Resources Connection, Inc. (NASDAQ:RGP) Q2 2021 Results Conference Call January 6, 2021 5:00 PM ET Company Participants Kate Duchene - CEO Tim Brackney - President and COO Jen Ryu - CFO Conference Call Participants Josh Vogel - Sidoti Mark Marcon - Baird Andrew Steinerman - JP Morgan Operator Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and ins ...

[Company Information](index=1&type=section&id=Company%20Information) Provides registrant details for RESOURCES CONNECTION, INC., a Delaware corporation, including its Nasdaq listing and common stock outstanding [Registrant Details](index=1&type=section&id=Registrant%20Details) RESOURCES CONNECTION, INC. (RGP) is a Delaware corporation, an accelerated filer, with its common stock traded on The Nasdaq Stock Market LLC - Registrant Name: **RESOURCES CONNECTION, INC.**[2](index=2&type=chunk) - State of Incorporation: **Delaware**[2](index=2&type=chunk) Company Filing Status and Stock Information | Metric | Value | | :--- | :--- | | Trading Symbol | RGP | | Exchange | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) | | Filer Status | Accelerated filer | | Common Stock Outstanding (as of Oct 2, 2020) | 32,433,305 shares | | Par Value per Share | $0.01 | [PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) Presents unaudited consolidated financial statements and management's discussion for the period ended August 29, 2020 - Financial statements are unaudited and prepared in accordance with GAAP for interim financial information[21](index=21&type=chunk) - Interim results are not necessarily indicative of full fiscal year results and should be read in conjunction with the Fiscal Year 2020 Form 10-K[22](index=22&type=chunk) [ITEM 1. Consolidated Financial Statements (Unaudited)](index=3&type=section&id=ITEM%201.%20Consolidated%20Financial%20Statements%20(Unaudited)) Presents the unaudited consolidated financial statements for Resources Connection, Inc. for the period ended August 29, 2020, prepared in accordance with GAAP for interim financial information [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Presents the company's financial position, detailing assets, liabilities, and equity as of August 29, 2020, and May 30, 2020 Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | August 29, 2020 | May 30, 2020 | Change (Aug 29 vs May 30) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $114,551 | $95,624 | +$18,927 | | Trade accounts receivable, net | $108,242 | $124,986 | -$16,744 | | Total current assets | $231,514 | $230,999 | +$515 | | Goodwill | $216,091 | $214,067 | +$2,024 | | Total assets | $529,162 | $529,181 | -$19 | | Total current liabilities | $88,058 | $94,901 | -$6,843 | | Long-term debt | $88,000 | $88,000 | $0 | | Total liabilities | $219,234 | $225,520 | -$6,286 | | Total stockholders' equity | $309,928 | $303,661 | +$6,267 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Details the company's revenues, expenses, and net income for the three months ended August 29, 2020, and August 24, 2019 Consolidated Statements of Operations Highlights (Three Months Ended, Amounts in thousands, except per share amounts) | Metric | August 29, 2020 | August 24, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Revenue | $147,346 | $172,225 | -$24,879 (-14.4%) | | Gross margin | $57,897 | $67,503 | -$9,606 (-14.2%) | | Income from operations | $4,206 | $8,062 | -$3,856 (-47.8%) | | Net income | $2,284 | $4,939 | -$2,655 (-53.8%) | | Basic Net income per common share | $0.07 | $0.16 | -$0.09 | | Diluted Net income per common share | $0.07 | $0.15 | -$0.08 | | Cash dividends declared per common share | $0.14 | $0.14 | $0.00 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Reports net income and other comprehensive income components, such as foreign currency translation adjustments, for the three months ended August 29, 2020 Consolidated Statements of Comprehensive Income Highlights (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income | $2,284 | $4,939 | -$2,655 | | Foreign currency translation adjustment, net of tax | $4,316 | $(686) | +$5,002 | | Total comprehensive income | $6,600 | $4,253 | +$2,347 | [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Outlines changes in stockholders' equity, including net income, dividends, and other comprehensive income, for the three months ended August 29, 2020 Consolidated Statements of Stockholders' Equity Highlights (Amounts in thousands) | Metric | May 30, 2020 | August 29, 2020 | Change | | :--- | :--- | :--- | | Total Stockholders' Equity | $303,661 | $309,928 | +$6,267 | | Additional Paid-in Capital | $477,438 | $481,571 | +$4,133 | | Retained Earnings | $360,534 | $358,294 | -$2,240 | | Accumulated Other Comprehensive Loss | $(13,862) | $(9,546) | +$4,316 | - Changes in stockholders' equity for the three months ended August 29, 2020, included **$2.3 million in net income**, a **$4.3 million positive currency translation adjustment**, and **$4.5 million in cash dividends declared**[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended August 29, 2020 Consolidated Statements of Cash Flows Highlights (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $18,586 | $(3,038) | +$21,624 | | Net cash used in investing activities | $(247) | $(24,822) | +$24,575 | | Net cash (used in) provided by financing activities | $(1,530) | $30,744 | -$32,274 | | Net increase in cash | $18,927 | $2,678 | +$16,249 | | Cash and cash equivalents at end of period | $114,551 | $45,723 | +$68,828 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed disclosures and explanations for the consolidated financial statements, covering accounting policies, acquisitions, and other financial details [1. Description of the Company and its Business](index=8&type=section&id=1.%20Description%20of%20the%20Company%20and%20its%20Business) Describes Resources Connection, Inc. as a global consulting firm offering professional staffing and project execution services - Resources Connection, Inc. (RGP) is a global consulting firm providing professional staffing and project execution services in transactions, regulations, and transformations[19](index=19&type=chunk) - The Company operates in the U.S., Asia, Australia, Canada, Europe, and Mexico[19](index=19&type=chunk) - The fiscal year consists of **52 or 53 weeks**, ending on the Saturday closest to May 31[20](index=20&type=chunk) [2. Summary of Significant Accounting Policies](index=8&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) Outlines the key accounting principles and policies used in preparing the interim financial statements, including revenue recognition and valuation - The financial statements are prepared in accordance with U.S. GAAP for interim financial information, with certain disclosures condensed or omitted per SEC rules[21](index=21&type=chunk) - Critical accounting policies include allowance for doubtful accounts, income taxes, revenue recognition, stock-based compensation, valuation of long-lived assets, goodwill, and business combinations[23](index=23&type=chunk)[25](index=25&type=chunk) - The Company adopted ASU 2016-13 (Credit Losses) in Q1 FY2021, which did not have a material impact on financial condition, results of operations, or cash flows[32](index=32&type=chunk)[33](index=33&type=chunk) Net Income Per Common Share (Three Months Ended, Amounts in thousands, except per share amounts) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Net income | $2,284 | $4,939 | | Basic EPS | $0.07 | $0.16 | | Diluted EPS | $0.07 | $0.15 | | Basic Weighted average shares | 32,183 | 31,788 | | Diluted Weighted average shares | 32,232 | 32,267 | | Anti-dilutive shares not included | 5,324 | 3,345 | [3. Acquisition](index=10&type=section&id=3.