189) (131) 342 (262)
adjustment
Adjusted EBITDA $ 12,395 $ 22,671 $ 22,612 $ 34,580
Revenue $ 153,222 $ 184,507 $ 300,567 $ 356,732
Adjusted EBITDA Margin 8.1 % 12.3 % 7.5 % 9.7%
Our non-GAAP financial measures are not measurements of financial performance or
liquidity under GAAP and should not be considered in isolation or construed as
substitutes for revenue, net (loss) income or other cash flow data prepared in
accordance with GAAP for purposes of analyzing our revenue, profitability or
liquidity. These measures should be considered in addition to, and not as a
substitute for, revenue, net (loss) income, (loss) earnings per share, cash
flows or other measures of financial performance prepared in conformity with
GAAP.
Further, a limitation of our non-GAAP financial measures is they exclude items
detailed above that have an impact on our GAAP reported results. Other companies
in our industry may calculate these non-GAAP financial measures differently than
we do, limiting their usefulness as a comparative measure. Because of these
limitations, these non-GAAP financial measures should not be considered a
substitute for performance measures calculated in accordance with GAAP.
Consolidated Operating Results - Three Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue decreased$31.3 million , or 17.0%, to$153.2 million in the second quarter of fiscal 2021 from$184.5 million in the second quarter of fiscal 2020. Billable hours decreased 16.9% while average bill rate increased by 1.0% in the second quarter of fiscal 2021 compared to the prior year quarter. On a sequential basis, consolidated revenue in the second quarter of fiscal 2021 increased by 4.0% compared to the first quarter of fiscal 2021.
Revenue discussion on a same day constant currency basis
On a same day constant currency basis, revenue for the second quarter of fiscal 2021 decreased by$28.8 million , or 15.6%, compared to the prior year quarter, primarily reflecting the adverse impact of the Pandemic on client demand and consumption. On a sequential basis, consolidated revenue in the second quarter of fiscal 2021 increased 6.4% compared to the first quarter of fiscal 2021, reflecting a steady improvement of weekly revenue across most markets. While decline in revenue persisted in the second quarter of fiscal 2021 compared to the prior year, the percentage of decline narrowed compared to the first fiscal quarter year over year revenue comparison. As macro events continued to unfold in the second fiscal quarter, including the development of the COVID vaccine, mitigating some uncertainty in the macro environment, we experienced an uptick in demand for our services as well as more swift decision making by our clients. InEurope andAsia Pacific , the second quarter year-over-year decline in revenue narrowed to 7.9% and 13.0%, respectively, compared to the first quarter year-over-year decline of 16.5% and 19.4%, respectively. InNorth America , the second quarter year-over-year decline of 16.8% remained similar to the first quarter year-over-year comparison.
The number of consultants on assignment as of
23
--------------------------------------------------------------------------------
Direct Cost of Services. Direct cost of services decreased $15.1 million , or
13.7%, to $95.0 million for the second quarter of fiscal 2021 from $110.1
million for the second quarter of fiscal 2020. The decrease in the amount of
direct cost of services between periods was primarily attributable to a 16.9%
decrease in billable hours.
Direct cost of services as a percentage of revenue was 62.0% for the second
quarter of fiscal 2021 compared to 59.7% for the second quarter of fiscal 2020.
The increased percentage compared to the prior year quarter was primarily
attributable to a decrease in bill/pay spread, an increase in holiday pay as a
result of more holidays in the current fiscal quarter due to the timing of
Thanksgiving in the U.S. (included in the second quarter of fiscal 2021 but not
in the second quarter of fiscal 2020), unfavorable self-insured medical expense,
and a decrease in executive search and conversion fee revenues, partially offset
by lower passthrough revenue from client reimbursement. Consolidated average
bill rate increased 1% while average pay rate also increased 2.9% in the second
quarter of fiscal 2021 compared to the second quarter of fiscal 2020, resulting
in a 90-basis-point decline in bill/pay spread year-over-year. Our target direct
cost of services percentage is 60%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") was $54.6 million , or 35.6% as a percentage of
revenue, for the second quarter of fiscal 2021 compared to $53.8 million , or
29.1% as a percentage of revenue, for the second quarter of fiscal 2020.
