The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Part I, Item 1A. "Risk Factors." and elsewhere in this Annual Report on Form 10-K. See "Forward Looking Statements" above for further explanation.
Resources Global Professionals is a global consulting firm helping clients match the right professional talent needed to tackle transformation, change and compliance challenges. As a next-generation human capital partner for our clients, we specialize in solving today's most pressing business problems across the enterprise in the areas of transactions, regulations, and transformations. 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. Disrupting the professional services industry since our founding in 1996, we are the "now of work" - attracting the best talent in an increasingly fluid gig-oriented environment. Based in
Irvine, California, with offices worldwide, our agile human capital model attracts top-caliber professionals with in-demand skillsets who seek a workplace environment that embraces flexibility, collaboration and human connection. Our agile professional services model quickly aligns the right resources for the work at hand with speed and efficiency. Our approach to workforce strategy uniquely positions us to help our clients transform their businesses and workplaces. See Part 1, Item 1 "Business" for further discussions about our business and operations.
Key transformation initiatives
Over the last several years, we have made strides to ensure our company is truly global, scalable and distinctive in our culture and approach to professional services. We completed a number of transformative enterprise initiatives including cultivating a more robust sales culture, adopting a center-led operating model for sales, talent and delivery, refreshing the RGP brand, and developing a digital pathway to serve our clients through building and commercializing our digital engagement platform and enhancing our consulting capabilities in the digital transformation space. To optimize our sales organization, we aligned our sales process using tools such as Salesforce.com and implemented a new incentive compensation program focused on driving growth in our business with the appropriate metrics. In addition, we focused on client-centricity, including the establishment of our Strategic Client Account Program to serve a set of our largest global multi-national clients with a dedicated account team and our key industry vertical in healthcare. We will continue to invest in building broader and deeper relationships in these important clients to enhance the stickiness of our revenue stream. Under the new operating model, we realigned our organizational structure, largely defined by functional area rather than on an office location basis. We reorganized our Advisory and Project Services function, a team of seller-doer professionals whose primary responsibility is to shepherd sales pursuits and engagement delivery on our more complex projects. We believe this team deepens the scoping conversation, achieves value-oriented pricing and improves delivery management through greater accountability and a more seamless customer experience. Through an extensive brand refresh project, we adopted a new brand identity focused on our human-centered approach to serving clients and engaging with our consultants. We believe the continued development of our new brand will attract and retain both clients and consultants, supporting future revenue growth. Over recent years, explosive technological innovation has fueled the rise of digital transformation as a corporate imperative. Our clients have been forced to rethink the way they do business to stay ahead and compete with digitally native new entrants. In order to support our clients - including these digitally native businesses-we have evolved significantly to help clients solve their digital needs including automation, functional process redesign and technology migration. We acquired Veracity in 2019 to help us build end-to-end digital solutions for our clients who strive to automate workflows and increase collaboration - which has become even more important given the increasingly virtual nature of today's workforce as a result of the Pandemic. 23
As the Pandemic struck in the fourth quarter of our fiscal 2020, we evolved our business to be more virtual and borderless. We launched the Borderless Talent initiative, changing our employment paradigm and client delivery model by finding and matching qualified talent with appropriate skill sets for specific project needs on a global basis. As remote work became more mainstream, our borderless talent management and deployment further enhanced our capabilities to serve multinational clients in a seamless manner, broadened our client reach in markets where we do not have a physical presence, allowed for improved operation efficiency while offering clients and consultants more choice and agility. As the economy opens up, our ability to flex seamlessly between traditional on-premise and virtual models will offer greater optionality in how we deliver projects and our go-to-market motion. Supply and demand alignment is a key operating principle which we believe can be truly streamlined in a world of borderless talent. Removing the constraint of geo-fencing our consultants based on locality has opened up new avenues of opportunity for both our clients and our talent. This enables us to attract and retain talent on a broader geographic basis and allows for additional opportunities in terms of prospect cultivation, client engagement and project delivery. For RGP's clients specifically, the Pandemic has hastened the shift to fluid talent strategies as a dynamic force for improving corporate performance. In other words, in a world filled with technology change, demographic shifts, and economic uncertainty, having the right talent in the right place at the right time has become an imperative to compete and thrive in today's business environment. As we move into more of a post-pandemic environment, the added dimension of evolving labor preferences toward remote work, additional flexibility and increased choice, has resulted in drastic changes to the human capital marketplace. These factors explain why a growing number of large enterprises now define staffing needs with agility in mind. We believe the agile talent strategies that are taking hold today, play to our strengths and capabilities.
Strategic areas of intervention for the 2021 financial year
Our strategic focus areas in FY2021 were:
Continue our digital expansion with the launch of our human cloud platform and increased market penetration for the business we acquired from Veracity
Develop our core business through our strategic vertical programs for customers and industry
? Size and control our cost structure globally, and optimize our operations to achieve higher operating leverage
Our primary area of focus for fiscal 2021 was digital expansion and we have made solid strides in this area. We are substantially ready to pilot our human cloud platform with select clients in the fall of calendar 2021, which introduces a new way for clients and talent alike to engage with us. Our efforts also include expanding the go-to-market penetration for Veracity and launching a new Digital Technology Practice in the
Asia Pacificregion, which is expected to enhance our abilities to provide digital transformation and technology 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 throughout fiscal 2021, with Veracity revenue growing 39.2% compared to fiscal 2020 and the Technology and Digital solution offerings becoming one of the key drivers for accelerating the overall RGP revenue recovery during fiscal 2021. We believe the Pandemic and the resulting increase in virtual or remote delivery arrangements have and will continue to accelerate digital transformation agendas in our existing client base and create opportunities for us to engage with new clients. The second focus area for this fiscal year was building our core business, including through the growth of our strategic client and key industry vertical programs, particularly in healthcare. The continued evolution of our delivery model to be more flexible, virtual and borderless has allowed us to expand opportunities within existing core clients and markets as well as to uncover opportunities to effectively serve new clients in new markets. We are working to further penetrate our existing core 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 - like Chief Digital, Chief Peopleand Chief Marketing Officers. We see strong growth momentum in our biggest clients 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, with the goal to strengthen the business and right size our cost structure globally, we have substantially completed our restructuring initiatives across North America, APAC and Europe. The North Americaand APAC Plan, which we initiated in the fourth quarter of fiscal 2020, and the European Plan which we initiated in the second quarter of fiscal 2021 (collectively, the " Restructuring 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 on high growth core markets for greater impact. As of May 29, 2021, we have substantially completed the reduction in force under the Restructuring Plans, and recognized substantially all of the associated expected employee termination costs. Additionally, we made solid progress in executing our real estate exit strategy, with all of the planned lease terminations in Europeand 79% of the planned lease terminations in North Americacompleted as of May 29, 2021, generating substantial savings in occupancy costs. We expect to continue to push for a more virtual footprint beyond the 24
Restructuring Plans, although the exact amount and timing of the expenses and resulting payments associated with our real estate exit plans are subject to a number of variables which may not be within our control, such as the condition of the real estate/leasing market. We believe the successful execution of the Restructuring Plans has allowed us to operate with agility, resilience and efficiency heading into fiscal 2022. See Note 13 - Restructuring Activities in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Results of Operations" below for additional disclosures regarding the impact of the Restructuring Plans on our results of operations and cash flows during the year ended
May 29, 2021.