%20Acquisition) Details the acquisition of Veracity Consulting Group, LLC, including the purchase price and contingent consideration liability - On July 31, 2019, RGP acquired Veracity Consulting Group, LLC for approximately **$38.6 million**[34](index=34&type=chunk) - The acquisition includes earn-out payments based on Veracity's EBITDA performance, measured as a Level 3 fair value liability using Monte Carlo simulation[34](index=34&type=chunk) Veracity Contingent Consideration Liability (Amounts in thousands) | Metric | August 29, 2020 | May 30, 2020 | | :--- | :--- | :--- | | Total contingent consideration liabilities | $8,500 | $7,900 | | Increase in fair value (Q1 FY2021) | $500 | N/A | | Current portion (Other current liabilities) | $5,300 | N/A | | Noncurrent portion (Long-term liabilities) | $2,800 | N/A | [4. Intangible Assets and Goodwill](index=10&type=section&id=4.%20Intangible%20Assets%20and%20Goodwill) Provides a breakdown of intangible assets and goodwill, including amortization expense and the impact of foreign currency changes Intangible Assets, Net (Amounts in thousands) | Category | August 29, 2020 | May 30, 2020 | | :--- | :--- | :--- | | Customer contracts and relationships | $16,207 | $17,072 | | Tradenames | $1,983 | $2,225 | | Backlog | $306 | $516 | | Consultant list | $0 | $58 | | Non-compete agreements | $43 | $67 | | Computer software | $122 | $139 | | Total Intangible Assets, Net | $18,661 | $20,077 | Amortization Expense and Goodwill (Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Amortization expense (3 months ended) | $1,500 | $1,100 | | Goodwill, end of period | $216,091 | N/A | | Goodwill, beginning of period | $214,067 | N/A | | Impact of foreign currency exchange rate changes on Goodwill | $2,024 | N/A | Future Estimated Amortization Expense (Amounts in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2021 (remaining 9 months) | $3,113 | | 2022 | $3,360 | | 2023 | $3,151 | | 2024 | $3,119 | | 2025 | $3,119 | | 2026 | $2,326 | | Total | $18,188 | [5. Leases](index=11&type=section&id=5.%20Leases) Details the company's lease costs, weighted average lease terms, discount rates, and future operating lease maturities Total Lease Cost (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Operating lease cost | $2,873 | $3,080 | | Short-term lease cost | $63 | $78 | | Variable lease cost | $567 | $604 | | Sublease income | $(222) | $(121) | | Total lease cost | $3,281 | $3,641 | Operating Lease Metrics | Metric | August 29, 2020 | May 30, 2020 | | :--- | :--- | :--- | | Weighted average remaining lease term | 4.1 years | 4.3 years | | Weighted average discount rate | 4.06% | 4.09% | Operating Lease Maturity as of August 29, 2020 (Amounts in thousands) | Years Ending | Operating Lease Maturity | | :--- | :--- | | May 29, 2021 | $9,818 | | May 28, 2022 | $11,382 | | May 27, 2023 | $8,978 | | May 25, 2024 | $7,181 | | May 31, 2025 | $3,442 | | Thereafter | $3,186 | | Total minimum payments | $43,987 | | Less: discount | $(3,525) | | Present value of operating lease liabilities | $40,462 | - The Company leases office space, vehicles, and equipment under operating leases and subleases a portion of its headquarters, generating rental income[40](index=40&type=chunk)[42](index=42&type=chunk) [6. Income Taxes](index=12&type=section&id=6.%20Income%20Taxes) Presents the provision for income taxes and the effective tax rate, explaining the factors influencing changes Income Tax Provision and Effective Tax Rate (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Provision for income taxes | $2,000 | $2,600 | | Effective tax rate | 46.1% | 34.8% | | Unrecognized tax benefits liability | $800 | $800 | - The increase in the effective tax rate was primarily due to **higher international losses** and **lower domestic pretax income** in Q1 FY2021[43](index=43&type=chunk) [7. Long-Term Debt](index=12&type=section&id=7.%20Long-Term%20Debt) Describes the company's secured revolving credit facility, outstanding borrowings, and compliance with financial covenants - The Company has a **$120.0 million secured revolving credit facility** with Bank of America, available for working capital and general corporate purposes[44](index=44&type=chunk) - Borrowings bear interest at LIBOR plus a margin or an alternate base rate plus a margin, with rates ranging from **1.98% to 2.49%** as of August 29, 2020[44](index=44&type=chunk)[48](index=48&type=chunk) Long-Term Debt and Facility Capacity (Amounts in millions) | Metric | August 29, 2020 | | :--- | :--- | | Borrowings on Facility | $88.0 | | Outstanding letters of credit | $1.3 | | Remaining capacity under Revolving Commitment | $0.7 | | Remaining capacity under Reducing Revolving Commitment | $30.0 | - The Company was compliant with all financial covenants under the Facility as of August 29, 2020[45](index=45&type=chunk) [8. Stockholders' Equity](index=13&type=section&id=8.%20Stockholders'%20Equity) Discusses changes in stockholders' equity, including stock repurchase programs and declared cash dividends - The Company's July 2015 stock repurchase program had approximately **$85.1 million remaining available** for future repurchases as of August 29, 2020[49](index=49&type=chunk) - A quarterly cash dividend of **$0.14 per common share** was declared on July 30, 2020, totaling approximately **$4.5 million**[50](index=50&type=chunk) [9. Restructuring Activities](index=13&type=section&id=9.%20Restructuring%20Activities) Details the North America and APAC Plan, including associated costs and employee separation liabilities - The North America and APAC Plan, initiated in March 2020, aims to streamline management, eliminate positions, and rationalize real estate[52](index=52&type=chunk) Restructuring Costs (Three Months Ended, Amounts in thousands) | Cost Type | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Employee termination costs | $938 | $0 | | Real estate exit costs | $22 | $0 | | Other costs | $56 | $0 | | Total restructuring costs | $1,016 | $0 | Employee Separation Liability (Amounts in thousands) | Metric | Amount | | :--- | :--- | | Liability balance at May 30, 2020 | $1,874 | | Increase in liability (restructuring costs) | $938 | | Reduction in liability (payments and others) | $(1,409) | | Liability balance at August 29, 2020 | $1,403 | | Cumulative restructuring costs (as of Aug 29, 2020) | $6,000 | | Expected additional employee termination costs (FY2021) | $400 | [10. Supplemental Disclosure of Cash Flow Information](index=14&type=section&id=10.%20Supplemental%20Disclosure%20of%20Cash%20Flow%20Information) Provides additional details on non-cash investing and financing activities, as well as income taxes and interest paid Supplemental Cash Flow Information (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Income taxes paid | $873 | $1,432 | | Interest paid | $460 | $477 | | Non-cash investing and financing activities: | | | | Liability for contingent consideration (Veracity acquisition) | $0 | $10,400 | | Dividends declared, not paid | $4,509 | $4,476 | [11. Stock-Based Compensation Plans](index=14&type=section&id=11.%20Stock-Based%20Compensation%20Plans) Outlines the company's stock-based compensation plans, including stock option activity and unrecognized compensation costs - The 2014 Performance Incentive Plan allows for various awards, with **1,724,000 shares available for grant** as of August 29, 2020[58](index=58&type=chunk) Stock-Based Compensation Expense (Three Months Ended, Amounts in thousands) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Stock-based compensation expense | $1,400 | $1,500 | Stock Option Activity (Three Months Ended August 29, 2020, Amounts in thousands, except weighted average exercise price) | Metric | Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at May 30, 2020 | 5,755 | $16.07 | | Exercised | (44) | $11.36 | | Forfeited | (131) | $17.36 | | Expired | (141) | $16.04 | | Outstanding at August 29, 2020 | 5,439 | $16.08 | | Exercisable at August 29, 2020 | 3,179 | $15.11 | | Unrecognized compensation cost | $6,400 | N/A | | Weighted-average recognition period | 1.70 years | N/A | - The Employee Stock Purchase Plan (ESPP) allows employees to purchase common stock at **85% of the lesser of the fair market value** at the beginning or end of semi-annual periods[63](index=63&type=chunk) - **245,000 shares were issued** under ESPP in Q1 FY2021[64](index=64&type=chunk) - As of August 29, 2020, there was approximately **$1.7 million of remaining unrecognized compensation cost** for unvested restricted awards, expected to be recognized over **1.67 years**[65](index=65&type=chunk) [12. Legal Proceedings](index=15&type=section&id=12.