RESOURCES CONNECTION, INC. MANAGEMENT’S DISCUSSION AND

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.
Overview
Resources Global Professionals is a global consulting firm focused on project
execution services that power clients' operational needs and change initiatives
with on demand experienced and diverse talent. 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.
A disruptor within the professional services industry since its founding in
1996, today the Company finds itself enjoying a highly favorable macro
environment that embraces its differentiated agile delivery model. The trends in
today's marketplace favor the flexibility and agility RGP provides as businesses
confront transformation pressures and speed-to-market challenges. Based in
Irvine, California, with offices worldwide, RGP's agile delivery model attracts
top-caliber professionals with in-demand skillsets who seek a workplace
environment that embraces flexibility, collaboration and human connection. Our
unique approach to workforce strategy strongly positions us to help our clients
transform their businesses and workplaces, especially in a time where
high-quality talent is increasingly scarce and the usage of a flexible workforce
to execute transformational projects has become the dominant operating model.
See Part I, Item 1 "Business" for further discussions about our business and
operations.
We are laser focused on driving long-term growth in our business by seizing the
favorable macro shifts in workforce strategies and preferences, building an
efficient and scalable operating model, and maintaining a distinctive culture
and approach to professional services. Our enterprise initiatives in recent
years include refining the operating model for sales, talent and delivery to be
more client-centric, cultivating a more robust performance culture by aligning
incentives to business performance, building and commercializing our digital
engagement platform, enhancing our consulting capabilities in digital
transformation to align with market demand and improving our fixed-cost
structure through a global restructuring initiative.
Despite the impact of the Pandemic, we successfully evolved our operating model
to enable us to capitalize on the prominent macro industry trends that favor our
business model. These macro industry trends include the pivot to virtual and/or
hybrid working models, the dramatic shift in talent preferences toward
flexibility and career control and our clients responding to these trends by
embracing new, more agile, workforce strategies. 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 ability to
serve multinational clients in a seamless manner, broadened our client reach in
markets where we do not have a physical presence, and allowed for improved
operational efficiency while offering clients and consultants more choice and
agility. As the economy reopened and recovered in fiscal 2022, our ability to
flex seamlessly between traditional on-premises and virtual models has offered
greater optionality in how we deliver projects and our go-to-market motion.
Removing the constraint of geo-fencing our consultants based on locality has
opened new avenues of opportunity for both our clients and our talent. This
enabled us to attract and retain talent on a broader geographic basis and
allowed for additional opportunities in terms of prospect cultivation, client
engagement and project delivery.
Our agile talent platform has helped clients pivot their workforce and operating
models in an increasingly tightening labor market. The robust top-line growth
and margin expansion we achieved in fiscal 2022 were fueled by the favorable
macro shifts in both talent and client preferences driving higher supply and
demand, and the operational and go-to-market improvements we have achieved
through our enterprise initiatives discussed above. We believe we are continuing
to lay the right foundation for further growth ahead.
Fiscal 2022 Strategic Focus Areas
Our strategic focus areas in fiscal 2022 were:
•Drive meaningful revenue growth and deliver enhanced EBITDA margin;
•Commercialize our digital strategy;
•Modernize our global technology infrastructure; and
•Strengthen the RGP brand.
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Drive Revenue and EBITDA Growth - Driving meaningful growth in our top-line
revenue and expanding our EBITDA (earnings before interest, taxes, depreciation
and amortization) margin were our highest priorities this fiscal year. In fiscal
2022, we continued to focus on the growth of our Strategic Client Account and
key industry vertical programs, particularly in healthcare, leveraging broader
market talent for virtual delivery and the increasing focus on account
penetration. Since inception, our Strategic Client Account program has been one
of the key drivers of revenue and business growth. In fiscal year 2022, we
successfully expanded our Strategic Client Account program by moving additional
accounts into the program and adopting a client-centric and borderless approach
to serve these clients. Revenue within this client set experienced significant
growth over the prior fiscal years and represented 32% of our consolidated
revenue. We believe our efforts have and will continue to allow us to develop
in-depth knowledge of these clients' needs and increase the scope and size of
our projects with them.
In our healthcare industry vertical, we experienced strong growth momentum 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. Revenue from the healthcare industry vertical grew
22% year over year. To align with market demand, we have been expanding our
capabilities in such areas as revenue integrity, clinical trials support and
supply chain optimization and leveraging our depth of industry expertise to help
clients operate with enhanced agility and efficiency in the rapidly evolving
healthcare industry.
In addition, the continued evolution of our operating and delivery model to be
more flexible, virtual, and borderless has allowed us to further penetrate
existing core clients and markets as well as to uncover opportunities to
effectively serve new clients in new markets. Revenue from our regional accounts
grew 30% over the prior fiscal year. As our clients continue to accelerate their
digital and workforce paradigm transformations in this still uncertain economic
environment, we are well positioned to deliver greater workforce agility and
flexibility to our clients.
Building on significant cost savings achieved in fiscal 2021 and the fundamental
improvement in our cost structure, coupled with heightened focus on pricing and
operational efficiency, we delivered significant improvement in EBITDA
performance in fiscal 2022 and enhanced shareholder value. We improved our
pay/bill ratio through value-based pricing and strategic management of our
direct delivery costs. In a world with intensified competition for talent, we
strive to attract high-caliber professionals with the right skillsets and
qualifications at competitive pay, and appropriately capture the value of the
talent and solutions delivered in our bill rates. In addition, we maintained the
structural improvement in cost leverage through disciplined management of
headcount, business expenses, and real estate costs in an increasingly digital,
virtual market.
Commercialize Our Digital Strategy - 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 of, 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 address their digital needs including
automation and digitization of business processes as well as offering digital
pathways to serve their needs.
We have completed the development of the core functionalities of HUGO, our
first-to-market employed-model digital staffing platform where talent and
clients can connect, engage and even transact directly. HUGO is designed to
offer clients and talent unprecedented transparency, speed, and control. We
launched a limited pilot in the New York Tri-State area in October 2021 and
continued to enhance its functionality with further artificial intelligence and
machine learning. We also have been developing sales and marketing strategies to
increase client and talent adoption of the platform. We plan to expand the
geographic reach to other key markets within the U.S. such as California and
Texas in fiscal 2023.
Additionally, our efforts to commercialize our digital strategy this year
included the acceleration of digital transformation revenue through the
continued expansion of go-to-market penetration for Veracity in North America.
We continued to drive enhancement in 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 has generated positive returns since inception, with Veracity
revenue growing 16% year over year in fiscal 2022. We believe the increase in
virtual or remote delivery arrangements resulting from the Pandemic has and will
continue to accelerate digital transformation agendas in our existing client
base and create opportunities for us to engage with new clients, contributing to
further top-line revenue growth.
Modernize Our Global Technology Infrastructure - In the third quarter of fiscal
2022, we launched a holistic digital transformation project to elevate our
technology infrastructure globally, including a cloud-based enterprise resource
planning system and talent acquisition and management system. We believe our
investment in this technology initiative will accelerate our efficiency and
data-led decision-making capabilities, optimize process flow and automation,
scale our operations to support future growth, and create an enhanced digital
