RESOURCES CONNECTION, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and accompanying notes. This discussion and analysis contains "forward-looking statements," within the meaning of Section 27A of the "Securities Act of 1933, as amended" (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "remain," "should," or "will" or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to review carefully the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results included our Annual Report on Form 10-K for the year endedMay 25, 2019 (File No. 000-32113) and our other public filings made with theSecurities and Exchange Commission ("SEC"). Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to "Resources Connection ," "RGP," "Resources Global Professionals," the "Company," "we," "us," and "our" refer toResources Connection, Inc. and its subsidiaries.
Overview
RGP is a global consulting firm that enables rapid business outcomes by bringing together the right people to create transformative change. As a human capital partner for our clients, we specialize in solving today's most pressing business problems across the enterprise in the areas of Business Strategy & Transformation, Finance & Accounting, Risk & Compliance and Technology & Digital Innovation. 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. RGP was founded in 1996 to help finance executives with operational and special project needs. Our first-to-market, agile human capital model quickly aligns the right resources for the work at hand with speed and efficiency. Our pioneering approach to workforce strategy uniquely positions us to support our clients on their transformation journeys. With more than 4,000 professionals, we annually engage with over 2,400 clients around the world from more than 70 practice offices.
To achieve our objective of being the premier provider of agile consulting services for companies facing transformation, change and compliance challenges, we have developed the following business strategies:
• Hire and retain highly qualified, experienced consultants. We believe our
highly qualified, experienced consultants provide us with a distinct
competitive advantage. Therefore, one of our priorities is to continue to
attract and retain high-caliber consultants who are committed to solving
problems.
• Maintain our distinctive culture. Our corporate culture is the foundationof our business strategy and we believe it has been a significant
component of our success. We believe our culture, "LIFE AT RGP",
representing Loyalty, Integrity, Focus, Enthusiasm, Accountability and
Talent, has created a circle of quality; our culture is instrumental to
our success in hiring and retaining highly qualified employees who, in
turn, attract quality clients.
• Build consultative relationships with clients. We emphasize a
relationship-oriented approach to business rather than a
transaction-oriented or assignment-oriented approach. We believe theprofessional services experience of our management and consultants
enables us to understand the needs of our clients and deliver an
integrated, relationship-based approach to meeting those needs. Client
relationships and needs are addressed from a client, not office,
perspective. We regularly meet with our existing and prospective clients
to understand their business issues and help them define their project
needs.
• Build the RGP brand. We want to be the preferred provider in the future
of work. Our primary means of building our brand is by consistently
providing high-quality, value-added services to our clients. We have also
focused on building a significant referral network. In addition, we have
global, regional and local marketing efforts that reinforce the RGP
brand.
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Through fiscal 2019, we completed various initiatives including cultivating a more robust sales culture, adopting a new operating model for sales, talent and delivery inNorth America , refreshing the RGP brand, establishing digital innovation functions focused on building and commercializing our digital engagement platform, enhancing our consulting capabilities in the digital transformation space, and building and commercializing digital product offerings. To achieve a more robust sales culture, we aligned our sales process using tools such as Salesforce.com, established an enterprise-wide business development function, and implemented a new incentive compensation program for individuals focused on profitable revenue generation and gross margin. Finally, to complete this initiative, we expanded our Strategic Client Program, which involves dedicated account teams for certain high-profile clients with global operations. Under the new operating model inNorth America , we realigned reporting relationships, 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. While we believe these efforts have already delivered improved revenue growth and improved customer experience throughout fiscal 2019, we are focused on continued improvement from this initiative into fiscal 2020. In fiscal 2019, we launched a brand refresh which emphasizes a human centered approach in how we serve our clients and engage with our consultants. We believe the development of our new brand will support future revenue growth. Our digital innovation initiatives are additional strategic components of our growth. InJuly 2019 , we acquiredVeracity Consulting Group, LLC ("Veracity"), a full-service digital transformation firm based inRichmond, Virginia . Veracity delivers innovative solutions to the Fortune 500 and leading healthcare organizations. We believe this acquisition will further our growth objective by allowing us to offer comprehensive end-to-endsolutions to clients by combining Veracity's customer-facing offerings with our depth of experience in implementation (see Note 3 - Acquisitions and Dispositions). In fiscal 2020, we will continue to focus on our growth strategy by further investing in our brand and digital innovation, as well as further refining our operating model and optimizing our systems and structure. After a thorough review of our European operations, we divested our business inResources Global Professionals Sweden AB ("RGP Sweden") and substantially exited theBelgium market during the first quarter of fiscal 2020, The Company expects to complete the remaining exit activities inBelgium during the third quarter of fiscal 2020, including an analysis of the potential tax benefits that may result from the exit activities (see Note 3 - Acquisitions and Dispositions).