Impact and outlook of COVID-19
The Pandemic has adversely impacted our business in the past year including, among other things, reducing demand for or delaying client decisions to procure our services. In response to the Pandemic, we evolved our operating model to be more virtual and borderless. The move to virtual and borderless talent helped us manage supply and demand more efficiently, which resulted in faster revenue generation and reduced consultant turnover, mitigating the negative impact of the Pandemic. During fiscal 2021, our revenue declined 10.5% from the prior year, or 10.2% on a same day constant currency basis, as the Pandemic started to impact the Company on a worldwide basis in the fourth quarter of fiscal 2020. We reached a trough in our revenue during the first quarter of fiscal 2021 and have since experienced a steady recovery in each sequential quarter thereafter. By the fourth quarter of fiscal 2021, our revenue, although declined 3.5% year over year, exceeded the prior year quarter on a same day constant currency basis by 1.2%. Given the timing of our fiscal period and the latent impact of the Pandemic in the fourth quarter of fiscal 2020, we did not yet see the full impact of the recovery from the Pandemic in our results in the fourth quarter of fiscal 2021. While the adverse 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. The increasing value that CEO and other C-suite decision-makers place on workforce flexibility and agility helped propel the robust momentum in our professional staffing revenue growth in fiscal 2021. 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. As further described in "Fiscal 2021 Strategic Focus Areas" above, we have substantially completed our restructuring initiatives across the globe as of the end of fiscal 2021. We believe these actions initiated ahead of the onset of the Pandemic have enabled us to operate with greater agility, as we seek to ensure our organizational health and resilience, and weather the challenges associated with the Pandemic. In order to strengthen our liquidity during the Pandemic, we took proactive measures to increase our cash on hand including, but not limited to, borrowing
$39 millionunder our secured revolving credit facility in the fourth quarter of fiscal 2020, reducing discretionary spending, and focusing on receivables collections efforts. We also elected to defer the deposit of our employer portion of social security taxes from April to December 2020, as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Due to our focused efforts to contain costs and manage working capital, we generated healthy cash flows from our operations to afford the ability to repay a total of $45 millionon our borrowings during fiscal 2021 and another $10 millionsubsequently on June 9, 2021. In addition, we elected to repay a total of $6.3 millionin deferred deposit of our employer portion of social security taxes prior to May 29, 2021. See "Liquidity and Capital Resources" below for additional information. Until we have further visibility into the continued lingering 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. As of the close of fiscal 2021, our operations have stabilized in a majority of the markets in which we operate, although we expect that some lingering adverse effects of the Pandemic could continue into fiscal 2022. The full extent to which the Pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact, the impacts of new variants of the virus, and the timing, distribution, efficacy and public acceptance of vaccines and other treatments for COVID-19. Heading into fiscal 2022, we are encouraged by the revenue acceleration and the continued improvements in sales and pipeline metrics, including win percentage, close won amount and average deal size, as well as the continued recovery of our average bill rate, as our clients rebound from the challenges caused by the Pandemic and resume or increase their discretionary spending, especially on advisory projects driven by digital transformation imperatives as a result of the Pandemic, and continue to shift towards a more agile workforce model. With sustained strength in our pipeline and accelerated revenue conversion, we remain optimistic about our position to capitalize on the positive dynamic of an economy in continued recovery.
Critical accounting conventions and estimates
The discussion and analysis of our financial condition and results of operations included in this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, are based upon our Consolidated Financial Statements, which 25
have been prepared in accordance with GAAP in
the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies and estimates, defined as those policies and estimates we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require management's most subjective or complex judgments. Allowance for doubtful accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates we have in the past. As of May 29, 2021and May 30, 2020, we had an allowance for doubtful accounts of $2.0 millionand $3.1 million, respectively. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect our future financial results. Income taxes - In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any income subject to taxation in each jurisdiction together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect our future financial result. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect our future financial results and financial condition. We also evaluate our uncertain tax positions and only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50 percentage likelihood of being realized upon settlement. We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs. As of May 29, 2021and May 30, 2020, a valuation allowance of $13.3 millionand $11.1 millionwas established on deferred tax assets totaling $31.9 millionand $25.1 million, respectively. Our income tax for the years ended May 29, 2021, May 30, 2020and May 25, 2019was a benefit of $2.5 million, an expense of $6.9 millionand an expense of $16.5 million, respectively. Our total liability for unrecognized tax benefits was $0.9 millionand $0.8 millionas of May 29, 2021and May 30, 2020, respectively. Revenue recognition - Revenues are recognized when control of the promised service is transferred to our clients, in an amount that reflects the consideration expected in exchange for the services. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities. Revenues from contracts are recognized over time, based on hours worked by our professionals. The performance of the agreed-upon service over time is the single performance obligation for revenues. Certain clients may receive discounts (for example, volume discounts or rebates) to the amounts billed. These discounts or rebates are considered variable consideration. Management evaluates the facts and circumstances of each contract and client relationship to estimate the variable consideration assessing the most likely amount to recognize and considering management's expectation of the volume of services to be provided over the applicable period. Rebates are the largest component of variable consideration and are estimated using the most likely amount method prescribed by Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not occur in subsequent periods. Changes in estimates would result in cumulative catch-up adjustments and could materially impact our financial results. Rebates recognized as contra-revenue for the years ended May 29, 2021, May 30, 2020and May 25, 2019were $2.6 million, $1.4 millionand $1.5 million, respectively. Stock-based compensation - Under our 2020 Performance Incentive Plan, officers, employees, and outside directors have received or may receive grants of restricted stock, restricted stock units, performance stock units, options to purchase common stock or other stock or stock-based awards. Under our ESPP, eligible officers and employees may purchase our common stock in accordance with the terms of the plan. We estimate the fair value of stock-based payment awards on the date of grant as described below. We determine the estimated value of restricted stock and restricted stock unit awards using the closing price of our common stock on the date of grant. We have 26
elected to use the Black-Scholes option-pricing model for our stock options and stock purchased under our ESPP which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock options. We use our historical volatility over the expected life of the stock option award and ESPP option award to estimate the expected volatility of the price of our common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The impact of expected dividends (