experience for our consultants, clients and employees.
Strengthen the RGP Brand - We have continued to build upon the brand work
conducted to date to further clarify and amplify our brand positioning in the
marketplace. Our employer-facing brand will continue to focus on the power of
human. Through enhanced transparency, flexibility and digital connection,
fulfilling assignments, competitive compensation and benefits and continued
education,
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training and professional development, we are strengthening our professional
community and delivering care and wellbeing to our consultants and employees. We
are positioning ourselves as the preferred professional environment for talent
looking for greater flexibility, choice and career control than traditional
employment models can offer. As we announced at our Investor Day, held on
April 12, 2022 at Nasdaq Marketplace, our corporate brand will focus on helping
both talent and clients work differently in the new world of work. We believe we
are poised to own a dominant position as a leading project execution partner of
choice and the brand work that we are doing is intended to support that effort.
Critical Accounting Policies 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 have been prepared in accordance with accounting principles
generally accepted in the U.S. ("GAAP"). 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.
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 for the vast majority of our 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.
On a limited basis, the Company may have fixed-price contracts, for which
revenues are recognized over time using the input method based on time incurred
as a proportion of estimated total time. Time incurred represents work
performed, which corresponds with, and therefore best depicts, the transfer of
control to the client. Management uses significant judgments when estimating the
total hours expected to complete the contract performance obligation. It is
possible that updated estimates for consulting engagements may vary from initial
estimates with such updates being recognized in the period of determination.
Depending on the timing of billings and services rendered, the Company accrues
or defers revenue as appropriate.
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 28, 2022, May 29, 2021 and
May 30, 2020 were $3.1 million, $2.6 million and $1.4 million, respectively.
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 28, 2022 and May 29, 2021, we had an allowance
for doubtful accounts of $2.1 million and $2.0 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.
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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 evaluate the realizability of our deferred tax assets based on all available
evidence and establish a valuation allowance to reduce deferred tax assets when
it is more likely than not that they will not be realized. When all available
evidence indicates that the deferred tax assets are more likely than not to be
realized, a valuation allowance is not required to be recorded or an existing
valuation allowance is reversed. Management assesses all available positive and
negative evidence, including (1) three-year cumulative pre-tax income or loss
adjusted for permanent tax differences, (2) history of operating losses and of
net operating loss carryforwards expiring unused, (3) evidence of future
reversal of existing taxable temporary differences, (4) availability of
sufficient taxable income in prior years, (5) tax planning strategies, and (6)
projection of future taxable income, to determine the need to establish or
release a valuation allowance on the deferred tax assets. An increase or
decrease in valuation allowance will result in a corresponding increase or
decrease in tax expense, and any such adjustment may materially affect our
future financial results.
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 28, 2022 and May 29, 2021, a valuation allowance of $8.2 million and
$13.3 million was established on deferred tax assets totaling $34.3 million and
$38.4 million, respectively. Our income tax for the years ended May 28, 2022,
May 29, 2021 and May 30, 2020 was an expense of $15.8 million, a benefit of $2.5
million and an expense of $6.9 million, respectively. Our total liability for
unrecognized tax benefits was $0.9 million as of both May 28, 2022 and May 29,
2021.
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 at a discount in
accordance with the terms of the plan. During fiscal 2022, the Company started
issuing performance stock unit awards under the 2020 Performance Incentive Plan
that will vest upon the achievement of certain company-wide performance targets
at the end of the defined three-year performance period. Vesting periods for
restricted stock, restricted stock units and stock option awards range from
three to four years.
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,
restricted stock unit and performance stock unit awards using the closing price
of our common stock on the date of grant. We have 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
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 ($0.14 per share for each quarter during fiscal
2022, 2021 and 2020) 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 directors' 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.
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, and in the case of performance stock units, based on the
actual performance. The number of performance stock units earned at the end of
the performance period may equal, exceed or be less than the targeted number of
shares depending on whether the performance criteria are met, surpassed or not
met. During each reporting period, the Company uses the latest forecasted
results to estimate the number of shares to be issued at the end of the
performance period. Any
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resulting changes to stock compensation expense are adjusted in the period in
which the change in estimates occur. 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 28, 2022, May 29, 2021 and May 30, 2020 was $8.2 million, $6.6 million
and $6.1 million, respectively.
Valuation of long-lived assets - For long-lived tangible and intangible assets,
including property and equipment, right-of-use ("ROU") assets, and
definite-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, ROU assets outside of exited markets, and
definite-lived intangible assets as of May 28, 2022. We determined that for such
long-lived assets, no impairment indicators were present as of May 28, 2022, and
no impairment charge was recorded during fiscal 2022.
For ROU assets within exited markets under our restructuring plans, we assess
the potential impairment whenever an impairment indicator was present. For
further discussion regarding impairment of ROU assets in exited markets, see
Note 14 - Restructuring Activities in the Notes to 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.
Goodwill - Goodwill represents 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 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 2022.
2022 Annual Goodwill Impairment Analysis
We performed our annual goodwill impairment test as of May 28, 2022 on our three
reporting units. 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
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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 28, 2022.
While we believe that the assumptions underlying our qualitative assessment are
reasonable, these assumptions could have a significant impact on whether 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.
Results of Operations
The following tables set forth, for the periods indicated, our Consolidated
Statements of Operations data. These historical results are not necessarily
indicative of future results.
Our operating results for the periods indicated are expressed as a percentage of
revenue below. The fiscal years ended May 28, 2022, May 29, 2021 and May 30,
2020 consisted of 52, 52, and 53 weeks, respectively (amounts in thousands,
except percentages).
                                                 For the Years Ended
                                   May 28,             May 29,             May 30,
                                    2022                2021                2020
Revenue                        $ 805,018 100.0 %   $ 629,516 100.0 %   $ 703,353 100.0 %
Direct cost of services          488,376  60.7       388,112  61.7       427,870  60.8
Gross profit                     316,642  39.3       241,404  38.3       275,483  39.2
Selling, general and             224,721  27.9       209,326  33.3       228,067  32.4
administrative expenses
Amortization expense               4,908   0.6         5,228   0.8         5,745   0.8
Depreciation expense               3,575   0.4         3,897   0.6         5,019   0.8
Income from operations            83,438  10.4        22,953   3.6        36,652   5.2
Interest expense, net              1,064   0.2         1,600   0.2         2,061   0.3
Other income                       (594) (0.1)       (1,331) (0.2)         (637) (0.1)
Income before provision           82,968  10.3        22,684   3.6        35,228   5.0
for income taxes
Income tax expense                15,793   2.0       (2,545) (0.4)         6,943   1.0
(benefit)
Net income                     $  67,175   8.3 %   $  25,229   4.0 %   $  28,285   4.0 %