%20Legal%20Proceedings) States that the company is not involved in any material legal proceedings that would adversely affect its financial position - Management believes that all legal matters, if disposed of unfavorably, would not have a material adverse effect on the Company's financial position, cash flows, or results of operations[66](index=66&type=chunk) [13. Subsequent Events](index=15&type=section&id=13.%20Subsequent%20Events) Discloses significant events occurring after the balance sheet date, such as credit agreement amendments and a new European restructuring plan - On September 3, 2020, the Credit Agreement was amended to extend the maturity date to **October 17, 2022**, increase the Revolving Commitment to **$120.0 million**, and modify interest rates[67](index=67&type=chunk) - On September 21, 2020, the Company repaid **$20.0 million** on its Facility, reducing outstanding borrowing to **$68.0 million**[68](index=68&type=chunk) - The Board approved a European Restructuring Plan in September 2020, including a proposed **40% reduction in force** and real estate footprint reduction[69](index=69&type=chunk) - Expected employee termination costs for the European Plan range from **$5.5 million to $6.5 million**, with anticipated annual pre-tax savings of **$6.0 million to $7.0 million** in personnel costs[70](index=70&type=chunk) - Expected cash and non-cash charges for European real estate exit initiatives are **$2.5 million to $3.5 million**, with anticipated annual pre-tax savings of **$1.0 million to $2.0 million** in occupancy and G&A costs[71](index=71&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on the Company's financial condition and results of operations, including an overview of the business, strategic focus areas, the impact of COVID-19, critical accounting policies, detailed analysis of operating results, and discussion of liquidity and capital resources - The discussion includes forward-looking statements subject to known and unknown risks and uncertainties[73](index=73&type=chunk)[74](index=74&type=chunk) [Overview](index=16&type=section&id=Overview) Describes RGP as a global consulting firm providing professional staffing and project execution services to a broad client base - RGP is a global consulting firm focused on professional staffing and project execution in transactions, regulations, and transformations[75](index=75&type=chunk) - The Company serves **88 of the Fortune 100**, with over **3,300 professionals** engaging with more than **2,400 clients globally**[77](index=77&type=chunk) - RGP aims to be the premier provider of agile human capital solutions and a preferred employer for experienced consultants[77](index=77&type=chunk) [Fiscal 2021 Strategic Focus Areas](index=17&type=section&id=Fiscal%202021%20Strategic%20Focus%20Areas) Outlines key strategic initiatives for fiscal year 2021, including digital expansion, core business growth, and global cost structure optimization - Primary focus is digital expansion, including launching a human cloud platform and expanding Veracity's go-to-market penetration[78](index=78&type=chunk)[84](index=84&type=chunk) - Second focus is building the core business through strategic client and industry vertical programs, particularly in healthcare[79](index=79&type=chunk)[84](index=84&type=chunk) - Third focus is global cost structure optimization, continuing the North America and APAC Plan and initiating the European Plan[80](index=80&type=chunk)[81](index=81&type=chunk)[84](index=84&type=chunk) - The North America and APAC Plan is substantially complete regarding headcount reduction, with expected savings of **$10.0 million to $12.0 million** in fiscal 2021[80](index=80&type=chunk) - The European Plan proposes a **40% reduction in force** and real estate footprint reduction, with expected annual pre-tax savings of **$6.0 million to $7.0 million** in personnel costs and **$1.0 million to $2.0 million** in occupancy costs[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk)[85](index=85&type=chunk) [COVID-19 Impact and Outlook](index=18&type=section&id=COVID-19%20Impact%20and%20Outlook) Discusses the pandemic's impact on revenue and operations, along with RGP's strategies to leverage accelerated market trends - The COVID-19 pandemic caused reduced demand, delayed client decisions, and project cancellations, leading to a **14.4% revenue decline** in Q1 FY2021[86](index=86&type=chunk) - The pandemic accelerated macro trends like increased use of contingent talent, virtual delivery, and borderless talent models, which RGP aims to leverage[87](index=87&type=chunk) - RGP remains focused on balance sheet health, liquidity, cost containment, and strategic allocation of resources to drive growth initiatives[88](index=88&type=chunk) [Critical Accounting Policies](index=18&type=section&id=Critical%20Accounting%20Policies) Confirms no material changes to critical accounting policies from the prior fiscal year's Form 10-K - There have been no material changes in critical accounting policies or underlying estimates and assumptions from those described in the Fiscal Year 2020 Form 10-K[90](index=90&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Provides a detailed analysis of the Company's financial performance for the three months ended August 29, 2020, compared to the prior year, including GAAP and non-GAAP measures, and explanations for significant changes in revenue, costs, and profitability [Non-GAAP Financial Measures](index=19&type=section&id=Non-GAAP%20Financial%20Measures) Explains the use and reconciliation of non-GAAP financial measures like 'Same day constant currency revenue' and 'Adjusted EBITDA' - RGP uses non-GAAP measures like 'Same day constant currency revenue' and 'Adjusted EBITDA' to assess financial and operating performance[94](index=94&type=chunk)[95](index=95&type=chunk) - Same day constant currency revenue adjusts for foreign currency exchange rate fluctuations and differences in business days[96](index=96&type=chunk) - Adjusted EBITDA is net income before amortization, depreciation, interest, income taxes, plus stock-based compensation, restructuring costs, and contingent consideration adjustments[96](index=96&type=chunk) Reconciliation of GAAP to Non-GAAP Financial Measures (Three Months Ended, Amounts in thousands, except percentages) | Metric | August 29, 2020 | August 24, 2019 | | :--- | :--- | :--- | | Revenue (GAAP) | $147,346 | $172,225 | | Currency impact | $(173) | N/A | | Business days impact | $(2,053) | N/A | | Same day constant currency revenue | $145,120 | N/A | | Net income (GAAP) | $2,284 | $4,939 | | Adjustments (Amortization, Depreciation, Interest, Taxes, Stock-based comp, Restructuring, Contingent consideration) | $7,932 | $6,969 | | Adjusted EBITDA | $10,216 | $11,909 | | Adjusted EBITDA Margin | 6.9% | 6.9% | [Three Months Ended August 29, 2020 Compared to Three Months Ended August 24, 2019](index=21&type=section&id=Three%20Months%20Ended%20August%2029,%202020%20Compared%20to%20Three%20Months%20Ended%20August%2024,%202019) Compares the company's financial performance for the three-month periods, highlighting changes in revenue, expenses, and profitability - Revenue decreased by **$24.9 million (14.4%) to $147.3 million**, primarily due to the