$0.14per share for each quarter during fiscal 2021 and 2020 and $0.13per share for each quarter during fiscal 2019) is also incorporated in determining the estimated value per share of employee stock option grants and purchases under our ESPP. Such dividends are subject to quarterly board of director approval. Our expected life of stock option grants is 5.6 years for non-officers and 8.1 years for officers, and the expected life of grants under our ESPP is 6 months. We review the underlying assumptions related to stock-based compensation at least annually or more frequently if we believe triggering events exist. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. We review the underlying assumptions related to stock-based compensation at least annually or more frequently if we believe triggering events exist. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period. Stock-based compensation expense for the years ended May 29, 2021, May 30, 2020and May 25, 2019was $6.6 million, $6.1 millionand $6.6 million, respectively. Valuation of long-lived assets - For long-lived tangible and intangible assets, including property and equipment, right-of-use assets, and finite-lived intangible assets, we assess the potential impairment periodically or whenever events or changes in circumstances indicate the carrying value may not be recoverable from the estimated undiscounted expected future cash flows expected to result from their use and eventual disposition. In cases where the estimated undiscounted expected future cash flows are less than net book value, an impairment loss is recognized equal to the amount by which the net book value exceeds the estimated fair value of assets. We performed our assessment of potential qualitative impairment indicators of long-lived assets, including property and equipment, right-of-use assets outside of exited markets, and finite-lived intangible assets as of May 29, 2021. We determined that for such long-lived assets, no impairment indicators were present as of May 29, 2021, and no impairment charge was recorded during fiscal 2021. For right-of-use assets within exited markets as we continue to execute the Restructuring Plans and move towards a more virtual footprint in certain markets, we assess the potential impairment whenever an impairment indicator was present. For further discussion regarding impairment of right-of-use assets in exited markets, see Note 13 - Restructuring Activities in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Estimating future cash flows requires significant judgment, and our projections may vary from the cash flows eventually realized. Future events and unanticipated changes to assumptions could result in an impairment in the future. Although the impairment is a non-cash expense, it could materially affect our future financial results and financial condition. Valuation of goodwill - Goodwillrepresents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We evaluate goodwill for impairment annually on the last day of our fiscal year, and whenever events indicate that it is more likely than not that the fair value of a reporting unit could be less than its carrying amount. In assessing the recoverability of goodwill, we make a series of assumptions including forecasted revenue and costs, estimates of future cash flows, discount rates and other factors, which requires significant judgment. A potential impairment in the future, although a non-cash expense, could materially affect our financial results and financial condition. In testing the goodwill of our reporting units for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of each of our reporting units is less than their respective carrying amounts. If it is deemed more likely than not that the fair value of a reporting unit is greater than its carrying value, no further testing is needed and goodwill is not impaired. Otherwise, the next step is a quantitative comparison of the fair value of the reporting unit to its carrying amount. We have the option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative goodwill impairment test. If a reporting unit's estimated fair value is equal to or greater than that reporting unit's carrying value, no impairment of goodwill exists and the testing is complete. If the reporting unit's carrying amount is greater than the estimated fair value, then a non-cash impairment charge is recorded for the amount of the difference, not exceeding the total amount of goodwill allocated to the reporting unit. Under the quantitative analysis, the estimated fair value of goodwill is determined by using a combination of a market approach and an income approach. The market approach estimates fair value by applying revenue and EBITDA multiples to each reporting unit's operating performance. The multiples are derived from guideline public companies with similar operating and investment characteristics to our reporting units, and are evaluated and adjusted, if needed, based on specific characteristics of the reporting units relative to the selected guideline companies. The market approach requires us to make a series of assumptions that involve significant judgment, such as the selection of comparable companies and the evaluation of the multiples. The income approach estimates fair value based on our estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital that reflects the relevant 27
risks associated with each reporting unit and the time value of money. The income approach also requires us to make a series of assumptions that involve significant judgment, such as discount rates, revenue projections and adjusted EBITDA margin projections. We estimate our discount rates on a blended rate of return considering both debt and equity for comparable guideline public companies. We forecast our revenue and adjusted EBITDA margin based on historical experience and internal forecasts about future performance.
The following is a discussion of our goodwill impairment tests performed during fiscal 2021.
Goodwill impairment test for the second quarter of 2021
As further discussed in Note 2 - Summary of Significant Accounting Policies and Note 18 - Segment Information and Enterprise Reporting in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and in "Operating Results of Segment" below, effective in the second quarter of fiscal 2021, we revised our historical one segment position and identified the following new operating segments: RGP, taskforce and Sitrick, each of which represents a reporting unit. Concurrent with the segment change, we completed a goodwill impairment assessment using the quantitative analysis, as further discussed above, and concluded that no goodwill impairment existed immediately before or after the change in segment reporting. We reallocated goodwill to the new reporting units on the relative fair value basis.
Annual analysis of goodwill impairment 2021
We performed our annual goodwill impairment test as of
May 29, 2021on our three reporting units. Considering the recent quantitative goodwill impairment analysis completed and the conclusion reached, we elected to perform a qualitative analysis and assessed the relevant events and circumstances to determine if it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount. We considered such events and circumstance including, macroeconomic factors, industry and market conditions, financial performance indicators and measurements, and other factors. Based on our assessment of these factors, we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying value, and no further testing is needed. We concluded that there was no goodwill impairment as of May 29, 2021. While we believe that the assumptions underlying our quantitative and qualitative assessment are reasonable, these assumptions could have a significant impact on whether or not a non-cash impairment charge is recognized and also the magnitude of such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our reporting units will be consistent with our projections. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Business combinations - We allocate the fair value of the purchase consideration of our acquisitions to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. Purchase price allocations for business acquisitions require significant judgments, particularly with regards to the determination of value of identifiable assets, liabilities, and goodwill. Often third-party specialists are used to assist in valuations requiring complex estimation. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Purchase agreements related to certain business acquisitions may include provisions for the payment of additional cash consideration if certain future performance conditions are met. These contingent consideration arrangements are recognized at their acquisition date fair value and included as part of the purchase price at the acquisition date. These contingent consideration arrangements are classified as accrued liabilities or other long-term liabilities in our Consolidated Balance Sheets and are remeasured to fair value at each reporting period, with any change in fair value being recognized in the applicable period's results of operations. Measuring the fair value of contingent consideration at the acquisition date, and for all subsequent remeasurement periods, requires a careful examination of the facts and circumstances to determine the probable resolution of the contingency(ies). We utilize the Monte Carlo simulation model and estimate fair value of the contingent consideration based on unobservable input variables related to meeting the applicable contingency conditions as per the terms of the applicable agreements. Total contingent consideration liabilities were $7.1 millionand $7.9 millionas of May 29, 2021and May 30, 2020, respectively. Contingent consideration adjustment was an expense of $4.5 millionand $0.8 million, respectively, for the years ended May 29, 2021and May 30, 2020, respectively, and a benefit of $0.6 millionfor the year ended May 25, 2019. 28
Results of operations
The following tables present, for the periods indicated, the data of our consolidated statements of earnings. These historical results are not necessarily indicative of future results.