Non-GAAP Financial Measures
We use certain non-GAAP financial measures to assess our financial and operating
performance that are not defined by or calculated in accordance with GAAP. A
non-GAAP financial measure is defined as a numerical measure of a company's
financial performance that (i) excludes amounts, or is subject to adjustments
that have the effect of excluding amounts, that are included in the comparable
measure calculated and presented in accordance with GAAP in the Consolidated
Statements of Operations; or (ii) includes amounts, or is subject to adjustments
that have the effect of including amounts, that are excluded from the comparable
GAAP measure so calculated and presented.
Our primary non-GAAP financial measures are listed below and reflect how we
evaluate our operating results.
?Same-day constant currency revenue is adjusted for the following items:

oCurrency impact. In order to remove the impact of fluctuations in foreign
currency exchange rates, we calculate same-day constant currency revenue, which
represents the outcome that would have resulted had exchange rates in the
current period been the same as those in effect in the comparable prior period.

oBusiness days impact. In order to remove the fluctuations caused by comparable
periods having a different number of business days, we calculate same-day
revenue as current period revenue (adjusted for currency impact) divided by the
number of business days in the current period, multiplied by the number of
business days in the comparable prior period. The number of business days in
each respective period is provided in the "Number of Business Days" section in
the table below.

?Adjusted EBITDA is calculated as net income before amortization expense,
depreciation expense, interest and income taxes plus stock-based compensation
expense, restructuring costs, technology transformation 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.
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?Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue.
Same-Day Constant Currency Revenue
Same-day constant currency revenue assists management in evaluating revenue
trends on a more comparable and consistent basis. We believe this measure also
provides more clarity to our investors in evaluating our core operating
performance and facilitates a comparison of such performance from period to
period. The following table presents a reconciliation of same-day constant
currency revenue to revenue, the most directly comparable GAAP financial
measure, by geography.
                                            RESOURCES CONNECTION, INC.
                               RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
                             Three Months Ended               Three Months Ended             For the Years Ended

Revenue by Geography May 28, February 26, May 28,

 May 29,          May 28,       May 29,
                           2022             2022                2022          2021             2022          2021
(Amounts in                     (Unaudited)                       (Unaudited)                  (Unaudited, except
thousands, except                                                                               for GAAP amounts)
number of business
days)
North America
As reported (GAAP)     $  183,817     $      173,569       $   183,817     $ 141,518       $  676,419     $ 512,777
Currency impact              (58)                                   16                          (297)
Business days impact     (11,308)                                    -                          2,694
Same-day constant
currency revenue       $  172,451                          $   183,833                     $  678,816

Europe
As reported (GAAP)     $   19,433     $       17,856       $    19,433     $  19,371       $   76,075     $  72,496
Currency impact               890                                1,869                          1,650
Business days impact          164                                (172)                          (153)
Same-day constant
currency revenue       $   20,487                          $    21,130                     $   77,572