adverse impact of the Pandemic, with billable hours decreasing **15.2%**[102](index=102&type=chunk) - North America revenue decline was partially offset by a **$4.3 million increase** from the Veracity acquisition[102](index=102&type=chunk) - Direct cost of services decreased by **$15.3 million (14.6%)** due to fewer billable hours, maintaining a similar percentage of revenue (**60.7% vs 60.8%**)[103](index=103&type=chunk)[104](index=104&type=chunk) - Selling, General and Administrative (SG&A) expenses decreased by **$5.8 million**, driven by lower management compensation, travel expenses, legal expenses, personnel severance, and lease expenses, partially offset by contingent consideration expense and restructuring costs[106](index=106&type=chunk) - Income from operations decreased by **47.8% to $4.2 million**, and net income decreased by **53.8% to $2.3 million**[11](index=11&type=chunk) - The effective tax rate increased to **46.1% from 34.8%**, primarily due to higher international losses and lower domestic pretax income[111](index=111&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) Discusses the company's sources of liquidity, including cash from operations and its revolving credit facility, and future cash requirements - Primary liquidity sources are cash from operations and the **$120.0 million secured revolving credit facility**[115](index=115&type=chunk) Cash and Cash Equivalents (Amounts in millions) | Metric | August 29, 2020 | | :--- | :--- | | Cash and cash equivalents | $114.6 | | Held in international operations | $30.7 | - The Credit Agreement was amended on September 3, 2020, extending maturity to **October 2022** and increasing the Revolving Commitment to **$120.0 million**[117](index=117&type=chunk) - Expected cash requirement for remaining restructuring actions is **$8.0 million to $11.0 million**[119](index=119&type=chunk) - Management believes current cash, operating cash flows, and the Facility will be adequate for working capital, capital expenditures, and restructuring initiatives for at least the next 12 months[121](index=121&type=chunk) [Operating Activities](index=24&type=section&id=Operating%20Activities) Analyzes cash flows generated from or used in the company's primary business operations - Operating activities provided **$18.6 million in cash** for Q1 FY2021, a significant improvement from **$3.0 million cash used** in Q1 FY2020[122](index=122&type=chunk) - The improvement was driven by a **$16.8 million decrease in trade accounts receivable**, a **$4.5 million payroll tax payment deferral** under the CARES Act, higher accounts receivable collections, and favorable payroll timing[122](index=122&type=chunk) [Investing Activities](index=24&type=section&id=Investing%20Activities) Examines cash flows related to the acquisition and disposal of long-term assets and investments - Net cash used in investing activities was **$0.2 million** in Q1 FY2021, a substantial decrease from **$24.8 million** in Q1 FY2020[123](index=123&type=chunk) - Q1 FY2020 included **$30.3 million for the Veracity acquisition** and **$6.0 million in short-term investment redemptions**, while Q1 FY2021 primarily involved **$0.3 million in property and equipment purchases**[123](index=123&type=chunk) [Financing Activities](index=24&type=section&id=Financing%20Activities) Details cash flows from debt, equity transactions, and dividend payments - Net cash used in financing activities was **$1.5 million** in Q1 FY2021, compared to **$30.7 million provided** in Q1 FY2020[124](index=124&type=chunk) - Q1 FY2021 cash usage was primarily due to **$4.5 million in cash dividends paid**, partially offset by **$3.0 million from ESPP and stock option exercises**[124](index=124&type=chunk) - Q1 FY2020 cash provided included **$30.0 million net borrowing** under the Facility for the Veracity acquisition and **$4.9 million from ESPP/stock option exercises**, offset by **$4.1 million in dividends**[124](index=124&type=chunk) - The estimated fair value of contingent consideration for Veracity and Expertence was **$8.5 million** as of August 29, 2020, with **$5.3 million expected to be paid** in Q2 FY2021[125](index=125&type=chunk) [Recent Accounting Pronouncements](index=24&type=section&id=Recent%20Accounting%20Pronouncements) Refers to Note 2 for information on recently adopted accounting standards - Information regarding recent accounting pronouncements is contained in Note 2 – Summary of Significant Accounting Policies[126](index=126&type=chunk) [Off-Balance Sheet Arrangements](index=24&type=section&id=Off-Balance%20Sheet%20Arrangements) Confirms the absence of any off-balance sheet arrangements - The Company has no off-balance sheet arrangements[127](index=127&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Discusses the company's exposure to market risks, primarily from fluctuations in interest rates and foreign currency exchange rates, and their potential impact on financial results - RGP is exposed to interest rate risk from cash and cash equivalents (**$114.6 million**) and variable-rate borrowings (**$88.0 million**) under its Facility[129](index=129&type=chunk) - A **10% change in interest rates** would result in approximately a **$0.2 million change** in annual interest expense on current borrowings[130](index=130&type=chunk) - Approximately **19.4% of Q1 FY2021 revenues** were generated outside the U.S., exposing the Company to foreign currency exchange rate risk[131](index=131&type=chunk) - Approximately **26.8% of cash and cash equivalents** were denominated in foreign currencies as of August 29, 2020[132](index=132&type=chunk) - The Company does not currently use financial hedging techniques to mitigate foreign currency fluctuation risks[133](index=133&type=chunk) [ITEM 4. Controls and Procedures](index=25&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of August 29, 2020 - The Company's disclosure controls and procedures were effective as of August 29, 2020[134](index=134&type=chunk) - There was no material change in the Company's internal control over financial reporting during the quarter ended August 29, 2020[134](index=134&type=chunk) [PART II—OTHER INFORMATION](index=25&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) Contains additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits [ITEM 1. Legal Proceedings](index=25&type=section&id=ITEM%201.%20Legal%20Proceedings) States that the Company is not a party to any material legal proceedings - The Company is not a party to any material legal proceedings[135](index=135&type=chunk) [ITEM 1A. Risk Factors](index=25&type=section&id=ITEM%201A.%20Risk%20Factors) Refers to the risk factors disclosed in the Company's Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year ended May 30, 2020[136](index=136&type=chunk) [ITEM 6. Exhibits](index=26&type=section&id=ITEM%206.%20Exhibits) Lists the exhibits filed with or incorporated by reference into the Quarterly Report on Form 10-Q - Key exhibits include the Fifth Amendment to Credit Agreement, CEO and CFO certifications (302 and 906), and Inline XBRL financial statements[140](index=140&type=chunk) [Signatures](index=28&type=section&id=Signatures) Contains the official signatures of the Company's authorized officers for the Quarterly Report on Form 10-Q - The report is signed by Kate W. Duchene (President, Chief Executive Officer) and Jennifer Ryu (Chief Financial Officer and Executive Vice President) on October 8, 2020[145](index=145&type=chunk)[146](index=146&type=chunk)

Resources Connection, Inc. (NASDAQ:RGP) Q1 2021 Earnings Conference Call October 7, 2020 5:00 PM ET Company Participants Kate Duchene - CEO Tim Brackney - President and COO Jennifer Ryu - CFO Lauren Elkerson - General Counsel Conference Call Participants Josh Vogel - Sidoti & Company Andrew Steinerman - JPMorgan Operator Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a quest ...