Our operating results for the periods indicated are expressed as a percentage of revenue below. The fiscal years ended
May 29, 2021, May 30, 2020and May 25, 2019consisted of 52, 53, and 52 weeks, respectively. (Amounts in thousands, except percentages.) For the Years Ended May 29, May 30, May 25, 2021 2020 2019 Revenue $ 629,516100.0 % $ 703,353100.0 % $ 728,999100.0 % Direct cost of services 388,112 61.7 427,870 60.8 446,560 61.3 Gross profit 241,404 38.3 275,483 39.2 282,439 38.7 Selling, general and 209,326 33.3 228,067 32.4 223,802 30.7 administrative expenses Amortization of intangible assets 5,228 0.8 5,745 0.8 3,799 0.5 Depreciation expense 3,897 0.6 5,019 0.8 4,679 0.6 Income from operations 22,953 3.6 36,652 5.2 50,159 6.9 Interest expense, net 1,600 0.2 2,061 0.3 2,190 0.3 Other income (1,331) (0.2) (637) (0.1) - - Income before provision for 22,684 3.6 35,228 5.0 47,969 6.6 income taxes Income tax (benefit) expense (2,545) (0.4) 6,943 1.0 16,499 2.3 Net income $ 25,2294.0 % $ 28,2854.0 % $ 31,4704.3 % 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 measure so calculated and presented.
Our principal non-GAAP financial measures are listed below and reflect how we assess our results of operations.
Same-day constant currency income is adjusted for the following:
o Currency impact. In order to eliminate the impact of exchange rate fluctuations, we calculate the turnover in constant currencies, which represents the result that would have been obtained if the exchange rates of the current period had been the same as those in force over the previous comparable 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 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 turnover in constant currency
Same-day constant currency earnings help management assess revenue trends on a more comparable and consistent basis. We believe this metric also provides more clarity to our investors in assessing our baseline operating performance and facilitates a comparison of that performance from period to period. The following table provides a reconciliation of same-day constant currency revenue to revenue, the most directly comparable GAAP financial measure, by geographic area.
Table of Contents RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES Three Months Ended Three Months Ended For the Years Ended Revenue by Geography May 29, February 27, May 29, May 30, May 29, May 30, 2021 2021 2021 2020 2021 2020 (Amounts in thousands, (Unaudited) (Unaudited) (Unaudited, except for except number of business GAAP amounts) days) North America As reported (GAAP)
$ 141,518 $ 127,913 $ 141,518 $ 148,568 $ 512,777 $ 580,185Currency impact (4) (384) 8 Business days impact (8,709) 8,685 6,105 Same day constant currency revenue $ 132,805 $ 149,819 $ 518,890Europe As reported (GAAP) $ 19,371 $ 17,751 $ 19,371 $ 18,383 $ 72,496 $ 74,546Currency impact 37 (1,817) (4,679) Business days impact 316 1,570 938 Same day constant currency revenue $ 19,724 $ 19,124 $ 68,755Asia Pacific As reported (GAAP) $ 11,429 $ 10,967 $ 11,429 $ 11,618 $ 44,243 $ 48,622Currency impact 222 (405) (1,241) Business days impact (188) 711 870 Same day constant currency revenue $ 11,463 $ 11,735 $ 43,872Total Consolidated As reported (GAAP) $ 172,318 $ 156,631 $ 172,318 $ 178,569 $ 629,516 $ 703,353Currency impact 255 (2,606) (5,912) Business days impact (8,581) 10,966 7,913 Same day constant currency revenue $ 163,992 $ 180,678 $ 631,517Number of Business Days North America (1) 65 61 65 69 252 255 Europe (2) 62 63 62 67 253 257 Asia Pacific (2) 62 61 62 66 247 252
(1) This represents the number of working days in the
(2) This represents the number of working days in the countries where income is most concentrated in geography.
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 income, the most directly comparable GAAP financial measure: Three Months Ended For the Years Ended May 29, May 30, May 29, May 30, May 25, 2021 2020 2021 2020 2019 (Amounts in thousands, except percentages) Net income
$ 23,248 $ 4,067 $ 25,229 $ 28,285 $ 31,470Adjustments: Amortization of intangible assets 1,104 1,592 5,228 5,745 3,799 Depreciation expense 943 1,106 3,897 5,019 4,679 Interest expense, net 284 535 1,600 2,061 2,190 Income tax (benefit) expense (7,814) 2,948 (2,545) 6,943 16,499 Stock-based compensation expense 1,674 1,408 6,613 6,057 6,570 Restructuring costs (185) 4,982 8,260 4,982 - Contingent consideration adjustment 1,460 1,914 4,512 794 (590) Adjusted EBITDA $ 20,714 $ 18,552 $ 52,794 $ 59,886 $ 64,617Revenue $ 172,318 $ 178,569 $ 629,516 $ 703,353 $ 728,999Adjusted EBITDA Margin 12.0% 10.4% 8.4% 8.5% 8.9% 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 income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our revenue, profitability or liquidity. 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 but rather considered in addition to performance measures calculated in accordance with GAAP.
Percentage change calculations are based on amounts in thousands. Fiscal 2021 had 52 weeks while fiscal 2020 had 53 weeks.
Revenue. Revenue decreased
$73.8 million, or 10.5%, to $629.5 millionfor the year ended May 29, 2021from $703.4 millionfor the year ended May 30, 2020. Billable hours decreased by 10.4% year-over-year in fiscal 2021, while the average bill rate remained relatively consistent between the two periods. In fiscal 2021, we approached pricing opportunistically with certain clients when warranted but remained cautious to recover concessions and rebates extended during the Pandemic. On a same day constant currency basis, revenue decreased $71.8 million, or 10.2%, to $631.5 millionfor the year ended May 29, 2021from $703.4 millionfor the year ended May 30, 2020.