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in theU.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. Except for the adoption of Accounting Standards Codification ("ASC") 842 as described in Item 1, Note 2 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form 10-K for the year endedMay 25, 2019 . 20
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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.
Three Months Ended Six Months Ended
November 23, November 24, November 23, November 24,
2019 2018 2019 2018
(Amounts in thousands)
Revenue $ 184,507 $ 188,799 $ 356,732 $ 367,357
Direct cost of services 110,130 115,378 214,852 225,785
Gross margin 74,377 73,421 141,880 141,572
Selling, general and
administrative expenses 53,755 54,959 110,733 111,325
Amortization of intangible
assets 1,510 952 2,604 1,907
Depreciation expense 1,424 1,197 2,793 2,266
Income from operations 17,688 16,313 25,750 26,074
Interest expense 551 608 1,033 1,134
Other (income)/expense (537 ) - (537 ) -
Income before provision for
income taxes 17,674 15,705 25,254 24,940
Provision for income taxes 5,337 5,141 7,978 8,635
Net income $ 12,337 $ 10,564 $ 17,276 $ 16,305
We also assess the results of our operations using Adjusted EBITDA and Adjusted
EBITDA Margin. We define Adjusted EBITDA as net income before amortization of
intangible assets, depreciation expense, interest and income taxes plus
stock-based compensation expense and plus or minus contingent consideration
adjustments. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by
revenue. These measures assist management in assessing our core operating
performance. 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 Six Months Ended
November 23, November 24, November 23, November 24,
2019 2018 2019 2018
(Amounts in thousands, except percentages)
Net income $ 12,337 $ 10,564 $ 17,276 $ 16,305
Adjustments:
Amortization of intangible assets 1,510 952 2,604 1,907
Depreciation expense 1,424 1,197 2,793 2,266
Interest expense 551 608 1,033 1,134
Provision for income taxes 5,337 5,141 7,978 8,635
Stock-based compensation expense 1,643 1,652 3,158 3,013
Contingent consideration adjustment (131 ) (130 ) (262 ) (33 )
Adjusted EBITDA $ 22,671 $ 19,984 $ 34,580 $ 33,227
Revenue $ 184,507 $ 188,799 $ 356,732 $ 367,357
Adjusted EBITDA Margin 12.3 % 10.6 % 9.7 % 9.0 %
The financial measures and key performance indicators we use to assess our
financial and operating performance above 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.
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Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. We believe Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to our investors because they are financial measures used by management to assess the core performance of the Company. Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, net income, earnings per share, cash flows or other measures of financial performance prepared in conformity with GAAP.
Further, Adjusted EBITDA and Adjusted EBITDA Margin have the following limitations:
• Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future and Adjusted EBITDA does not reflect any cash requirements for
such replacements;
• Equity based compensation is an element of our long-term incentive
compensation program, although we exclude it as an expense from Adjusted
EBITDA when evaluating our ongoing operating performance for a particular
period;
• We exclude the changes in the fair value of the contingent consideration
obligation related to business acquisitions from Adjusted EBITDA; and
• Other companies in our industry may calculate Adjusted EBITDA andAdjusted EBITDA Margin differently than we do, limiting their usefulness
as a comparative measure.
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures calculated in accordance with GAAP.
Three Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue decreased$4.3 million , or 2.3%, to$184.5 million for the three months endedNovember 23, 2019 from$188.8 million for the three months endedNovember 24, 2018 . On a constant currency basis, revenue decreased 1.9%. The decrease in revenue reflects the impact of less hours worked. Total hours worked during the three months endedNovember 23, 2019 decreased 2.0% compared to prior year quarter, while average bill rates for the three months endedNovember 23, 2019 had a slight decrease compared to prior year period. The decrease in hours worked in the second quarter of fiscal 2020 reflected the impact of the wind-down of technical accounting implementation projects inNorth America as well as the exit from the Nordics andBelgium markets, partially offset by the addition of hours worked from Veracity and the favorable impact due to the timing ofThanksgiving holidays.