[Part I](index=4&type=section&id=PART%20I) [Business](index=4&type=section&id=ITEM%201.%20BUSINESS.) RGP is a global consulting firm providing agile human capital solutions for transactions, regulations, and transformations to a diverse client base [Overview](index=4&type=section&id=Overview) RGP is a global consulting firm providing human capital solutions to over 2,400 clients, including 88 of the Fortune 100 - RGP is a global consulting firm specializing in solving business problems across transactions, regulations, and transformations by providing human capital solutions[15](index=15&type=chunk) - As of July 2020, RGP has served **88 of the Fortune 100 companies** and engages with over 2,400 clients worldwide annually, supported by a professional team of more than 3,400 individuals[16](index=16&type=chunk) [Industry Background and Trends](index=4&type=section&id=Industry%20Background%20and%20Trends) The professional services market is shifting towards flexible, project-based workforce strategies, a trend accelerated by the COVID-19 pandemic - There is a growing trend of corporations adopting more flexible workforce strategies, moving away from permanent professional roles towards engaging agile talent for project initiatives, which may be accelerated by the COVID-19 pandemic[17](index=17&type=chunk) - The supply of professionals seeking agile work is increasing due to a desire for flexible hours, diverse and challenging engagements, and more control over their client projects[19](index=19&type=chunk) [RGP's Strategic Priorities](index=5&type=section&id=RGP's%20Strategic%20Priorities) RGP's strategy focuses on hiring high-caliber consultants, building consultative client relationships, and driving growth through client penetration and strategic acquisitions - The company's business strategy is centered on hiring experienced consultants, fostering a unique corporate culture (LIFE AT RGP), building relationship-oriented client services, and enhancing the RGP brand as a premier provider of agile human capital[23](index=23&type=chunk)[24](index=24&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - Key growth strategies include deeper penetration of the existing client base, attracting new clients through networking and marketing, making strategic acquisitions like **Veracity and Expertence in fiscal 2020**, and expanding service offerings in areas like finance and digital transformation[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) [COVID-19 Impact](index=7&type=section&id=COVID-19%20Impact) The COVID-19 pandemic adversely impacted operating results in the second half of fiscal 2020 and is expected to continue this impact into fiscal 2021 - The COVID-19 pandemic adversely affected operating results in the second half of fiscal 2020, and this **negative impact is expected to persist into fiscal 2021**[35](index=35&type=chunk) - The company initiated a strategic business review and reduction in force in North America and Asia Pacific in early March 2020, which it believes has increased its agility to handle the challenges posed by the pandemic[35](index=35&type=chunk) [Consultants, Clients, and Operations](index=7&type=section&id=Consultants%2C%20Clients%2C%20and%20Operations) RGP engages nearly 2,500 consultants to serve over 2,400 clients, with operations managed locally and supported by centralized administrative functions - As of May 30, 2020, RGP employed or contracted **2,495 consultants**, with U.S. consultants typically being employees and international consultants being a mix of employees and independent contractors[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk) - In fiscal 2020, RGP served over 2,400 clients across 37 countries, with **no single client exceeding 10% of revenues**[39](index=39&type=chunk) - The company operates on a local market level with centralized support for administrative, marketing, finance, HR, IT, and legal functions from its Irvine, CA headquarters and a European support center in Utrecht, Netherlands[40](index=40&type=chunk)[45](index=45&type=chunk) [Competition](index=9&type=section&id=Competition) RGP operates in a fragmented and competitive market, competing on quality, speed, and price against a diverse range of professional services firms - The company competes with a diverse range of organizations, including consulting firms, accounting firms, independent contractors, staffing firms, and clients' internal teams[49](index=49&type=chunk)[56](index=56&type=chunk) [Risk Factors](index=9&type=section&id=ITEM%201A.%20RISK%20FACTORS.) The company faces significant risks from the COVID-19 pandemic, economic conditions, market competition, and challenges in retaining personnel and managing cybersecurity - The COVID-19 pandemic poses a significant risk, having already caused reduced demand, project cancellations, and a **9.1% decline in average weekly revenue** in the latter part of Q4 fiscal 2020, with potential for goodwill impairment[54](index=54&type=chunk)[55](index=55&type=chunk)[57](index=57&type=chunk) - The business is vulnerable to economic downturns, which can reduce demand for services and impact the collectability of receivables, potentially triggering goodwill impairment[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) - The company operates in a **highly competitive and fragmented market**, facing pressure from consulting firms, accounting firms, and staffing agencies with greater resources[62](index=62&type=chunk) - The success of the business depends on **retaining highly qualified consultants and key senior management**, the loss of whom could adversely affect operating results[74](index=74&type=chunk)[83](index=83&type=chunk) - **Cybersecurity breaches, system interruptions, and failure to comply with evolving data privacy laws like GDPR** pose significant risks, potentially leading to legal liability and financial penalties[77](index=77&type=chunk)[81](index=81&type=chunk) - The **reclassification of independent contractors as employees** by foreign authorities could negatively impact the business model and result in significant retroactive costs[92](index=92&type=chunk) [Properties](index=17&type=section&id=ITEM%202.%20PROPERTIES.) RGP maintains 62 offices globally, mostly leased, and owns its 57,000 square foot corporate headquarters in Irvine, California - As of May 30, 2020, the company maintained **39 domestic and 23 international offices**, primarily through operating leases[95](index=95&type=chunk) - The company owns its corporate office building in Irvine, California, which is approximately 57,000 square feet[95](index=95&type=chunk) [Legal Proceedings](index=17&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS.) The company is not currently subject to any material legal proceedings - The company is not currently involved in any material legal proceedings[96](index=96&type=chunk) [Part II](index=18&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=18&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES.) The company changed its ticker to 'RGP', maintained its quarterly dividend, and made no stock repurchases in Q4 fiscal 2020 - On April 2, 2020, the company's ticker symbol changed from 'RECN' to **'RGP'** to align with its trade name[100](index=100&type=chunk) - The company declared a quarterly dividend of **$0.14 per share** in fiscal 2020, up from $0.13 in fiscal 2019[101](index=101&type=chunk) - The company has a **$150.0 million stock repurchase program** authorized in July 2015, with no repurchases made in the fourth quarter of fiscal 2020[103](index=103&type=chunk)[104](index=104&type=chunk) [Selected Financial Data](index=20&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA.) The company presents a five-year summary of key financial data, showing a revenue decrease to $703.4 million in fiscal 2020 Selected Financial Data (FY2016-FY2020) | | FY 2020 (53 wks) | FY 2019 (52 wks) | FY 2018 (52 wks) | FY 2017 (52 wks) | FY 2016 (52 wks) | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $703,353 | $728,999 | $654,129 | $583,411 | $598,521 | | **Income from operations** | $36,652 | $50,159 | $30,624 | $34,402 | $53,803 | | **Net income** | $28,285 | $31,470 | $18,826 | $18,651 | $30,443 | | **Diluted EPS** | $0.88 | $0.98 | $0.60 | $0.56 | $0.81 | | **Total assets** | $529,181 | $428,370 | $432,674 | $364,128 | $417,255 | | **Long-term debt** | $88,000 | $43,000 | $63,000 | $48,000 | $ - | | **Stockholders' equity** | $303,661 | $282,396 | $268,825 | $238,142 | $342,649 | *All amounts in thousands, except per share data.