The following table represents our consolidated revenues according to GAAP by geographic region:
For the Years Ended May 29, May 30, 2021 2020 (Amounts in thousands, except percentages) North America
$ 512,77781.5 % $ 580,18582.5 % Europe 72,496 11.5 74,546 10.6 Asia Pacific 44,243 7.0 48,622 6.9 Total $ 629,516100.0 % $ 703,353100.0 % Revenue declined across all geographies during fiscal 2021 as compared to fiscal 2020 due to the adverse impact of the Pandemic and fewer business days in each geography in fiscal 2021. 31
North Americaexperienced the most significant decline at 11.6%. Revenue level troughed during the first quarter of fiscal 2021 and has since recovered steadily in each quarter thereafter as uncertainties related to the Pandemic began to subside beginning in the second fiscal quarter as vaccine development advanced. We experienced sustained improvement in revenue momentum, especially in the fourth quarter, as both pipeline and sales productivity continued to pick up, resulting from the combination of better operational execution and some level of pent-up demand, especially in advisory projects, as clients begin to resume their discretionary spending and continue to accelerate their digital and workforce paradigm transformations. Certain macro trends accelerated by the Pandemic, including increased use of contingent talent and the shift towards a more agile workforce model also helped propel the momentum in professional staffing in fiscal 2021. Our European and Asia Pacificregion experienced similar trends as North Americain fiscal 2021 due to the Pandemic, albeit with a more modest decline of 2.7% and 9.0%, respectively. Europe'srevenue decline of $2.1 millionin fiscal 2021 was driven by the decline in revenue of $2.6 millionas a result of exiting certain markets in connection with our restructuring initiative, partially offset by revenue growth in certain other European markets, as we continue to adopt an integrated global go-to-market approach to focus on serving our tier one multi-national clients in this region. Despite sporadic COVID-19 outbreaks in certain parts of Asiain the second half of fiscal 2021, revenue in Asia Pacificreturned to pre-Pandemic level by the end of the fourth quarter. To capitalize on the upward momentum in the macro environment across all three geographies, we focused our efforts on our strategic client accounts, core markets, key solution offerings as well as key industry verticals, and drove meaningful acceleration and growth in the second half of the fiscal year. During the fourth quarter of fiscal 2021, we achieved a 16.9% rebound in consolidated revenue compared to the first quarter trough in fiscal 2021. Although still a decline of 3.5% year over year, revenue in the fourth quarter of fiscal 2021 improved 1.2% from the prior year quarter on the same day constant currency basis. Given the timing of our fiscal period and the latent impact of the Pandemic in the fourth quarter of fiscal 2020, we did not yet see the full impact of the recovery from the Pandemic in our results in the fourth quarter of fiscal 2021. Direct Cost of Services. Direct cost of services decreased $39.8 million, or 9.3%, to $388.1 millionfor the year ended May 29, 2021from $427.9 millionfor the year ended May 30, 2020. The decrease is primarily due to a 10.4% decrease in billable hours between the two periods offset slightly by a 2.0% increase in the average consultant pay rates from fiscal 2020 to fiscal 2021. Direct cost of services as a percentage of revenue was 61.7% for the year ended May 30, 2021compared to 60.8% for the year ended May 30, 2020. The increased percentage compared to the prior year was partially attributable to an increase in the pay/bill ratio of 60 basis points, as the 0.8% increase in average bill rate was outpaced by the 2.0% increase in average pay rate during fiscal 2021 compared to fiscal 2020. This was primarily caused by a more opportunistic pricing approach with certain clients, while offering competitive pay rates to consultants as the labor market continues to tighten. Additionally, the increase in non-billable pay and unfavorable healthcare costs further contributed to the increased direct cost of services as a percentage of revenue. These negative impacts were partially offset by lower passthrough revenue from client reimbursement and less holiday pay due to the timing of the Memorial Dayholiday which occurred after our fiscal 2021 year-end. Our target direct cost of services percentage is 60%.
The number of consultants on assignment at the end of FY2021 was 2,902 compared to 2,495 at the end of FY2020.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses were
$209.3 million, or 33.3% as a percentage of revenue, for the fiscal year ended May 29, 2021compared to $228.1 million, or 32.4% as a percentage of revenue, for the fiscal year ended May 30, 2020. Contingent consideration and restructuring costs contributed $12.8 millionand $5.8 millionto SG&A expense in fiscal 2021 and 2020, respectively. Excluding contingent consideration and restructuring costs, SG&A expense improved $25.7 million, or 11.6%, compared to fiscal 2020. Management compensation and bonus and occupancy costs were reduced by $12.5 millionand $3.5 million, respectively, compared to the prior year, primarily as a result of the restructuring initiatives the Company undertook at the end of fiscal 2020 and one less week included in fiscal 2021 compared to fiscal 2020. The Company continued to benefit from its virtual work environment and disciplined cost measures, reducing general business expenses by $5.7 millioncompared to the prior year. Additionally, the Company reduced its bad debt expense by $1.9 millioncompared to the prior year, as strengthened collections drove improvement in accounts receivable aging. The Company reduced its legal costs by $2.0 millionprimarily due to its continued spending discipline and the recovery of $1.0 millionof legal costs during fiscal 2021 related to a collection case. Contingent consideration expense was $4.5 millionin fiscal 2021 compared to $0.8 millionin fiscal 2020. 32
Restructuring charges. We initiated our
North Americaand APAC Plan in March 2020and the European Plan in September 2020. All employee termination and facility exit costs incurred under the Restructuring Plans were associated with the RGP segment, as further discussed in Note 18 - Segment Information and Enterprise Reporting in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Restructuring costs for the years ended May 29, 2021and May 30, 2020were as follows (in thousands): For the Year Ended May 29, 2021For
the year ended
North America European North America European and APAC Plan Plan Total and APAC Plan Plan Total Employee termination costs $ 1,024
$ 4,838 $ 5,862$ 3,927 $ - $ 3,927Real estate exit costs 1,052 666 1,718 1,055 - 1,055 Other costs - 680 680 - - - Total restructuring costs $ 2,076 $ 6,184 $ 8,260$
$ 4,982 –
For further information on our restructuring initiatives, please refer to Note 13 - Restructuring Activities in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Fiscal 2021 Strategic Focus Areas" above. Amortization and Depreciation Expense. Amortization of intangible assets was
$5.2 millionand $5.7 millionin 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, partially offset by the amortization of identifiable intangible assets acquired through Veracity and certain internally developed software put in service in the second quarter of fiscal 2021. Depreciation expense was $3.9 millionand $5.0 millionin fiscal 2021 and fiscal 2020, respectively. The decrease in depreciation expense was primarily due to computer equipment becoming fully-depreciated in periods prior to fiscal 2021, and the write-off of leasehold improvement as part of the real estate exit initiatives executed under the Restructuring Plans. Other Income. Other income for fiscal 2021 was $1.3 millioncompared to $0.6 millionfor fiscal 2020. Other income in fiscal 2021 was primarily related to government COVID-19 relief funds received globally. Other income in 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. Interest Expense, Net. Net interest expense for fiscal 2021, including commitment fees, was $1.6 millioncompared to $2.1 millionin fiscal 2020. The decrease was due to a lower average interest rate in fiscal 2021 as compared to the prior fiscal year. Income Taxes. Income tax was a benefit of $2.5 million(effective tax benefit rate of approximately 11.2%) for the year ended May 29, 2021compared to an expense of $6.9 million(effective tax rate of approximately 19.7%) for the year ended May 30, 2020. We operate in an international environment. Accordingly, the consolidated effective tax rate is a composite rate reflecting the earnings (losses) in various locations and the applicable tax rates in those jurisdictions, and fluctuations in the consolidated effective tax rate reflect the changes in the mix of earnings (losses) in these jurisdictions. We record tax expense based upon actual results versus a forecasted tax rate because of the volatility in the profitability of our international operations. The income tax benefit for fiscal 2021 was primarily related to our tax planning strategies under which we elected to make certain changes to the capitalization of fixed assets, resulting in an NOL carryback permitted under the CARES Act. As a result, we recognized a discrete tax benefit of $12.8 millionin the fourth quarter of fiscal 2021, resulting in an overall effective tax benefit rate of 11.2% and an expected federal tax refund in the amount of $34.0 millionthat we expect to file for within the next 12 months. The prior year effective tax rate of 19.7% was primarily a result of a $6.6 milliondiscrete tax benefit from the deduction of the investment basis in four European entities upon their dissolutions.