Excluding the $6.8 million of restructuring costs incurred in the current fiscal
quarter, as further discussed below, SG&A costs decreased $6.0 million from the
second quarter of fiscal 2020 to the second quarter of fiscal 2021, which was
primarily attributable to (1) a $3.3 million decrease in management compensation
and bonuses primarily resulting from the reduction in force as part of the
global restructuring plan, as further discussed below, and a lower revenue base
for incentive compensation; (2) $1.7 million of savings in travel-related
business expenses attributable to cost containment measures and reduced business
travel during the Pandemic; and (3) $0.8 million of savings in lease expense
primarily as a result of the real estate exit initiatives taken.
Management and administrative headcount was 896 at the end of the second quarter
of fiscal 2021 and 962 at the end of the second quarter of fiscal 2020.
Management and administrative headcount includes full time equivalent headcount
for our seller-doer group, which is determined by utilization levels achieved by
the seller-doers-higher levels of utilization would reduce the full-time
equivalent management and administrative headcount, and lower levels would
increase it.
Restructuring charges. We initiated our North America and APAC Plan in March
2020 and the European Plan in September 2020 . All employee termination and the
facility exit costs incurred under the restructuring plans were associated with
the RGP segment, as further discussed in Note 12 - Segment Information, and are
recorded in selling, general and administrative expenses in the Consolidated
Statement of Operations. Restructuring costs for the three months ended November
28, 2020 and November 23, 2019 were as follows (in thousands):
Three Months Ended
November 28, November 23,
2020 2019
Employee termination costs $ 5,455 $ -
Real estate exit costs 1,082 -
Other costs 238 -
Total restructuring costs $ 6,775 $ -
For further information on our restructuring initiatives, please refer to Note 9
- Restructuring Activities in Part I, Item 1 above and "Fiscal 2021 Strategic
Focus Areas" above.
Amortization and Depreciation Expense. Amortization of intangible assets was
$1.4 million and $1.5 million in the second quarter of fiscal 2021 and fiscal
2020, respectively. The decrease in amortization expense is primarily due to
certain acquired intangible assets being fully amortized at the end of the first
quarter in fiscal 2021. Depreciation expense was $1.0 million and $1.4 million
in the second quarter of fiscal 2021 and fiscal 2020, respectively. The decrease
in depreciation expense was primarily due to fully-depreciated computer
equipment in periods prior to the second quarter of fiscal 2021 and the
write-off of leasehold improvement as part of the real estate exit initiatives
executed under the Plans.
Other Income. Other income was $0.5 million in the second quarter of both fiscal
2021 and 2020. Other income in the second quarter of fiscal 2021 was primarily
related to government COVID-19 relief funds received globally. Other income in
the second quarter of fiscal 2020 was primarily related to the gain on the
settlement of a pre-acquisition claim with the seller of Accretive, an
acquisition completed in fiscal 2018.
Income Taxes. Our provision for income taxes was $2.3 million expense (effective
tax rate of approximately 178.5%) for the second quarter of fiscal 2021 compared
to $5.3 million (effective tax rate of approximately 30.2%) for the second
quarter of fiscal 2020. We record tax expense based upon actual results versus a
forecasted tax rate because of the volatility in its international operations
that span numerous tax jurisdictions. Tax provision of $2.3 million for the
second quarter was primarily associated with
24
--------------------------------------------------------------------------------
pre-tax income from regions outside of Europe . The majority of the restructuring
charges incurred during the second quarter were incurred in our European
entities resulting in a pre-tax loss in Europe . With significant required
valuation allowances on tax benefits related to these net operating losses, no
tax benefits were recognized in connection with the pre-tax loss, resulting in
an effective tax rate of 178.5%.
We recognized a net tax benefit of approximately $0.1 million and $0.3 million
related to stock-based compensation for nonqualified stock options expensed and
for disqualifying dispositions under our Employee Stock Purchase Plan ("ESPP")
during the second quarter of fiscal 2021 and fiscal 2020, respectively.