Asia Pacific
As reported (GAAP)     $   13,781     $       13,184       $    13,781     $  11,429       $   52,524     $  44,243
Currency impact               487                                  857                          1,477
Business days impact            -                                  119                              -
Same-day constant
currency revenue       $   14,268                          $    14,757                     $   54,001

Total Consolidated
As reported (GAAP)     $  217,031     $      204,609       $   217,031     $ 172,318       $  805,018     $ 629,516
Currency impact             1,319                                2,742                          2,830
Business days impact     (11,144)                                 (53)                          2,541
Same-day constant
currency revenue       $  207,206                          $   219,720                     $  810,389

Number of Business
Days
North America (1)              65                 61                65            65              251           252
Europe (2)                     62                 63                62            62              254           253
Asia Pacific (2)               62                 62                62            62              247           247

(1) This represents the number of business days in the U.S.
(2) This represents the number of business days in the country or countries in
which the revenues are most concentrated within the geography.



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EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
EBITDA, 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 EBITDA, 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 (amounts in thousands,
except percentages).
                                             For the Years Ended
                           May 28,    % of         May 29,   % of         May 30,   % of
                             2022    Revenue        2021    Revenue        2020    Revenue

Net income                $   67,175     8.3  %   $  25,229     4.0  %   $  28,285     4.0  %
Adjustments:
Amortization expense           4,908     0.6          5,228     0.8          5,745     0.8
Depreciation expense           3,575     0.4          3,897     0.6          5,019     0.7
Interest expense, net          1,064     0.2          1,600     0.3          2,061     0.3
Income tax expense            15,793     2.0        (2,545)   (0.4)          6,943     1.0
(benefit)
EBITDA                        92,515    11.5         33,409     5.3         48,053     6.8
Stock-based compensation       8,168     1.0          6,613     1.1          6,057     0.9
expense
Restructuring costs              833     0.1          8,260     1.3          4,982     0.7
Contingent consideration         166       -          4,512     0.7            794     0.1
adjustment
Technology transformation      1,449     0.2              -       -              -       -
costs (1)
Adjusted EBITDA           $  103,131    12.8  %   $  52,794     8.4  %   $  59,886     8.5  %


(1) Technology transformation costs represent costs included in net income
related to the Company's initiative to upgrade its technology platform globally,
including a cloud-based enterprise resource planning system and talent
acquisition and management system. Costs for the fiscal year ended May 28, 2022
primarily include software licensing costs, third-party consulting fees and
costs associated with dedicated internal resources.
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 measures of financial performance
or financial condition 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.
Year Ended May 28, 2022 Compared to Year Ended May 29, 2021
Percentage change computations are based upon amounts in thousands. Fiscal 2022
and fiscal 2021 consisted of 52 weeks.
Revenue. Revenue increased $175.5 million, or 27.9%, to $805.0 million for the
year ended May 28, 2022 from $629.5 million for the year ended May 29, 2021. On
a same-day constant currency basis, revenue increased 28.7% in fiscal 2022
compared to fiscal 2021. In addition to higher volume of billable hours, we
improved bill rates. Billable hours increased by 25.0% and the average bill rate
improved 2.4% year over year, meaningfully contributing to the overall year over
year revenue growth in fiscal 2022.

?

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The following table represents our GAAP consolidated revenues by geography
(amounts in thousands, except percentages):

                     For the Years Ended
                  May 28,            May 29,
                   2022               2021

North America $ 676,419 84.0 % $ 512,777 81.5 %
Europe

           76,075   9.5       72,496  11.5
Asia Pacific     52,524   6.5       44,243   7.0
Total         $ 805,018 100.0 %  $ 629,516 100.0 %