We found a break-even point and a net tax benefit of
We review the components of both book and taxable income to prepare 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 United Statesstatutory 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, our election to change certain tax methods, and the unpredictability of timing and the amount of disqualifying dispositions of certain stock options. Based upon current economic circumstances and our business performance, management will continue to monitor the need to record additional or release existing valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the currently reserved foreign deferred tax assets is dependent upon generating sufficient future taxable income in those foreign territories. We have maintained a position of being indefinitely reinvested in our foreign subsidiaries' earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized on the foreign earnings. Management's indefinite reinvestment position is supported by: 33
? RGP in
?RGP has sufficient cash flow from operations in
the United Statesto service its debt and other current or known obligations without requiring cash to be remitted from foreign subsidiaries.
“Management’s growth objectives include accumulating liquidity in RGP’s profitable overseas subsidiaries in the hope of finding strategic expansion plans to further penetrate RGP’s more successful locations.
“The consequences of distributing foreign profits have always been considered tax inefficient for RGP or less beneficial.
Segment operating results
As discussed in Business Segments in Item 1, Note 2 - Summary of Significant Accounting Policies and Note 18 - Segment Information and Enterprise Reporting in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we revised our historical one segment position and identified the following new operating segments effective in the second quarter of fiscal 2021 to align with changes made in our internal management structure and our reporting structure of financial information used to assess performance and allocate resources: RGP, taskforce, and Sitrick. RGP is the Company's 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. The following table presents our operating results by segment. All prior year periods presented in the table and referenced below were recast to reflect the impact of the preceding segment changes (amounts in thousands, except percentages). For the Years Ended May 29, May 30, 2021 (2) 2020 (2) Revenues: RGP
$ 587,62093.3 % $ 662,47594.2 % Other Segments 41,896 6.7 40,878 5.8 Total revenues $ 629,516100.0 % $ 703,353100.0 % Adjusted EBITDA: RGP $ 77,589147.0 % $ 87,836146.7 % Other Segments 3,580 6.8 2,601 4.3
Reconciling items (1) (28,375) (53.8) (30,551) (51.0) Total adjusted EBITDA
(1) Reconciling items are generally comprised of unallocated corporate administrative costs, including management and board compensation, corporate support function costs and other general corporate costs that are not allocated to segments.
(2) The 2020 financial year consists of 53 weeks. Fiscal year 2021 consisted of 52 weeks.
Revenue by Segment RGP - RGP revenue decreased
$74.9 million, or 11.3%, in fiscal 2021 compared to fiscal 2020, primarily as a result of a 10.8% decline in billable hours year-over-year. Revenue from RGP represents more than 90% of total consolidated revenue and generally reflects the overall consolidated revenue trend.
The number of consultants on assignment in the RGP segment in
was 2,795 against 2,407 in
Other Segments - Other Segments' revenue for fiscal 2021 increased
$1.0 million, or 2.5%, compared to fiscal 2020. The revenue growth was primarily due to the continued revenue synergy generated from combining RGP Germany to operate under taskforce despite the adverse impact from the Pandemic and the more recent COVID-19 lock-downs in Germany.
The number of consultants on assignment for other segments in the
was 107 against 88 in
Adjusted EBITDA by segment
RGP - RGP adjusted EBITDA decreased
$10.2 million, or 11.7%, in fiscal 2021, compared to fiscal 2020. Adjusted EBITDA margin decreased slightly by 6 basis points to 13.2% in fiscal 2021. Compared to the prior year, revenue decreased $74.9 million, which was partially offset by the decrease in cost of services of $42.0 millionand significant cost savings of $22.0 millionprimarily in SG&A costs attributed to RGP. The trend in revenue, cost of services and other costs and expenses at RGP year-over-year is generally consistent with those at the consolidated level, as discussed above, with the exception that the SG&A used to derive segment Adjusted EBITDA does not include certain unallocated corporate administrative costs. Other Segments - Other Segments' adjusted EBITDA improved $1.0 million, or 37.6%, in fiscal 2021 compared to fiscal 2020. Adjusted EBITDA margin increased by 220 basis points to 8.5% in fiscal 2021. The improvement in adjusted EBITDA and EBITDA margin was primarily attributable to the $2.1 millionimprovement in SG&A year-over-year, partially offset by higher cost of services as a percentage of revenue, mostly driven by lower utilization of fixed salaried consultants.
For a comparison of our results of operations at the consolidated level for the fiscal years ended
May 30, 2020and May 25, 2019, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended May 30, 2020, filed with the SECon July 27, 2020(File No. 0-32113).