Periodically, we review the components of both book and taxable income to
analyze the adequacy of the tax provision. There can be no assurance that our
effective tax rate will remain constant in the future because of the lower
benefit from the U.S. statutory rate for losses in certain foreign
jurisdictions, the limitation on the benefit for losses in jurisdictions in
which a valuation allowance for operating loss carryforwards has previously been
established, and the unpredictability of timing and the amount of eligible
disqualifying incentive stock options exercise.
Adjusted EBITDA. Adjusted EBITDA decreased $10.3 million , or 45.3%, to $12.4
million in the second quarter of fiscal 2021, compared to $22.7 million in the
second quarter of fiscal 2020. The decrease was primarily attributable to a
$16.2 million decline in gross profit as a result of the decline in revenue as
well as gross margin, partially offset by a $5.9 million reduction in SG&A in
the second quarter of 2021 compared to the prior year quarter. SG&A used to
derive Adjusted EBITDA does not include contingent consideration, stock-based
compensation expense and restructuring charges.
Comparability of Quarterly Results. Our quarterly results have fluctuated in the
past and we believe they will continue to do so in the future. Certain factors
that could affect our quarterly operating results are described in Part II,
Item 1A.-Risk Factors of our Annual Report on Form 10-K for the year ended May
30, 2020 . Due to these and other factors, we believe quarter-to-quarter
comparisons of our results of operations may not be meaningful indicators of
future performance.
Consolidated Operating Results - Six Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue decreased$56.2 million , or 15.7%, to$300.6 million for the six months endedNovember 28, 2020 from$356.7 million for the six months endedNovember 23, 2019 . Billable hours decreased 16.1% while average bill rate increased by 1.4% compared to the first half of fiscal 2020. Veracity contributed$11.7 million and$7.2 million of revenue in first half of fiscal 2021 and fiscal 2020, respectively. On a same day constant currency basis, revenue for the first half of fiscal 2021 decreased by$55.8 million , or 15.6%, compared to the same period of fiscal 2020. The decline in revenue for the first half of the fiscal 2021 was due primarily to the adverse impact of the Pandemic. Direct Cost of Services. Direct cost of services decreased$30.4 million , or 14.1%, to$184.5 million for the six months endedNovember 28, 2020 from$214.9 million for the six months endedNovember 23, 2019 . The decrease in the amount of direct cost of services between periods was primarily attributable to a decrease of 16.1% in billable hours. Direct cost of services as a percentage of revenue was 61.4% for the six months endedNovember 28, 2020 compared to 60.2% for the six months endedNovember 23, 2019 . The increased percentage compared to the prior year was primarily due to a decrease in bill/pay spread, unfavorable self-insured medical expense, and increased holiday pay primarily due to more holidays in the first half of fiscal 2021 due to the timing ofThanksgiving in theU.S. (included in the second quarter of fiscal 2021 but not in the second quarter of fiscal 2020), partially offset by lower passthrough revenue from client reimbursement. Consolidated average bill rate increased 1.4% while average pay rate increased 2.4% in the first half of fiscal 2021 compared to the first half of fiscal 2020, resulting in a 50-basis-point decline in bill/pay spread year-over-year. Our target direct cost of services percentage is 60%. Selling, General and Administrative Expenses. SG&A expenses were$105.7 million , or 35.2% as a percentage of revenue, for the six months endedNovember 28, 2020 compared to$110.7 million , or 31.1% as a percentage of revenue, for the six months endedNovember 23, 2019 . Excluding the$7.8 million of restructuring costs incurred in the first half of fiscal 2021, as further discussed below, year-over-year SG&A costs decreased$12.8 million , which was primarily attributable to: (1) a$4.8 million decrease in management compensation and bonuses primarily resulting from the reduction in force as part of the global restructuring plan and a lower revenue base for incentive compensation; (2)$4.1 million of savings in travel-related business expenses attributable to cost containment measures and reduced business travel during the Pandemic; (3) a$1.5 million net reduction in legal expenses primarily due to the recovery of$1.0 million of legal costs during the first quarter of fiscal 2021 related to a receivable collection case; (4) a$1.1 million decrease in personnel severance costs, which were$1.3 million in the first six months of fiscal 2020, related primarily to exiting the Nordic markets and the departure of several former executives, as compared to$0.2 million in the first six months of fiscal 2021; (5) costs of$0.8 million incurred in the first six months of fiscal 2020 associated with the acquisition of Veracity; and (6)$1.4 million of savings in lease expense primarily as a result of the real estate exit initiatives taken. These decreases were partially offset by a change in contingent consideration related expense/benefit over the two periods, which was an expense of$0.3 million in the first 25