Revenue grew across all geographies during fiscal 2022 compared to fiscal 2021,
as we continued to benefit from favorable secular trends including a shift in
businesses adopting more workforce agility, workforce gaps caused by the
tightening labor market, the demand for digital transformation services, an
increase in client spending on significant and transformational initiatives, our
sustained improvement in sales execution and operational efficiency to match
supply and demand and continued progress in raising our bill rates. The strong
revenue performance was also driven by our client segmentation and client
service strategy to deepen our relationship within the Strategic Client Account
base as well as other key client sets to further expand our presence across
multiple buying centers. Our successful execution led to larger deal sizes,
longer project durations and record high pipelines and closed deals. The robust
revenue growth was across most client segments, and the majority of our markets,
and was led by solution areas in Finance and Accounting, Risk and Compliance and
Business Transformation.
North America experienced robust revenue growth of 31.9%, or 32.4% on a same-day
constant currency basis, compared to fiscal 2021. As the macro economy in the
U.S. continued to strengthen in fiscal 2022, our clients increased their
spending to advance change initiatives, such as finance and digital and
workforce paradigm transformation. The tightening labor market and almost record
low unemployment rate drove significant growth in our professional staffing
revenue, particularly in the U.S., as our clients looked to us to supply quality
talent to fill their temporary workforce gaps. The shift towards workforce
agility and the increased acceptance of co-delivery and remote delivery not only
enhanced our value proposition to our clients, but also allowed for better and
more efficient matching of supply and demand, enabling us to achieve sustained
improvement in our operational efficiency. In Europe, our adoption of a more
integrated global go-to-market approach to focus on serving our tier one
multi-national clients in this region also drove sustained top-line growth.
Europe revenue in fiscal 2022 grew 4.9%, or 7.0% on a same-day constant currency
basis, compared to fiscal 2021. Asia Pacific revenue improved 18.7%, or 22.1% on
a same-day constant currency basis, compared to fiscal 2021, as the economies in
this region continued to strengthen despite episodic COVID-19 outbreaks.
Direct Cost of Services. Direct cost of services increased $100.3 million, or
25.8%, to $488.4 million during fiscal 2022 from $388.1 million for fiscal 2021.
The increase in direct cost of services year over year was primarily
attributable to a 25.0% increase in billable hours.
Direct cost of services as a percentage of revenue was 60.7% for fiscal 2022
compared to 61.7% for fiscal 2021. The decreased percentage compared to the
prior year was primarily attributable to bill rate increases leading to an
improvement of 100 basis points in the overall pay/bill ratio. Pay rate
increases were relatively modest in fiscal 2022 despite tight labor supply
conditions and rising wages. In addition to these macro labor market conditions,
other factors impacting average pay rate included the impact of revenue mix
across solutions and geographies and foreign currency fluctuations against the
U.S. dollar. Our target direct cost of services percentage is below 60%.
The number of consultants on assignment at the end of fiscal 2022 was 3,388
compared to 2,902 at the end of fiscal 2021.
Selling, General and Administrative Expenses. SG&A was $224.7 million, or 27.9%
as a percentage of revenue, for the year ended May 28, 2022 compared to $209.3
million, or 33.3% as a percentage of revenue, for the year ended May 29, 2021.
SG&A as a percentage of revenue improved by 5.4% in fiscal 2022 compared to
fiscal 2021 as a result of the improvement in our operating leverage due to
significant year over year revenue growth. The $15.4 million increase in SG&A
year over year was primarily attributed to (1) a $21.0 million increase in
management compensation and benefits primarily related to higher incentive
compensation due to significant growth in both revenue and profitability, (2) a
$1.6 million increase in stock-based compensation expense, (3) an increase of
$1.4 million in technology transformation costs incurred in fiscal 2022, (4) a
$1.3 million increase in other business and travel expenses as the impact of the
Pandemic subsided and business travel started to resume gradually, (5) a $1.2
million increase in computer software and consulting costs, (6) $0.5 million of
impairment related to exiting a real estate facility, and (7) a $1.2 million
increase in all other general and administration expenses. These incremental
costs were partially offset by (1) a decrease of $7.4 million in restructuring
costs as the restructuring activities wound down toward completion in fiscal
2022, (2) a $4.3 million adjustment related to the Veracity contingent
consideration recorded in the prior year, and (3) a $1.1 million gain in foreign
currency related to the dissolution of a foreign entity in the third quarter of
fiscal 2022.
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Management and administrative headcount was 871 at the end of fiscal 2022 and
851 at the end of fiscal 2021. Management and administrative headcount includes
full-time equivalent headcount for our seller-doer group, which is determined by
utilization levels achieved by the seller-doers. Any unutilized time is
converted to full-time equivalent headcount.
Restructuring charges. The Company initiated its global restructuring and
business transformation plan in North America and Asia Pacific (the "North
America and APAC Plan") in March 2020 and in Europe (the "European Plan" and,
together with the North America and APAC Plan, the "Restructuring Plans") in
September 2020. We substantially completed our Restructuring Plans in fiscal
2022. All employee termination and facility exit costs incurred under the
Restructuring Plans were associated with the RGP segment, and are recorded in
selling, general and administrative expenses in the Consolidated Statements of
Operations, as further discussed in Note 19 - Segment Information and Enterprise
Reporting in the Notes to Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K. Restructuring costs for the years
ended May 28, 2022, May 29, 2021 and May 30, 2020 were as follows (amounts in
thousands):
                            For the Year Ended                      For the Year Ended                          For the Year Ended
                              ?May 28, 2022                            ?May 29, 2021                               ?May 30, 2020
                    North
                   America                                   North                                     North
                   and APAC                               America and                               America and
                     Plan      European Plan     Total     APAC Plan     European Plan     Total     APAC Plan         European Plan     Total
Employee
termination
costs              $    168   $         (253)   $  (85)   $     1,024   $         4,838   $ 5,862   $      3,927      $             -   $ 3,927
Real estate exit
costs                   884              (10)       874         1,052               666     1,718          1,055                    -     1,055
Other costs               -                44        44             -               680       680              -                    -         -
Total
restructuring
costs              $  1,052   $         (219)   $   833   $     2,076   $         6,184   $ 8,260   $      4,982      $             -   $ 4,982


For further information on our restructuring initiatives, please refer to Note
14 - Restructuring Activities in the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
Amortization and Depreciation Expense. Amortization expense was $4.9 million and
$5.2 million in fiscal 2022 and fiscal 2021, 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 our internally developed digital engagement
platform (HUGO). HUGO was placed in service in October 2021 as we launched the
software in the New York Tri-state area, resulting in amortization expense
associated with the development costs in fiscal 2022. Depreciation expense was
$3.6 million and $3.9 million in fiscal 2022 and fiscal 2021, respectively. The
decrease in depreciation expense was primarily due to fully-depreciated computer
equipment during fiscal 2022.
Income Taxes. The provision for income taxes was $15.8 million (effective tax
rate of 19.0%) for the year ended May 28, 2022 compared to an income tax benefit
of $2.5 million (effective benefit rate of 11.2%) for the year ended May 29,
2021. We record tax expense based upon actual results versus a forecasted tax
rate because of the volatility in our international operations that span
numerous tax jurisdictions and the resulting uncertainty of our ability to
utilize historical net operating losses in such jurisdictions. The current year
rate benefitted from the improvement in operating results in the international
entities, enabling us to utilize the benefits from historical net operating
losses in certain foreign jurisdictions by reversing a $4.9 million valuation
allowance in a specific European entity in the third quarter. The Company also
recognized a $2.6 million benefit from the dissolution of our France entity. In
fiscal 2021, we recognized a $12.8 million benefit from the carryback of net
operating losses to higher tax rate years as permitted under the Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act") in the U.S., resulting in
an effective tax benefit rate of 11.2%. The losses carried back resulted from
accounting method changes in the treatment of self-constructed assets.
We recognized a net tax benefit of $2.1 million for fiscal 2022 and a breakeven
impact in fiscal 2021 from compensation expense related to stock options,
restricted stock awards, restricted stock units, performance stock units and
ESPP during fiscal 2022 and fiscal 2021, respectively.
We reviewed 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 U.S. statutory rate
for losses in certain foreign jurisdictions, the limitation on the benefit for
losses in jurisdictions in which a valuation allowance for operating loss
carryforwards has previously been established, and the unpredictability of
timing and the amount of 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.
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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:
?RGP in the U.S. has generated more than enough cash to fund operations and
expansion, including acquisitions. RGP uses its excess cash to, at its
discretion, return cash to stockholders through dividend payments and stock
repurchases.