Segment operating results
As discussed in Business Segments in Item 1, Note 2 - Summary of Significant Accounting Policies and Note 18 - Segment Information and Enterprise Reporting in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we reorganized our reporting segments in fiscal 2021, and the discussion and analysis for our reporting segments set forth below conform to the current presentation of our reporting segments. Amounts in thousands, except percentages. For the Years Ended May 30, May 25, 2020 (2) 2019 (2) Revenues: RGP
$ 662,47594.2 % $ 689,60294.6 % Other Segments 40,878 5.8 39,397 5.4 Total revenues $ 703,353100.0 % $ 728,999100.0 % Adjusted EBITDA: RGP $ 87,836146.7 % $ 87,728135.8 % Other Segments 2,601 4.3 3,323 5.1
Reconciling items (1) (30,551) (51.0) (26,434) (40.9) Total adjusted EBITDA
(1) Reconciling items are generally comprised of unallocated corporate administrative costs, including management and board compensation, corporate support function costs and other general corporate costs that are not allocated to segments.
(2) The 2020 financial year included 53 weeks. The 2019 fiscal year consisted of 52 weeks.
Revenue by Segment RGP - RGP revenue decreased
$27.1 million, or 3.9%, in fiscal 2020 compared to fiscal 2019, primarily as a result of a 3.5% decline in billable hours year-over-year while average bill rate remained relatively consistent between the two periods. Revenue from RGP represents more than 90% of total consolidated revenue and generally reflects the overall consolidated revenue trend.
The number of consultants on assignment in the RGP segment in
was 2,407 against 2,858 in
Other Segments - Other Segments' revenue for fiscal 2020 increased
$1.5 million, or 3.8%, compared to fiscal 2019. The improvement in revenue was primarily due to the continued strong revenue growth at taskforce since our acquisition in fiscal 2018.
The number of consultants on assignment for other segments in the
was 88 against 107 in
Adjusted EBITDA by segment
RGP - RGP adjusted EBITDA increased
$0.1 million, or 0.1%, in fiscal 2020, compared to fiscal 2019. Adjusted EBITDA margin increased by 50 basis points to 13.3% in fiscal 2020. Compared to the prior year, revenue decreased $27.1 millionwhich was offset by a $20.1 millionreduction in cost of services and cost savings of approximately $6.6 millionprimarily as a result of savings in general business expenses mainly attributable to cost containment measures and reduced business travel during the Pandemic and a decrease in internal consultants costs as we continued to leverage our existing resources more efficiently on various projects and initiatives. The trend in revenue, cost of services and other costs and expenses at RGP year-over-year is generally consistent with that at the consolidated level, with the exception that the SG&A used to derive segment Adjusted EBITDA does not include certain unallocated corporate administrative costs. Other Segments - Other Segments' adjusted EBITDA decreased $0.7 million, or 21.7%, in fiscal 2020 compared to fiscal 2019. Adjusted EBITDA margin decreased by 210 basis points to 6.4% in fiscal 2020. The decline in adjusted EBITDA margin was primarily attributable to higher sales commission costs at taskforce as a result of the revenue growth.
Liquidity and capital resources
Our primary source of liquidity is cash provided by our operations, our
$120.0 millionsecured revolving credit facility with Bank of America(the "Facility") 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, and we continued to do so for the year ended May 29, 2021, despite significant additional cash payouts associated with the execution of our restructuring initiatives across our geographies. 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 current one caused by the Pandemic. As of May 29, 2021, we had $74.4 millionof cash and cash equivalents including $27.6 millionheld in international operations. As described in Note 7 - Long-Term Debt in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we entered into a Credit Agreement, dated October 17, 2016, between the Company and Resources Connection LLC, as borrowers, and Bank of America, N.A. as lender (as amended, the "Credit Agreement"), which provides for a Facility for working capital and general corporate purposes, including potential acquisitions and stock repurchases. Until September 3, 2020, the Facility consisted of (1) a $90.0 millionrevolving loan facility ("Revolving Commitment"), which included a $5.0 millionsublimit for the issuance of standby letters of credits, and (ii) a $30.0 millionreducing revolving loan facility ("Reducing Revolving Commitment"), any amounts of which could not be reborrowed after being repaid. We entered into the Fifth Amendment to the Credit Agreement (the "Fifth Amendment") with Bank of America, N.A. as lender on September 3, 2020, and the Sixth Amendment to the Credit Agreement (the "Sixth Amendment") with Bank of America, N.A. as lender on May 25, 2021, both of which amended the terms of the Facility. The Fifth Amendment, among other things, (1) eliminated the $30.0 millionReducing Revolving Commitment and (2) increased the Revolving Commitment by $30.0 millionto $120.0 million. The Sixth Amendment, among other things, (1) further revised the definition of Consolidated EBITDA in the Credit Agreement to include addbacks for certain restructuring costs, (2) included customary provisions relating to the transition from LIBOR as the benchmark interest rate under the Credit Agreement, including providing for a Benchmark Replacement option (as defined in the Credit Agreement) to replace LIBOR, and (3) decreased the interest rate floor as described below. Borrowings under the Facility bear interest at a rate per annum of either, at our option, (i) a LIBOR interest rate defined in the Credit Agreement plus a margin or (ii) an alternate base rate, plus a margin, with the applicable margin depending on our consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America'sprime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. Prior to entering into the Fifth Amendment, the margin for loans based on LIBOR was 1.25% to 1.50%, and the margin for loans based on the alternate base rate was 0.25% to 0.50%, and the LIBOR interest rate floor was 0%. Effective upon entering into the Fifth Amendment, the appliable margin increased by 0.25% and the LIBOR interest rate floor increased to 0.25%. Effective upon entering into the Sixth Amendment, the LIBOR interest rate floor was removed and reverted to 0%. We pay an unused commitment fee on the average daily unused portion of the Facility, which, prior to entering into the Fifth Amendment, was a rate of 0.15% to 0.25% per annum depending on our consolidated leverage ratio and, effective upon entering into the Fifth Amendment, is 0.25% per annum. The unused commitment fee remains at 0.25% per annum under the Sixth Amendment. The Facility expires on October 17, 2022. The Facility contains both affirmative and negative covenants. We were in compliance with all financial covenants under the Facility as of May 29, 2021and do not expect material uncertainties in our continued ability to be in compliance with all financial covenants through the remaining term of the Facility. As of May 29, 2021, our borrowings on the Facility were $43.0 millionoutstanding under the Facility, bearing an average interest rate per annum of 1.93% and we had $1.3 millionof outstanding letters of credit issued under the Facility. The Pandemic has created significant uncertainty in the global economy and capital markets for a large part of fiscal 2021. While there appears to be more certainty and clarity in the macro environment and capital markets in the recent months, there could be lingering adverse effect into the remainder of calendar 2021 and beyond. We currently believe that our cash on hand, ongoing cash flows 36
from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs and fund for our restructuring initiatives, systems and technology transformations and upgrades, and potential future contingent consideration payments associated with our acquisitions for at least the next 12 months and beyond. During fiscal 2021, we paid approximately