--------------------------------------------------------------------------------
six months of fiscal 2021 as compared to a benefit of
Restructuring charges. We initiated ourNorth America and APAC Plan inMarch 2020 and the European Plan inSeptember 2020 . All employee termination and the facility exit costs incurred under the restructuring plans were associated with the RGP segment, as further discussed in Note 12 - Segment Information. Restructuring costs for the six months endedNovember 28, 2020 andNovember 23, 2019 were as follows (in thousands): Three Months Ended Six Months Ended November 28, November 23, November 28, November 23, 2020 2019 2020 2019 Employee termination costs$ 5,455 $ -$ 6,393 $ - Real estate exit costs 1,082 - 1,104 - Other costs 238 - 294 - Total restructuring costs$ 6,775 $ -$ 7,791 $ - For further information on our restructuring initiatives, please refer to Note 9 - Restructuring Activities in Part I, Item 1 above and "Fiscal 2021 Strategic Focus Areas" above. Liability balance at May 25, 2019 $ -
Increase in liability (restructuring costs) 3,927
Reduction in liability (payments and others) (2,053)
Liability balance at
1,874
Increase in liability (restructuring costs) 6,393
Reduction in liability (payments and others) (2,965)
Liability balance at
Amortization and Depreciation Expense. Amortization of intangible assets was$2.9 million and$2.6 million in the first six months of fiscal 2021 and fiscal 2020, respectively. The increase in amortization expense is primarily due to the amortization of identifiable intangible assets acquired through Veracity partially offset by certain acquired intangible assets being fully amortized at the end of the first quarter in fiscal 2021. Depreciation expense was$2.0 million and$2.8 million in the first six months of fiscal 2021 and fiscal 2020, respectively. The decrease in depreciation expense was primarily due to fully-depreciated computer equipment in periods prior to the second quarter of fiscal 2021 and the write-off of leasehold improvement as part of the real estate exit initiatives executed under the Plans. Other Income. Other income was$1.0 million in the first six months of fiscal 2021 compared to$0.5 million in the first six months of fiscal 2020. Other income in the current fiscal year was primarily related to government COVID-19 relief funds received globally. Other income in the first six months of fiscal 2020 was primarily related to the gain on the settlement of a pre-acquisition claim with the seller of Accretive, an acquisition completed in fiscal 2018. Income Taxes. Our provision for income taxes was$4.2 million expense (effective tax rate of approximately 76.5%) for the six months endedNovember 28, 2020 compared to$8.0 million (effective tax rate of approximately 31.6%) for the six months endedNovember 23, 2019 . We record tax expense based upon actual results versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions. Tax provision of$4.2 million for the first half of fiscal 2021 was primarily associated with pre-tax income from regions outside ofEurope . The majority of the restructuring charges incurred during the second quarter were incurred in the Company's European entities resulting in a pre-tax loss inEurope . With significant required valuation allowances on tax benefits related to these net operating losses, no tax benefits were recognized in connection with the pre-tax loss, resulting in an effective tax rate of 76.5%. We recognized a net tax benefit of approximately$0.3 million and$0.7 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under our ESPP during the first half of fiscal 2021 and fiscal 2020, respectively. Periodically, we review the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that our effective tax rate will remain constant in the future because of the lower benefit from theU.S. statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying incentive stock options exercise. Adjusted EBITDA. Adjusted EBITDA decreased$12.0 million , or 34.6%, to$22.6 million in the first half of fiscal 2021, compared to$34.6 million in the first half of fiscal 2020. The decrease was primarily attributable to a$25.8 million decline in gross profit as a result of the decline in revenue as well as gross margin, partially offset by a$13.4 million reduction in SG&A in the first 26
--------------------------------------------------------------------------------
half of 2021 compared to the prior year period. SG&A used to derive Adjusted EBITDA does not include contingent consideration, stock-based compensation expense and restructuring charges.