?RGP has sufficient cash flow from operations in the U.S. to service its debt
and other current or known obligations without requiring cash to be remitted
from foreign subsidiaries.
?Management's growth objectives include allowing cash to accumulate in RGP's
profitable foreign subsidiaries with the expectation of finding strategic
expansion plans to further penetrate RGP's most successful locations.
?The consequences of distributing foreign earnings have historically been deemed
to be tax-inefficient for RGP or not materially beneficial.
Operating Results of Segment
As discussed in Business Segments in Item 1, Note 2 - Summary of Significant
Accounting Policies and Note 19 - Segment Information and Enterprise Reporting
in the Notes to 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.
We regularly evaluate all parts of our business to ensure that we align our
time, resources and efforts to market opportunities that will enable us to
maximize profitability and shareholder value. On May 31, 2022, we completed the
sale of taskforce to the senior leaders of the business. We believe an interim
management business that primarily serves the middle market client base in
Germany no longer aligns with our strategy in the European region, which highly
focuses on providing project consulting and execution services to large global
clients. Beginning in fiscal 2023, we will operate in the remaining two
operating segments, RGP and Sitrick. See the discussion in Note 2 - Summary of
Significant Accounting Policies and Note 20 - Subsequent Events in the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
The following table presents our operating results by segment (amounts in
thousands, except percentages):
                                     For the Years Ended
                                May 28,              May 29,
                                 2022                 2021

Revenue:
RGP                        $  764,350   94.9 % $  587,620   93.3 %
Other Segments                 40,668    5.1       41,896    6.7
Total revenue              $  805,018  100.0 % $  629,516  100.0 %

Adjusted EBITDA:
RGP                        $  134,187  130.1 % $   77,589  147.0 %
Other Segments                  3,527    3.4        3,580    6.8

Reconciling Items (1) (34,583) (33.5) (28,375) (53.8)
Total Adjusted EBITDA (2) $ 103,131 100.0 % $ 52,794 100.0 %


(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) A reconciliation of the Company’s net income to Adjusted EBITDA on a
consolidated basis is presented above under “Non-GAAP Financial
Measures–Reconciliation of GAAP to Non-GAAP Financial Measures.”