$6.5 millionrelated to employee termination costs, consisting of $2.5 millionunder the North Americaand APAC Plan and $4.0 millionunder the European Plan. We currently estimate the cash requirement for completing the remaining restructuring actions to be in the range of $2 millionto $4 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. We also have certain contractual obligations, such as operating lease obligations and purchase obligations. At May 29, 2021, we had operating leases, primarily for office premises, and purchase obligations include payments due under various types of licenses, expiring at various dates through March 2028. As described further in Note 6 - Leases in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we had a total of $33.2 millionof minimum operating lease obligations. These minimum lease payments range from approximately $1.6 millionto $11.2 millionon an annual basis over the next five years. At May 29, 2021, we had purchase obligations of $2.3 millionoutstanding, including $1.9 millionand $0.4 millionexpiring in fiscal 2022 and fiscal 2023, respectively. Our total liability for unrecognized tax benefits could also impact operating cash flows, which was $872,000as of May 29, 2021, although we are unable to reasonably estimate the period during which this obligation may be incurred, if at all. As described in Note 3 - Acquisitions and Dispositions in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, 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 contingent liabilities under the Monte Carlo simulation model based on unobservable input variables related to meeting the applicable contingency conditions as per the terms of the applicable agreements. The estimated fair value of the contingent consideration liability as of May 29, 2021was $7.1 million, all of which is due before the end of calendar 2021. In March 2020, the CARES Act was enacted into law. The CARES Act includes provisions, among others, addressing the carryback of net operating losses ("NOLs") for specific periods, and provides for deferral of the employer-paid portion of the social security payroll taxes. We have elected to defer the employer-paid portion of social security payroll taxes through December 31, 2020until May of 2021 when we chose to make a partial payment of previously deferred payroll taxes in the amount of $6.3 million. As of May 29, 2021, $6.3 millionof deferred payroll taxes remain and is expected to be paid in calendar 2022. In addition, as part of our tax planning strategies, we made certain changes related to the capitalization of fixed assets effective for fiscal 2021. This strategy allowed us to carry back the net operating losses of fiscal 2021 to fiscal years 2016 to 2018. We recognized a discrete tax benefit of $12.8 millionin the fourth quarter of fiscal 2021 and expect to file for a federal tax refund in the amount of $34.0 millionwithin the next 12 months. 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. In order to strengthen our liquidity during the Pandemic, we took proactive measures to increase our cash on hand including, but not limited to, borrowing of $39 millionunder our Facility in the fourth quarter of fiscal 2020, reducing discretionary spending, and focusing on receivables collections efforts. We repaid a total of $45 millionon our borrowings during fiscal 2021, and another $10 millionsubsequently on June 9, 2021as a result of our ability to generate adequate cash flows from operations and improved clarity in the capital market. Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of our Facility, expand the size 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. Notwithstanding the potential liquidity challenges described above, we expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements. However, we could be required, or could elect to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including our ability to continue to adapt and efficiently serve our clients, our clients' project needs in the future, and our clients' financial health and ability to make timely payments on our receivables. A material adverse impact from the Pandemic could result in a need for us to raise additional capital or incur additional indebtedness to fund strategic initiatives or operating activities. 37
Operating activities, fiscal years 2021 and 2020
Operating activities provided
$39.9 millionand $49.5 millionin cash in fiscal 2021 and fiscal 2020, respectively. Cash provided by operations in fiscal 2021 resulted from net income of $25.2 millionand net favorable non-cash reconciling adjustments of $33.9 million. These were partially offset by net unfavorable changes in operating assets and liabilities totaling $19.2 million, primarily consisting of an increase in income taxes receivable of $32.6 millionas a result of certain tax method changes elected in the fourth quarter of fiscal 2021 and the first quarter of fiscal 2022, which allowed us to recognize a tax benefit of $12.8 millionin fiscal 2021, as described further in Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, partially offset by a decrease in trade accounts receivable of $11.4 million, mostly attributable to improved collection on our accounts receivable and an increase in accrued salaries and related obligations of $2.4 millionprimarily as a result of increased vacation accrual year-over-year. In fiscal 2020, cash provided by operations resulted from net income of $28.3 millionand net favorable non-cash reconciling adjustments of $21.5 million. These amounts were partially offset by a net unfavorable change in operating assets and liabilities of $0.3 millionprimarily due to a $7.9 milliondecrease in accounts payable, a $6.8 milliondecrease in accrued salaries and related obligations and a $2.5 millionincrease in prepaid income taxes, partially offset by a $10.0 milliondecrease in trade accounts receivable and a $7.3 millionincrease in other liabilities.
Investing activities, fiscal years 2021 and 2020
Net cash used in investing activities was
$3.8 millionfor fiscal 2021, compared to $26.8 millionin fiscal 2020. We used $3.8 millionof cash in fiscal 2021 to develop internal-use software and acquire property and equipment. In fiscal 2020, we used $30.3 millionof cash (net of cash acquired) to acquire Veracity. We also redeemed $6.0 millionof short-term investments in fiscal 2020, which we purchased in fiscal 2019.
Fundraising activities, fiscal years 2021 and 2020
The primary sources of cash in financing activities are borrowings under our Facility, cash proceeds from the exercise of employee stock options and proceeds from the issuance of shares purchased under our ESPP. The primary uses of cash in financing activities are repayments under the Facility, payment of contingent consideration, repurchases of our common stock and cash dividend payments to our stockholders. Net cash used in financing activities totaled
$59.5 millionin fiscal 2021 compared to net cash provided by financing activities of $30.9 millionin fiscal 2020. Net cash used in financing activities during the year ended May 29, 2021consisted of repayments on the Facility of $45.0 million, cash dividend payments of $18.2 million, and the first Veracity contingent consideration payment, of which $3.0 millionwas categorized as financing (the remaining $2.3 millionof the total $5.3 millionVeracity year one contingent consideration payment was categorized as operating cash flow). These were partially offset by $6.8 millionin proceeds received from ESPP share purchases and employee stock option exercises. Additional information regarding dividends is included in Note 11 - Stockholders' Equity in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10- K. Netcash provided by financing activities of $30.9 millionin fiscal 2020 consisted of $74.0 millionof proceeds borrowed from the Facility and $10.3 millionfrom the issuance of shares under ESPP and the exercise of employee stock options, partially offset by principal repayments of $29.0 millionunder the Facility, $17.6 millionof cash dividend payments and $5.0 millionfor share repurchases. For a comparison of our cash flow activities for the fiscal years ended May 30, 2020and May 25, 2019, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended May 30, 2020, filed with the SECon July 27, 2020(File No. 0-32113).
Recent accounting positions
Information regarding recent accounting pronouncements is contained in Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
© Edgar online, source