RESOURCES CONNECTION INC

Starting in January 2020, the outbreak of COVID-19 (the “Pandemic”) has severely impacted the global economic climate, creating significant challenges and uncertainty in the operations of organizations around the world. We are closely monitoring the impact of the Pandemic on all aspects of our business, including how it impacts our employees and client engagements. While the extent to which our operations may be impacted by the Pandemic is still uncertain and depends largely on future developments, we believe the Pandemic adversely impacted our operating results in the second half of fiscal 2020 and expect the impact is going to continue into fiscal 2021. As further described in Management’s Discussion and Analysis of Financial Condition and Results of Operations below, we initiated our strategic business review in North America and Asia Pacific ahead of the Pandemic, and carried out a reduction in force in early March. We have substantially completed the restructuring initiatives in these markets in fiscal 2020. We believe these actions 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.

The real estate component of the Plan, specifically to shrink our real estate footprint by 26% globally through either lease termination or subleasing, has afforded us a head start in managing the impact of the Pandemic. As a result of the work we did in the third quarter of fiscal 2020 preparing for a shift to virtual operations in connection with office closures, we were able to seamlessly pivot to a virtual operating model when the Pandemic hit in March, supported by a robust array of enhanced technical tools which enabled remote work. During the fourth quarter of fiscal 2020, we incurred $1.1 million of non-cash charges relating to lease terminations and other costs associated with exiting the facilities, including $0.6 million in impairment of our operating right-of-use assets and $0.5 million in loss on disposal of fixed assets. We expect to incur additional restructuring charges in fiscal 2021 as we continue to exit certain real estate leases in accordance with the Plan. The exact amount and timing will depend on a number of variables, including market conditions. Given the current macro environment, particularly the current shift away from commercial real estate occupancy, accelerated by the Pandemic, we are seeing challenges in our effort to sublet our real estate facilities. As a result, we believe it could take longer and be more costly to terminate and sublet our leases, therefore taking longer to realize the expected savings.

We expect to realize $10.0 million to $12.0 million of savings in fiscal 2021 as a result of the Plan.

Valuation of goodwill – Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. We evaluate goodwill for impairment annually on the last day of the 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. We operate under one reporting unit resulting from the combination of our practice offices. We early adopted Accounting Standards Update (“ASU”) No. 2017-04 Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) on May 26, 2019, the first day of fiscal 2020. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Under ASU 2017-04, we compare the fair value and the carrying value of our reporting unit to assess and measure goodwill impairment. There was no goodwill impairment for fiscal 2020. Depending on future market values of our stock, our operating performance and other factors, the assessment could potentially 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.

Selling, General and Administrative Expenses (“SG&A”).  SG&A increased $4.3 million, or 1.9%, to $228.1 million for the year ended May 30, 2020 from $223.8 million for the year ended May 25, 2019. SG&A in fiscal 2020 reflected one extra week of activities as compared to fiscal 2019. SG&A as a percentage of revenue increased from 30.7% in fiscal 2019 to 32.4% in fiscal 2020. The increase in SG&A is primarily due to the following: (1) $5.0 million of restructuring costs incurred in fiscal 2020, including $3.9 million in personnel-related costs, and $1.1 million in real estate exit related costs; (2) a  $2.9 million increase in management compensation and bonuses and commissions partially driven by the one extra week in fiscal 2020; and (3) a  change in contingent consideration related expense/benefit over the two periods, which was an expense of $0.8 million in fiscal 2020 as compared to a benefit of $0.6 million in fiscal 2019. The increase in SG&A was partially offset by the following: (1) $2.5 million of savings in general business expenses, primarily attributable to cost containment measures and reduced business travel during the Pandemic; (2)  a $1.7 million decrease in internal consultants costs as we continue to leverage our existing resources more efficiently on various projects and initiatives; and (3) a $0.5 million decrease in stock-based compensation expense.  

The Company adopted the guidance on May 26, 2019, the first day of its fiscal 2020, using the modified retrospective approach through a cumulative-effect adjustment, which after completing the implementation analysis, resulted in no adjustment to the Company’s May 26, 2019 beginning retained earnings balance. Periods prior to the date of adoption are presented in accordance with ASC 840, Leases.  As part of the adoption, the Company elected the package of practical expedients, which among other things, permits the Company to not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, and the initial direct costs for any existing leases. The Company also elected the practical expedient to not assess whether existing land easements that were not previously accounted for as leases are or contain a lease under the new guidance. The Company did not elect the hindsight practice expedient to use hindsight when determining lease term and assessing impairment of ROU lease assets. On May 26, 2019, the Company recognized $43.2 million of ROU assets and $51.0 million of operating lease liabilities, including noncurrent operating lease liabilities of $38.5 million, as a result of the adoption. The difference between the ROU assets and the operating lease liabilities was primarily due to previously accrued rent expense relating to periods prior to May 26, 2019, and the remaining prepaid rent balance as of May 25, 2019. The adoption did not have an impact on the Company’s consolidated results of operations or cash flows. Additional information and disclosures required by the new standard are contained in Note 6—Leases.