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Revenue by Segment
RGP - RGP revenue increased $176.7 million, or 30.1%, to $764.4 million compared
to $587.6 million in fiscal 2021, primarily as a result of a 25.6% increase in
billable hours and a 3.3% increase in bill rate year over year. Revenue from RGP
generally represents more than 90% of total consolidated revenue. Geographic
revenue trends in North America and Asia Pacific within the RGP segment are
consistent with the revenue trends discussed within Consolidated Operating
results above. Revenue in the European region within the RGP segment grew by
8.1%, or 8.8% on a same-day constant currency basis, during fiscal 2022 compared
to fiscal 2021. The growth in the European region outside of Germany was led by
continued penetration and growth in the Strategic Client Account base.
The number of consultants on assignment under the RGP segment as of May 28, 2022
was 3,263 compared to 2,795 as of May 29, 2021.
Other Segments - Other Segments' revenue decreased $1.2 million, or 2.9%, in
fiscal 2022 compared to fiscal 2021, primarily due to a $1.2 million decrease in
Sitrick revenue. The declines in Sitrick revenue during fiscal 2022 compared to
the prior year were primarily due to the closure of the U.S. courts during the
Pandemic and the continued lingering impact on the court system, resulting in
slower business development and revenue conversion.
The number of consultants on assignment under Other Segments as of May 28, 2022
was 125 compared to 107 as of May 29, 2021.
Adjusted EBITDA by Segment
RGP - RGP Adjusted EBITDA increased $56.6 million, or 72.9%, to $134.2 million
in fiscal 2022, compared to $77.6 million in fiscal 2021. The increase was
primarily attributable to the $176.7 million increase in segment revenue
partially offset by the increase in the related cost of services of $101.0
million. Additionally, SG&A costs attributed to RGP increased $18.4 million in
fiscal 2022 as compared to fiscal 2021 primarily due to the increase in bonuses
and commissions of $17.8 million as a result of higher revenue and profitability
achieved; an increase in other business and travel expenses of $1.2 million as
the impact of the Pandemic subsided and business travel started to resume
gradually; a $0.4 million increase in recruiting expenses; a $0.5 million
impairment related to exiting a real estate facility; a $0.7 million reduction
in other income; and a $0.6 million increase in all other general and
administration expenses; and partially offset by reductions in occupancy costs
of $2.4 million primarily as a result of the restructuring effort and fixed
management compensation of $0.4 million in fiscal 2021 that did not occur in
fiscal 2022. For fiscal 2022, the material costs and expenses attributable to
the RGP segment that are not included in computing the segment measure of
Adjusted EBITDA included depreciation and amortization expense of $8.0 million
and stock-based compensation expense of $7.6 million.
The trend in revenue, cost of services, and other costs and expenses at RGP year
over year are 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 declined $0.1 million in fiscal
2022 compared to the same period in fiscal 2021. This decline was primarily
driven by a decrease in revenue of $1.2 million, which was partially offset by a
decrease of $0.8 million in cost of services and a $0.3 million reduction in
general and administrative expenses. For fiscal 2022, the material costs and
expenses attributable to the Other Segments that are not included in computing
the segment measure of Adjusted EBITDA included depreciation and amortization
expense of $0.5 million and stock-based compensation expense of $0.6 million.
Year Ended May 29, 2021 Compared to Year Ended May 30, 2020
For a comparison of our results of operations at the consolidated and segment
level for the fiscal years ended May 29, 2021 and May 30, 2020, 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
29, 2021, filed with the SEC on July 23, 2021 (File No. 0-32113).
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by our operations, our $175.0
million senior secured revolving credit facility, as further discussed below,
and, historically, to a lesser extent, stock option exercises and ESPP
purchases. On an annual basis, we have generated positive cash flows from
operations since inception. Our ability to generate positive cash flow from
operations in the future will be, at least in part, dependent on global economic
conditions and our ability to remain resilient during economic downturns. As of
May 28, 2022, we had $104.2 million of cash and cash equivalents, including
$35.4 million held in international operations.
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Prior to November 12, 2021, we had a $120.0 million secured revolving credit
facility with Bank of America (the "Previous Credit Facility"), which was
scheduled to mature on October 17, 2022. On November 12, 2021, the Company and
Resources Connection LLC and all domestic subsidiaries of the Company as
guarantors, entered into the New Credit Agreement and concurrently terminated
the Previous Credit Facility. The New Credit Agreement provides for a $175.0
million senior secured revolving loan, which includes a $10.0 million sublimit
for the issuance of standby letters of credit and a swingline sublimit of $20.0
million. The New Credit Facility also includes an option to increase the amount
of the revolving loan up to an additional $75.0 million, subject to the terms of
the agreement. The New Credit Facility matures on November 12, 2026.
Borrowings under the New Credit Facility bear interest at a rate per annum of
either, at the Company's election, (i) Term SOFR (as defined in the New Credit
Agreement) plus a margin ranging from 1.25% to 2.00% or (ii) the Base Rate (as
defined in the New Credit Agreement), plus a margin of 0.25% to 1.00% with the
applicable margin depending on the Company's consolidated leverage ratio. In
addition, the Company pays an unused commitment fee on the average daily unused
portion of the New Credit Facility, which ranges from 0.20% to 0.30% depending
upon on the Company's consolidated leverage ratio.
The New Credit Facility is available for working capital and general corporate
purposes, including potential acquisitions, dividend distribution and stock
repurchases. Additional information regarding the New Credit Facility is
included in Note 8 - Long-Term Debt in the Notes to consolidated financial
statements included in Item 8 of Part II of this Annual Report on Form 10-K.
As of May 28, 2022, we had $54.0 million outstanding under the New Credit
Facility. We borrowed $20.0 million under the New Credit Facility on December 6,
2021 to finance the repurchase of 1,155,236 shares of our common stock from
Dublin Acquisition, LLC (the "Seller") pursuant to a Stock Purchase Agreement,
dated December 3, 2021, entered into between the Company and the Seller. See
Note 12 - Stockholders' Equity in the Notes to consolidated financial statements
included in Item 8 of Part II of this Annual Report on Form 10-K.
In addition to cash needs for ongoing business operations, from time to time, we
have strategic initiatives that could generate significant additional cash
requirements. Our initiative to upgrade our technology platform, as described in
"Fiscal 2022 Strategic Focus Areas" above, requires significant investments over
multiple years. As of May 28, 2022, we have non-cancellable purchase obligations
totaling $9.9 million, which are payable as follows pursuant to the licensing
arrangements that we have entered into in connection with this initiative: $3.4
million due during fiscal 2023 and 2024, $3.6 million due during fiscal 2025 and
2026, and $2.9 million due thereafter. While we are still finalizing the
assessment of the total amount of the investments required for this multi-year
initiative, we currently expect to incur total investments between $20.0 million
to $25.0 million through the completion of the system implementation. Such costs
primarily include software licensing fees, third-party consulting fees and costs
associated with dedicated internal resources that are not capitalized. The exact
amount and timing will depend on a number of variables, including progress made