Operating Results by Segment
All prior year periods referenced below were recast to reflect the impact of the segment changes as discussed in "Information about Segments" above.
Revenue by segment
RGP - Revenue decreased$32.0 million , or 18.4%, to$142.0 million in the second quarter of fiscal 2021 from$174.0 million in the second quarter of fiscal 2020. RGP revenue improvement on a sequential basis is similar to that at the consolidated level. Through the first half of fiscal 2021, RGP revenue decreased$56.9 million , or 16.9%, to$279.1 million compared to$336.0 million in the first half of fiscal 2020. Revenue from RGP represents more than 90% of total consolidated revenue and generally reflects the overall consolidated revenue trend. Please refer to discussion of consolidated operating results. Other Segments - Revenue for the second fiscal quarter of 2021 increased$0.7 million , or 6.7%, to$11.2 million from$10.5 million in the second quarter of fiscal 2020. Through the first half of fiscal 2021, revenue from Other Segments increased$0.7 million , or 3.5%, to$21.5 million from$20.7 million in the first half of fiscal 2020. The improvement in revenue is the result of combining RGP Germany to operate under taskforce generating additional revenue synergy.
Gross Profit by segment
RGP - Gross margin trends in RGP for the three and six months endedNovember 28, 2020 are similar with the trends of consolidated operating results. Please refer to discussion of consolidated revenue and direct cost of services.
Adjusted EBITDA by segment
RGP - Adjusted EBITDA decreased$10.2 million or 35.7% to$18.4 million in the second quarter of fiscal 2021, compared to$28.6 million in the second quarter of fiscal 2020. The decrease was primarily attributable to a$16.1 million decline in gross profit as a result of the decline in revenue as well as gross margin, partially offset by a$6.0 million reduction in SG&A in the second quarter of 2021 compared to the prior year quarter. Adjusted EBITDA decreased$13.2 million or 27.5% to$34.9 million in the first half of fiscal 2021, compared to$48.1 million in the first half of fiscal 2020. The decrease was primarily attributable to the$25.4 million decline in gross profit as a result of the decline in revenue and as well as gross margin, partially offset by a reduction of$11.8 million in SG&A in the first half of fiscal 2021 compared to the prior year period. SG&A reductions for the three and six months endedNovember 28, 2020 are primarily due to a decrease in management compensation costs as a result of the reduction in force under the Plans, a decrease in variable compensation due to lower revenue and favorable SG&A expenses reflecting the impact of the new virtual operating model, a reduction in real estate footprint and overall discipline in discretionary spend. SG&A used to derive Adjusted EBITDA does not include contingent consideration, stock-based compensation expense and restructuring charges. Other Segments - Adjusted EBITDA improved in both the three and six months endedNovember 28, 2020 compared to the same periods in fiscal 2020. The improvements in both periods are primarily due to more favorable SG&A related to the recovery of legal costs associated with a receivable collection case.
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by our operations, our$120.0 million secured revolving credit facility ("Facility") withBank of America 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 generate positive cash flow from operations in the future will be, at least in part, dependent on global economic conditions and our ability to remain resilient during economic downturns, such as the one we are currently in caused by the Pandemic. As ofNovember 28, 2020 , we had$97.2 million of cash and cash equivalents including$31.3 million held in international operations. Our Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. Our Facility consists of a$120 million revolving loan facility ("Revolving Commitment"), which includes a$5.0 million sublimit for the issuance of standby letters of credit. AtNovember 28, 2020 , we had borrowings of$68.0 million outstanding under the Facility, bearing an interest rate per annum ranging from 2.00% to 2.23%. Additional information regarding the Facility is included in Note 7 - Long-Term Debt in the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly 27
--------------------------------------------------------------------------------
Report on Form 10-Q.