* [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=20&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS.) Fiscal 2020 revenue decreased 3.5% due to COVID-19, while a global restructuring plan aims for future savings and liquidity remains sufficient [Fiscal 2020 Strategic Focus and Restructuring](index=21&type=section&id=Fiscal%202020%20Strategic%20Focus%20and%20Restructuring) RGP acquired Veracity Consulting to enhance digital offerings and initiated a global restructuring plan expected to generate significant cost savings - Acquired Veracity Consulting Group, a digital transformation firm, to offer end-to-end digital solutions[120](index=120&type=chunk) - Initiated a global restructuring plan, which included a reduction in force (RIF) eliminating 73 positions and a plan to shrink the global real estate footprint by 26%[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk) Fiscal 2020 Restructuring Costs | Cost Type | Amount (in millions) | Note | | :--- | :--- | :--- | | Employee Termination Costs | $3.9 | For RIF in North America & Asia Pacific | | Real Estate Exit Costs | $1.1 | Non-cash charges for lease terminations | | **Total FY2020 Costs** | **$5.0** | | - The restructuring plan is expected to yield savings of **$10.0 million to $12.0 million** in fiscal 2021[125](index=125&type=chunk) [COVID-19 Impact and Outlook](index=22&type=section&id=COVID-19%20Impact%20and%20Outlook) The pandemic negatively impacted Q4 fiscal 2020 revenue and consultant count, but the company believes its strong liquidity position is sufficient to manage uncertainty - Average weekly revenue **declined 9.1%** during the last 12 non-holiday weeks of Q4 fiscal 2020 compared to the first eight non-holiday weeks of the 2020 calendar year[127](index=127&type=chunk) - The number of consultants on assignment decreased from 2,965 at the end of fiscal 2019 to **2,495 at the end of fiscal 2020**[127](index=127&type=chunk) - As of May 30, 2020, the company had **$95.6 million in cash and cash equivalents** and an additional $30.7 million available under its credit facility[128](index=128&type=chunk) - The company deferred **$2.9 million in U.S. payroll tax payments** under the CARES Act but does not intend to file for other funding[129](index=129&type=chunk) [Critical Accounting Policies](index=22&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies require significant management judgment, particularly for goodwill, income taxes, and revenue recognition - Key areas requiring significant management estimates include allowance for doubtful accounts, income taxes, revenue recognition, stock-based compensation, and valuation of goodwill, long-lived assets, and business combinations[133](index=133&type=chunk) - **Goodwill is tested for impairment annually** by comparing the fair value of the single reporting unit to its carrying value; no impairment was recorded in fiscal 2020[142](index=142&type=chunk) - Contingent consideration from acquisitions is recorded at fair value at the acquisition date and remeasured each reporting period, with changes in fair value recognized in the results of operations[144](index=144&type=chunk) [Results of Operations (FY2020 vs. FY2019)](index=25&type=section&id=Results%20of%20Operations%20(FY2020%20vs.%20FY2019)) Fiscal 2020 revenue and operating income declined due to the pandemic and project wind-downs, though gross margin improved and the tax rate fell significantly Fiscal 2020 vs. 2019 Results of Operations | Metric | FY 2020 | FY 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $703.4M | $729.0M | (3.5)% | | Same Day Organic Revenue | $671.0M | $716.9M | (6.4)% | | Gross Margin | 39.2% | 38.7% | +0.5 ppt | | SG&A as % of Revenue | 32.4% | 30.7% | +1.7 ppt | | Income from Operations | $36.7M | $50.2M | (26.9)% | | Net Income | $28.3M | $31.5M | (10.1)% | | Effective Tax Rate | 19.7% | 34.4% | -14.7 ppt | - The decrease in revenue was attributed to the adverse impact of the COVID-19 pandemic and the wind-down of large projects, particularly related to lease accounting implementation[159](index=159&type=chunk) - The increase in SG&A was primarily driven by **$5.0 million in restructuring costs** and a $1.4 million swing in contingent consideration adjustments[164](index=164&type=chunk) - The effective tax rate decreased significantly from 34.4% to 19.7% mainly due to a **$6.6 million net tax benefit from a worthless stock deduction** related to exiting certain European markets[167](index=167&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains sufficient liquidity through cash from operations and its credit facility, despite increased borrowings and cash outlays for acquisitions and dividends Cash Flow Summary (in millions) | Cash Flow Activity | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $49.5 | $43.6 | | Net Cash used in Investing Activities | ($26.8) | ($12.9) | | Net Cash from (used in) Financing Activities | $30.9 | ($43.6) | - As of May 30, 2020, the company had **$95.6 million in cash and cash equivalents** and **$88.0 million outstanding** on its $120.0 million credit facility[176](index=176&type=chunk)[178](index=178&type=chunk) - Key investing activities in FY2020 included the **$30.3 million net cash used for the Veracity acquisition**[180](index=180&type=chunk) - Key financing activities in FY2020 included **net borrowings of $45.0 million** from the credit facility, $17.6 million in dividend payments, and $5.0 million in share repurchases[182](index=182&type=chunk) [Contractual Obligations](index=32&type=section&id=Contractual%20Obligations) As of May 30, 2020, the company had future minimum commitments totaling $138.6 million, primarily for long-term debt and operating leases Contractual Obligations as of May 30, 2020 (in thousands) | Obligation Type | Total | Fiscal 2021 | Fiscal 2022-2023 | Fiscal 2024-2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $45,762 | $12,610 | $19,526 | $10,458 | $3,168 | | Purchase obligations | $4,855 | $2,797 | $2,058 | $ - | $ - | | Long-term debt | $88,000 | $ - | $88,000 | $ - | $ - | [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK.) The company is exposed to market risks from interest rate fluctuations on its variable-rate debt and foreign currency exchange rates - The company is exposed to interest rate risk on its **$88.0 million of variable-rate debt**, where a 10% change in rates would impact annual interest expense by approximately $0.2 million[194](index=194&type=chunk) - The company is exposed to foreign currency exchange rate risk, as approximately **19.1% of its fiscal 2020 revenues were generated outside the United States**, and does not currently use financial hedges[195](index=195&type=chunk)[197](index=197&type=chunk) [Financial Statements and Supplementary Data](index=34&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA.) This section contains the company's audited consolidated financial statements and accompanying notes for the three years ended May 30, 2020 [Consolidated Financial Statements](index=35&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements present the company's financial position, results of operations, and cash flows for the last three fiscal years Consolidated Balance Sheet Highlights (in thousands) | | May 30, 2020 | May 25, 2019 | | :--- | :--- | :--- | | Total Current Assets | $230,999 | $191,657 | | Total Assets | $529,181 | $428,370 | | Total Current Liabilities | $94,901 | $91,416 | | Total Liabilities | $225,520 | $145,974 | | Total Stockholders' Equity | $303,661 | $282,396 | Consolidated Statement of Operations Highlights (in thousands) | | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Revenue | $703,353 | $728,999 | $654,129 | | Gross Margin | $275,483 | $282,439 | $246,055 | | Income from Operations | $36,652 | $50,159 | $30,624 | | Net Income | $28,285 | $31,470 | $18,826 | [Notes to Consolidated Financial Statements](index=41&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail key accounting policies and events, including the adoption of a new lease standard, acquisitions, restructuring, and debt facilities - Adopted new lease standard ASC 842 on May 26, 2019, recognizing **$43.2 million of ROU assets and $51.0 million of operating lease liabilities** on the balance sheet[261](index=261&type=chunk) - Acquired Veracity on July 31, 2019, for total consideration of **$38.6 million**, including $32.3 million in cash and $6.3 million in estimated contingent consideration, adding $23.0 million in goodwill[268](index=268&type=chunk)[271](index=271&type=chunk)[273](index=273&type=chunk) - In fiscal 2020, the company initiated a global restructuring plan, incurring **$3.9 million in employee termination costs and $1.1 million in facility exit costs**[322](index=322&type=chunk)[324](index=324&type=chunk)[325](index=325&type=chunk) - As of May 30, 2020, borrowings under the **$120.0 million credit facility were $88.0 million**, with the facility expiring on October 17, 2021[300](index=300&type=chunk)[303](index=303&type=chunk) - The company has foreign net operating loss carryforwards of **$53.2 million**, of which $44.1 million have an unlimited carryforward period[308](index=308&type=chunk)[309](index=309&type=chunk) [Controls and Procedures](index=63&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES.) Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that the company's **disclosure controls and procedures were effective** as of May 30, 2020[345](index=345&type=chunk) - Management concluded that the company's **internal control over financial reporting was effective** as of May 30, 2020, based on the COSO 2013 framework[348](index=348&type=chunk) - The independent auditor, RSM US LLP, provided an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting as of May 30, 2020[349](index=349&type=chunk)[352](index=352&type=chunk) - There were **no material changes in internal control** over financial reporting during the fourth quarter of fiscal 2020[349](index=349&type=chunk) [Part III](index=65&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=65&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE.) This section incorporates by reference information on directors, officers, and governance from the company's 2020 proxy statement - Information regarding directors, executive officers, and corporate governance is **incorporated by reference** from the forthcoming 2020 proxy statement[361](index=361&type=chunk) - The company has adopted a code of business conduct and ethics applicable to all directors and employees, available on its website[360](index=360&type=chunk) [Executive Compensation](index=65&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION.) This section incorporates by reference all information regarding executive and director compensation from the company's 2020 proxy statement - All information related to executive compensation is **incorporated by