on the implementation. We expect the majority of the investment will take place
in fiscal 2023 and fiscal 2024. In addition to our technology transformation
initiative, we expect to continue to invest in digital pathways to enhance the
experience and touchpoints with our end users, including current and prospective
employees (consultants and management employees) and clients. Such effort will
require additional cash outlay and could further elevate our capital
expenditures in the near term. We believe our current cash, ongoing cash flows
from our operations and funding available under our New Credit Facility will
provide sufficient funds for these initiatives.
At May 28, 2022, we have substantially completed our restructuring initiatives
globally. We do not expect future cash requirements for restructuring
initiatives to be material. Additionally, during the three months ended November
27, 2021, we made the final cash earn-out payment of $7.0 million related to the
acquisition of Veracity. We have no remaining contingent consideration
liabilities as of May 28, 2022.
Other trends impacting our near-term liquidity include the deferral of payroll
taxes under the CARES Act and certain tax planning strategies implemented in the
fourth quarter of fiscal 2021. The CARES Act includes provisions, among others,
allowing deferral of the employer portion of the social security payroll taxes
and addressing the carryback of net operating losses ("NOLs") for specific
periods. We previously elected to defer the employer portion of social security
payroll taxes through December 31, 2020 totaling $12.6 million. Subsequent to
the deferral, we elected to make a partial repayment of $6.3 million in May 2021
and $2.3 million in December 2021. We expect to pay the remaining $4.0 million
of deferred payroll taxes in late 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 NOLs of fiscal 2021 to fiscal years 2016 to 2018. We recognized a discrete
tax benefit of $12.8 million in fiscal 2021 and filed for a federal tax refund
in the amount of $34.8 million in April 2022. We expect to receive such refund
in the first half of fiscal 2023.
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On a macro level, the Pandemic and uncertain macroeconomic conditions, including
recent inflationary pressures, rise in interest rates and global uncertainties
associated with the current conflict in Ukraine, have created significant
uncertainty in the global economy and capital markets, which is expected to
continue into fiscal 2023 and beyond and impact our financial results and
liquidity. If we are required to raise additional capital or incur additional
indebtedness for our operations or to invest in our business, we can provide no
assurances that we would be able to do so on acceptable terms or at all. Our
ongoing operations and growth strategy may require us to continue to make
investments in critical markets and further expand our internal technology and
digital capabilities. In addition, we may consider making strategic acquisitions
or initiating additional restructuring initiatives, which could require
significant liquidity and adversely impact our financial results due to higher
cost of borrowings. We believe that our current cash, ongoing cash flows from
our operations and funding available under our New Credit Facility will be
adequate to meet our working capital and capital expenditure needs for at least
the next 12 months.
Beyond the next 12 months, if we require additional capital resources to grow
our business, either organically or through acquisitions, we may seek to sell
additional equity securities, increase use of our New Credit Facility, expand
the size of our New Credit 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 New Credit Facility. The sale of additional equity
securities or certain forms of debt financing could result in additional
dilution to our stockholders. Our ability to secure additional financing in the
future, if needed, will depend on several factors. These include our future
profitability and the overall condition of the credit markets. Notwithstanding
these considerations, we expect to meet our long-term liquidity needs with cash
flows from operations and financing arrangements.
Operating Activities, Fiscal 2022 and 2021
Operating activities provided cash of $49.4 million and $39.9 million in fiscal
2022 and fiscal 2021, respectively. In fiscal 2022, cash provided by operations
resulted from net income of $67.2 million and non-cash adjustments of $6.9
million. Additionally, in fiscal 2022, net unfavorable changes in operating
assets and liabilities totaled $24.7 million. These changes primarily consisted
of a $44.8 million increase in trade accounts receivable, mainly attributable to
accelerated revenue growth throughout fiscal 2022, and a $5.5 million decrease
in other liabilities, which includes the final Veracity contingent consideration
payment, of which $3.7 million was categorized as operating (the remaining $3.3
million of the total $7.0 million contingent consideration payment was
categorized as financing cash flow) partially offset by a $22.0 million increase
in accrued salaries and related obligations due to the significant increase in
accrued incentive compensation as a result of strong business performance during
the fiscal year, and a $2.1 million decrease in prepaid income taxes due to
timing of estimated quarterly tax payments.
In fiscal 2021, cash provided by operations resulted from net income of $25.2
million and non-cash adjustments of $33.9 million. Additionally, in fiscal 2021,
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 million as 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 million in
fiscal 2021, 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
million primarily as a result of increased vacation accrual year over year.
Investing Activities, Fiscal 2022 and 2021
Net cash used in investing activities was $3.0 million in fiscal 2022 compared
to $3.8 million in fiscal 2021. Net cash used in investing activities in both
periods was primarily for the development of internal-use software and
acquisition of property and equipment.
Financing Activities, Fiscal 2022 and 2021
The primary sources of cash in financing activities are borrowings under our New
Credit 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 New Credit Facility,
payment of contingent consideration, repurchases of our common stock and cash
dividend payments to our stockholders.
Net cash used in financing activities totaled $13.4 million in fiscal 2022
compared to $59.5 million in fiscal 2021. Net cash used in financing activities
during fiscal 2022 consisted of $19.7 million used for the repurchase of our
common stock, cash dividend payments of $18.6 million, the final Veracity
contingent consideration payment, of which $3.3 million was categorized as
financing (the remaining $3.7 million of the total $7.0 million final Veracity
contingent consideration payment was categorized as operating), and the
Expertforce Interim Projects GmbH, LLC ("Expertence") contingent consideration
payment of $0.3 million, partially offset by $10.4 million of net borrowing
under the New Credit Facility (consisting of $73.4 million of proceeds and $63.0
million of repayment), and $17.9 million in proceeds received from ESPP share
purchases and employee stock option exercises.
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Net cash used in financing activities in fiscal 2021 consisted of repayments
under the Previous Credit Facility of $45.0 million, cash dividend payments of
$18.2 million, and the first Veracity contingent consideration payment, of which
$3.0 million was categorized as financing (the remaining $2.3 million of the
total $5.3 million Veracity year-one contingent consideration payment was
categorized as operating). These were partially offset by $6.8 million in
proceeds received from ESPP share purchases and employee stock option exercises.
For a comparison of our cash flow activities for the fiscal years ended May 29,
2021 and May 30, 2020, 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 29, 2021, filed with the SEC on July 23, 2021
(File No. 0-32113).
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 -
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form
10-K.

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