PART I—FINANCIAL INFORMATION Consolidated Financial Statements The unaudited financial statements show decreased revenue and operating income, with net income rising due to a one-time tax benefit Consolidated Balance Sheets 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 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 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 acquired16 Notes to Consolidated Financial Statements 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 Sheet3337 - On July 31, 2019, the company acquired Veracity Consulting Group for initial cash consideration of $30.3 million to enhance its digital transformation capabilities43 - 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 Nordics70141 - 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 costs9394 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue declines, strategic acquisitions, a major restructuring plan, and the emerging risks from the COVID-19 pandemic Results of Operations 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.S131 - 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 Liquidity and Capital Resources 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 facility162 - 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 pandemic94163 - Cash provided by operating activities for the nine-month period increased to $21.6 million from $13.5 million in the prior year165 Quantitative and Qualitative Disclosures About Market Risk 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 million177180 - 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 fluctuations181 Controls and Procedures 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, 2020184 PART II—OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings - The company states it is not party to any material legal proceedings185 Risk Factors 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 pandemic186 - 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 2020186189 - 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 assessment187188 Unregistered Sales of Equity Securities and Use of Proceeds 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 program79192 Other Information 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 presence193 - 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 completion194 - 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 pandemic196 Exhibits 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 certifications197200
Resources nection(RGP) - 2020 Q3 - Quarterly Report