reference** from the company's 2020 proxy statement[362](index=362&type=chunk) [Security Ownership and Related Stockholder Matters](index=65&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS.) Information on security ownership is incorporated by reference, and details of equity compensation plans are provided Equity Compensation Plan Information as of May 30, 2020 | Plan Category | Securities to Be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 5,755,018 | $16.07 | 3,093,776 | | Not approved by security holders | - | - | - | | **Total** | **5,755,018** | **$16.07** | **3,093,776** | - The **3,093,776 shares available for future issuance** consist of 1,640,778 shares under the ESPP and 1,452,998 shares under the 2014 Performance Incentive Plan[367](index=367&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=66&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE.) This section incorporates by reference information on related party transactions and director independence from the 2020 proxy statement - Information regarding related party transactions and director independence is **incorporated by reference** from the 2020 proxy statement[368](index=368&type=chunk) [Principal Accounting Fees and Services](index=66&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES.) This section incorporates by reference information regarding fees paid to the independent accounting firm from the 2020 proxy statement - Information on principal accounting fees and services is **incorporated by reference** from the 2020 proxy statement[369](index=369&type=chunk) [Part IV](index=67&type=section&id=PART%20IV) [Exhibit and Financial Statement Schedules](index=67&type=section&id=ITEM%2015.%20EXHIBIT%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES.) This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including material contracts and certifications - Lists the consolidated financial statements included in Item 8 of the report[370](index=370&type=chunk) - Provides an index of all exhibits filed with the report, including the company's bylaws, credit agreement, key employment agreements, and Sarbanes-Oxley certifications[373](index=373&type=chunk)[374](index=374&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q4 was $178.6 million, a decrease of 2% year-over-year and a 6.3% sequential increase [40] - Adjusted EBITDA increased to $18.6 million, representing 10.4% of revenue, up from 9.6% in the prior year quarter [10][43] - Net income for Q4 was $4.1 million, or $0.13 per diluted share, compared to $9.4 million, or $0.29 per diluted share in the prior year [42] Business Line Data and Key Metrics Changes - Organic revenue decreased by $18 million, or 10%, compared to Q4 of fiscal '19, with a constant currency decline of 9.5% [45] - Revenue from the largest clients increased by 9.1% year-over-year and 10.1% sequentially [47] - North American professional staffing revenue increased by 5.3% compared to Q4 last year [47] Market Data and Key Metrics Changes - Organic same-day revenue declined by 8.8% in North America, 12.7% in Europe, and 19.5% in Asia Pacific compared to Q4 fiscal '19 [46] - The average hourly bill rate for the quarter was approximately $127, up from $124 in the prior year quarter [50] Company Strategy and Development Direction - The company is focusing on cost control, building core client relationships, and digital expansion, including the launch of the HuGo platform [18][23] - The company anticipates a shift towards agile and contingent workers, with a predicted 5% increase in the use of contingent labor over the next two years [15] - The company aims to expand its presence in the healthcare industry, which is seen as a robust opportunity [22] Management's Comments on Operating Environment and Future Outlook - Management noted a slight uptick in the buying environment in June but indicated that new project signings remain soft [11] - The company expects continued challenges in revenue until greater clarity exists in the macro environment [11] - Management expressed optimism about the long-term sustainability of virtual delivery and borderless talent [29] Other Important Information - The company ended the fiscal year with cash and cash equivalents of $95.6 million, compared to $35.9 million at the end of Q3 [57] - The effective tax rate for the fourth quarter was 42%, impacted by lower pre-tax income and an increase in valuation allowance [56] Q&A Session Summary Question: How much of the business will remain virtual long-term? - Management estimates that about 50% of knowledge workers will remain virtual post-pandemic, finding it efficient and cost-effective [65][66] Question: Can you provide details on the real estate footprint? - The company plans to continue its real estate contraction strategy, having exited or sublet approximately half of its North American locations [71] Question: How has Veracity performed relative to expectations? - Management is pleased with Veracity's performance, expecting growth in the fiscal year despite some impact from COVID [76][78] Question: What are the trends in international operations, particularly in Asia Pacific? - Asia Pacific has shown stabilization, with consistent velocity and pipeline activity throughout the quarter [86] Question: What is the current headcount status and productivity? - The company has reduced headcount by approximately 8% in North America, with ongoing evaluations to ensure productivity [87][88]

Financial Data and Key Metrics Changes - Total revenue for Q3 fiscal '20 was $168.1 million, a 6.4% decrease year-over-year and an 8.9% decrease sequentially [59] - Gross margin for Q3 was 36.5%, down 130 basis points year-over-year and 380 basis points sequentially [60] - Net income for Q3 was $6.9 million or $0.21 per diluted share, up from $5.8 million or $0.18 per diluted share in the prior year quarter [61] Business Line Data and Key Metrics Changes - North America revenue decreased by $8 million or 5.4% year-over-year, with Veracity contributing $5.4 million [63] - Europe’s revenue decreased 13.8% year-over-year, with a $2.4 million decrease due to exit from the Nordics and Belgium markets [67] - Asia-Pacific revenue decreased 4.8% year-over-year, with significant impacts from COVID-19, particularly in China and Hong Kong [68] Market Data and Key Metrics Changes - North America saw a decline in revenue due to holiday impacts, while some markets like San Antonio and Seattle showed improvement [66] - The UK performed strongly compared to the prior year quarter, while Asia-Pacific showed signs of stabilization in China as the spread of COVID-19 slowed [69] Company Strategy and Development Direction - The company is undergoing a restructuring initiative called Project Strength, focusing on streamlining management, eliminating non-essential headcount, and reducing real estate spend [16][18] - The strategic shift towards a more virtual operating model aligns with the development of a human cloud platform expected in fiscal '21 [17] - The company aims to capitalize on macro trends favoring agile workforce strategies and project-oriented approaches [30][31] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's resilience and ability to adapt to the challenges posed by the COVID-19 pandemic [36][39] - The company anticipates that many transformation initiatives will continue despite the uncertain environment, with a focus on outreach and innovative client support [43] - There is significant uncertainty regarding the impact of COVID-19 on demand and client decisions, with some cancellations and delays already observed [77] Other Important Information - The company expects annual pre-tax savings of $13 million to $15 million from personnel cost reductions and $3 million to $4 million from reduced occupancy costs [81][83] - Cash and cash equivalents at the end of Q3 were $35.9 million, with receivables at $130.9 million [85] - The company has adopted a new stock ticker symbol, RGP, to enhance market clarity [91] Q&A Session Summary Question: What percentage of billable associates are able to work remotely? - Almost 100% of billable consultants are delivering remotely and continue to bill [99] Question: What might be the decremental margins in the fourth quarter? - Management indicated that there would be downward pressure on margins as they aim to preserve revenue and remain flexible for clients, but specific numbers are difficult to predict due to the fluid situation [102] Question: What percentage of revenue is associated with the practices being terminated? - The eight offices being closed represent less than 1% of total revenue [104][106] Question: How is the pipeline and ability to generate new engagements being impacted? - While the pipeline has seen some degradation, it remains higher than the previous year, with specific impacts noted in the Tri-State area due to the pandemic [109] Question: What is the current situation in China regarding business normalization? - Business in Shanghai is reported to be about 80% back to normal, with revenue streams starting to stabilize [116]