We undertook a number of restructuring actions across our geographies beginning in the fourth quarter of fiscal 2020. We expect the execution of the restructuring actions to continue through the remainder of fiscal 2021, which requires substantial liquidity. Through the first half of fiscal 2021, we paid approximately$3.0 million related to employee termination costs, including$1.9 million under theNorth America and APAC Plan and$1.1 million under the European Plan. We currently estimate the cash requirement for completing the remaining restructuring actions to be in the range of$6.5 million to$9.5 million . The exact amount and timing of the expenses and resulting payments are subject to a number of variables which may not be within our control, such as the condition of the real estate/leasing market. As described in Note 3 - Acquisition in the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 3 - Acquisitions and Dispositions in the Notes to consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year endedMay 30, 2020 , the purchase agreements for Veracity and Expertence require cash earn-out payments to be made when certain performance conditions are met. We estimated the fair value of the obligation to pay contingent consideration based on a number of different projections of the estimated EBITDA and estimated revenue. The estimated fair value of the contingent consideration as ofNovember 28, 2020 was$3.0 million . Our ongoing operations and growth strategy may require us to continue to make investments in critical markets and in systems and technology. In addition, we may consider making strategic acquisitions or initiating additional restructuring initiatives, which could require significant liquidity. 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, capital expenditure needs and funding for our restructuring initiatives and potential future contingent consideration payments associated with our acquisitions for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to sell additional equity securities, increase use of our Facility or raise additional debt. In addition, if we decide to make additional share repurchases, we may fund these through existing cash balances or use of our Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our operations, market position and competitiveness.
Operating Activities
Operating activities for the six months endedNovember 28, 2020 provided cash of$29.6 million compared to$17.2 million in cash provided by operating activities for the six months endedNovember 23, 2019 . In the first six months of fiscal 2021, cash provided by operations resulted from net income of$1.3 million and non-cash adjustments of$8.5 million . Additionally, net favorable changes in operating assets and liabilities totaled$19.8 million , primarily consisting of a$13.5 million decrease in trade accounts receivable and a$3.8 million increase in accounts payable and accrued expenses. In the first six months of fiscal 2020, cash provided by operations resulted from net income of$17.3 million and non-cash adjustments of$8.6 million . These amounts were partially offset by a net increase in operating assets and liabilities of$8.7 million primarily due to a decrease in accrued salaries and related obligations. The overall improvement in cash flow from operating activities for the first half of fiscal 2021 compared to the first half of fiscal 2020 was primarily attributable to (i) a$8.2 million payroll tax payment deferral under the Coronavirus Aid, Relief, and Economic Security Act that went effective in our fourth quarter of fiscal 2020, and (ii) overall favorable changes in working capital.
Investing Activities
Net cash used in investing activities was$1.6 million for the first six months of fiscal 2021 compared to$25.5 million in the comparable prior year period. We used$1.6 million of cash in the first six months of fiscal 2021 to develop internal-use software and acquire property and equipment, net of$0.2 million proceeds from the sale of assets. In the first half of fiscal 2020, we used net cash of$30.3 million to acquire Veracity, redeemed short-term investments of$6.0 million , and purchased$1.2 million of property and equipment, net of$0.1 million in proceeds from the sale of assets.
Financing Activities
Net cash used in financing activities totaled$29.1 million for the six months endedNovember 28, 2020 compared to cash provided by financing activities of$8.5 million for the six months endedNovember 23, 2019 . Net cash used in financing activities during the six months endedNovember 28, 2020 consisted of repayments on the Facility of$20.0 million , cash dividend payments of$9.1 million , and the Veracity year one contingent consideration payment, of which$3.0 million was categorized as financing (and the remaining$2.3 million of the total$5.3 million Veracity year one contingent consideration payment was categorized as operating). These were partially offset by$3.0 million in proceeds received from ESPP share purchases and employee stock option exercises. Net cash provided by financing activities of$8.5 million for the six months endedNovember 23, 2019 included$6.1 million of proceeds from employee stock option exercises and purchases of shares under the ESPP, and$35.0 million of borrowings to finance the acquisition of Veracity, partially offset by principal repayments of$24.0 million under the Facility and$8.6 million of cash dividend 28
--------------------------------------------------------------------------------
payments.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 - Summary of Significant Accounting Policies in the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Contractual Obligations Other than a$20.0 million repayment of the Facility during the six months endedNovember 28, 2020 , there have been no material changes to the contractual obligations reported in our Annual Report on Form 10-K for the year endedMay 30, 2020 .
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
© Edgar Online, source