PART I—FINANCIAL INFORMATION [Consolidated Financial Statements](index=4&type=section&id=ITEM%201.%20Consolidated%20Financial%20Statements) The unaudited financial statements show decreased revenue and operating income, with net income rising due to a one-time tax benefit [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Total assets and liabilities increased, driven by goodwill from acquisitions and the adoption of new lease accounting standards Consolidated Balance Sheet Highlights (in thousands) | Account | Feb 22, 2020 | May 25, 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$485,974** | **$428,370** | **+13.4%** | | Cash and cash equivalents | $35,944 | $43,045 | -16.5% | | Goodwill | $213,451 | $190,815 | +11.9% | | Operating right-of-use assets | $38,176 | $ - | N/A | | **Total Liabilities** | **$183,172** | **$145,974** | **+25.5%** | | Long-term debt | $49,000 | $43,000 | +14.0% | | Operating lease liabilities | $44,776 | $ - | N/A | | **Total Stockholders' Equity** | **$302,802** | **$282,396** | **+7.2%** | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) Quarterly and nine-month revenues declined, but net income increased due to a significant income tax benefit Three Months Ended Performance (in thousands, except per share data) | Metric | Q3 FY2020 | Q3 FY2019 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $168,052 | $179,498 | -6.4% | | Gross Margin | $61,420 | $67,911 | -9.6% | | Income from Operations | $3,452 | $10,213 | -66.2% | | Net Income | $6,942 | $5,796 | +19.8% | | Diluted EPS | $0.21 | $0.18 | +16.7% | Nine Months Ended Performance (in thousands, except per share data) | Metric | 9M FY2020 | 9M FY2019 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $524,784 | $546,855 | -4.0% | | Gross Margin | $203,300 | $209,483 | -2.9% | | Income from Operations | $29,202 | $36,287 | -19.5% | | Net Income | $24,218 | $22,101 | +9.6% | | Diluted EPS | $0.75 | $0.68 | +10.3% | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow increased while investing cash use grew significantly due to the Veracity acquisition Cash Flow Summary for Nine Months Ended (in thousands) | Cash Flow Activity | Feb 22, 2020 | Feb 23, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,563 | $13,496 | | Net cash used in investing activities | ($26,469) | ($5,939) | | Net cash used in financing activities | ($1,824) | ($15,624) | | **Net decrease in cash** | **($7,101)** | **($8,503)** | | Cash at end of period | $35,944 | $47,967 | - The significant increase in cash used for investing activities was driven by the **$30.3 million acquisition of Veracity**, net of cash acquired[16](index=16&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail the adoption of a new lease standard, acquisitions, a major tax benefit, and subsequent events like restructuring and COVID-19 impacts - The company adopted ASU No 2016-02 (Leases) on May 26, 2019, resulting in the recognition of **material right-of-use assets and lease liabilities** on the Consolidated Balance Sheet[33](index=33&type=chunk)[37](index=37&type=chunk) - On July 31, 2019, the company acquired Veracity Consulting Group for initial cash consideration of **$30.3 million** to enhance its digital transformation capabilities[43](index=43&type=chunk) - A net tax benefit of **$6.6 million** was recorded in Q3 FY2020 due to a worthless stock deduction related to the company's decision to exit markets in Belgium, Luxembourg, and the Nordics[70](index=70&type=chunk)[141](index=141&type=chunk) - Subsequent to the quarter end, the company initiated a restructuring plan to reduce its workforce by **7.5%** and consolidate real estate, expecting to incur **$4-5 million** in termination costs[93](index=93&type=chunk)[94](index=94&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses revenue declines, strategic acquisitions, a major restructuring plan, and the emerging risks from the COVID-19 pandemic [Results of Operations](index=35&type=section&id=Results%20of%20Operations) Revenue fell across all geographic regions in Q3, driven by fewer billable days and exits from certain European markets Revenue by Geography - Three Months Ended (in thousands) | Region | Q3 FY2020 | Q3 FY2019 | % Change | | :--- | :--- | :--- | :--- | | North America | $138,819 | $146,817 | -5.4% | | Europe | $18,031 | $20,911 | -13.8% | | Asia Pacific | $11,202 | $11,770 | -4.8% | | **Total** | **$168,052** | **$179,498** | **-6.4%** | Revenue by Geography - Nine Months Ended (in thousands) | Region | 9M FY2020 | 9M FY2019 | % Change | | :--- | :--- | :--- | :--- | | North America | $431,617 | $446,811 | -3.4% | | Europe | $56,163 | $64,758 | -13.3% | | Asia Pacific | $37,004 | $35,286 | +4.9% | | **Total** | **$524,784** | **$546,855** | **-4.0%** | - Direct cost of services as a percentage of revenue increased to **63.5%** in Q3 FY2020 from 62.2% in Q3 FY2019, primarily due to an increase in holiday pay for consultants in the U.S[131](index=131&type=chunk) - SG&A expenses were flat at **$55.3 million** for Q3 FY2020 compared to $55.6 million in the prior year, but increased as a percentage of revenue to **32.9%** from 31.0%[133](index=133&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains liquidity through cash from operations and its credit facility, from which it drew an additional $39.0 million post-quarter-end - As of February 22, 2020, the company had **$49.0 million** in borrowings and **$69.5 million** available under its revolving credit facility[162](index=162&type=chunk) - In March 2020, the company borrowed an additional **$39.0 million** from its credit facility as a precautionary measure in response to the COVID-19 pandemic[94](index=94&type=chunk)[163](index=163&type=chunk) - Cash provided by operating activities for the nine-month period increased to **$21.6 million** from $13.5 million in the prior year[165](index=165&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to interest rate risk on its variable-rate debt and foreign currency exchange rate risk - The company is exposed to interest rate risk on its **$49.0 million** of variable-rate debt, with a 10% rate change estimated to impact annual interest expense by approximately **$0.2 million**[177](index=177&type=chunk)[180](index=180&type=chunk) - Approximately **19.0%** of revenues for the three months ended February 22, 2020, were generated outside the U.S, creating exposure to foreign currency exchange rate fluctuations[181](index=181&type=chunk) [Controls and Procedures](index=49&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of the end of the period, February 22, 2020[184](index=184&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=49&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings - The company states it is **not party to any material legal proceedings**[185](index=185&type=chunk) [Risk Factors](index=49&type=section&id=ITEM%201A.%20Risk%20Factors) A new significant risk factor has been added concerning the business impact of the COVID-19 pandemic - A new risk factor has been introduced concerning the business impact of epidemic diseases, specifically the **COVID-19 pandemic**[186](index=186&type=chunk) - The company notes that COVID-19 had an adverse impact on its business in Asia Pacific during the quarter and expects an **adverse impact on operating results** in the fourth quarter of fiscal 2020[186](index=186&type=chunk)[189](index=189&type=chunk) - Potential impacts from COVID-19 include **reduced demand**, delayed client decisions, and deterioration in clients' ability to pay, which could also lead to a goodwill impairment assessment[187](index=187&type=chunk)[188](index=188&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased approximately $5.0 million of its common stock during the third quarter Share Repurchases for Q3 FY2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Nov 24, 2019 – Feb 22, 2020 | 318,430 | $15.70 | - As of February 22, 2020, approximately **$85.1 million** remained available for repurchase under the company's authorized stock repurchase program[79](index=79&type=chunk)[192](index=192&type=chunk) [Other Information](index=51&type=section&id=ITEM%205.%20Other%20Information) The company details a significant restructuring plan to reduce its workforce and real estate footprint, expecting substantial annual savings - On February 27, 2020, the company committed to a restructuring plan to reduce its management and administrative workforce by approximately **7.5%** and consolidate its geographic presence[193](index=193&type=chunk) - The company expects to incur a restructuring charge of **$4 million to $5 million** for employee termination costs and anticipates annual pre-tax savings of **$13 million to $15 million** upon completion[194](index=194&type=chunk) - In March 2020, the company borrowed **$39.0 million** under its Credit Facility as a precautionary measure due to the uncertainty caused by the COVID-19 pandemic[196](index=196&type=chunk) [Exhibits](index=53&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications and employment agreements - The Exhibit Index lists documents filed with the report, including employment agreements for Jennifer Ryu, Kate W Duchene, and Tim Brackney, as well as required Sarbanes-Oxley certifications[197](index=197&type=chunk)[200](index=200&type=chunk)

Resources Connection, Inc. (NASDAQ:RECN) Q2 2020 Earnings Conference Call January 2, 2020 5:00 PM ET Company Participants Alice Washington - General Counsel Kate Duchene - Chief Executive Officer Tim Brackney - President and Chief Operating Officer Jennifer Ryu - Interim Chief Financial Officer Conference Call Participants Andrew Steinerman - JP Morgan Mark Marcon - Baird Operator Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Incorporated Conference Call. At this time, all p ...

"�RGP" Investor Presentation &RGP® F o r w a r d L o o k i n g S t a t e m e n t s During this presentation, we may make forward-looking statements – in other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are only predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 26, 2018 for a discussion of some of the risks, uncertainties and other factors such as sea ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 23, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-32113 RESOURCES CONNECTION, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 33-0832424 (S ...