Revenue in the second quarter of fiscal 2020 included
As presented in the table below, revenue decreased in the first three months of
fiscal 2020 compared to the same period of fiscal 2019 in
Revenue for the Three
Months Ended
November 23, November 24, %
2019 2018 Change
North America $ 152,422 82.6 % $ 153,823 81.5 % (0.9 )%
Europe 19,369 10.5 23,163 12.3 (16.4 )%
Asia Pacific 12,716 6.9 11,813 6.2 7.6 %
Total $ 184,507 100 % $ 188,799 100.0 % (2.3 )%
Our financial results are subject to fluctuations in the exchange rates of
foreign currencies in relation to the U.S. dollar ("U.S. dollar"). Revenues
denominated in foreign currencies are translated into U.S. dollars at the
monthly average exchange rates in effect during each period. Thus, as the value
of the U.S. dollar strengthens relative to the currencies of our non-U.S. based
operations, our translated revenue (and expenses) will be lower; conversely, if
the value of the U.S. dollar weakens relative to the currencies of our non-U.S.
based operations, our translated revenue (and expenses) will be higher. Using
the comparable fiscal 2019 second quarter
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conversion rates, international revenues would have been higher than reported under GAAP by approximately$0.7 million in the second quarter of fiscal 2020. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue decreased inNorth America andEurope by 0.9% and 13.1%, respectively, and increased inAsia Pacific by 7.1% during the second quarter of fiscal 2020.
The number of consultants on assignment as of
Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services we provide or that future results can be reliably predicted by considering past trends. Direct Cost of Services. Direct cost of services decreased$5.3 million , or 4.5%, to$110.1 million for the three months endedNovember 23, 2019 from$115.4 million for the three months endedNovember 24, 2018 . The decrease in the amount of direct cost of services between periods was primarily attributable to a decrease of 2.0% in the number of hours worked and a decrease of 1.6% in the average pay rate per hour between the two quarters. Direct cost of services as a percentage of revenue was 59.7% and 61.1% for the three months endedNovember 23, 2019 andNovember 24, 2018 , respectively. The direct cost of services as a percentage of revenue improved in the second quarter of fiscal 2020 compared to prior year quarter primarily due to an improvement in the Company's bill/pay ratio as well as a decrease in holiday pay for consultants in theU.S. (second quarter of fiscal 2020 included onlyLabor Day while the second quarter of fiscal 2019 includedLabor Day andThanksgiving ).
Our target direct cost of services percentage is 60% in all of our markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of revenue was 29.1% for both
the three months ended November 23, 2019 and November 24, 2018 . SG&A was
$53.8 million for the second quarter of fiscal 2020 and $55.0 million for the
comparable prior year period. The year-over-year decrease is primarily
attributable to: (1) a $2.5 million decrease in incentive compensation as a
result of the decrease in second quarter revenue, (2) a $0.9 million decrease in
business expenses as management continues to closely manage discretionary spend
and (3) $0.8 million less in severance expense, partially offset by $2.9 million
in additional payroll and benefit costs due to additional headcount related to
project delivery and digital transformation efforts, including Veracity.
Management and administrative headcount was 962 at the end of the second quarter of fiscal 2020 and 912 at the end of the second quarter of fiscal 2019.
Sequential Operations. On a sequential quarter basis, fiscal 2020 second quarter revenues increased approximately 7.1% (7.3% constant currency), from$172.2 million to$184.5 million . Second quarter revenue includes a full quarter of Veracity and reflects active pipeline management and business development coupled with fewer holidays in theU.S. as well as seasonal impact (second quarter of fiscal 2020 includedLabor Day while the first quarter of fiscal 2020 includedMemorial Day andJuly 4th holidays in theU.S. and summer holiday breaks taken by our consultants), resulting in a 6.2% increase in hours worked. Average bill rates increased 0.8% from the first quarter. The Company's sequential revenue increased inNorth America andEurope by 8.6% and 3.2% respectively and decreased inAsia Pacific by 2.8%. On a constant currency basis, using the comparable first quarter fiscal 2020 conversion rates, sequential revenue increased inNorth America (8.6%),Europe (4.0%) and decreased inAsia Pacific (1.9%).Asia Pacific revenue decreased due to the week-long holidays in bothJapan andChina , two of the Company's largest markets inAsia . Direct cost of services as a percentage of revenue was 59.7% and 60.8% in the second quarter of fiscal 2020 and first quarter of fiscal 2020, respectively. The decrease in the direct cost of services percentage in the second quarter of 2020 is primarily due to a decrease in holiday pay for consultants in theU.S. as a result of fewer holidays (Labor Day in the second quarter of fiscal 2020 compared to theMemorial Day andJuly 4th holidays in the first quarter) as well as lower payroll taxes. SG&A as a percentage of revenue was 29.1% for the second quarter of fiscal 2020 compared to 33.1% for the first quarter of fiscal 2020. SG&A in the second quarter decreased$3.2 million to$53.8 million from$57.0 million in the previous quarter. The primary reasons for the decrease were: (1) severance cost of$0.4 million in the first quarter related to a former officer of the Company, (2)$0.7 million of costs related to exit activities inSweden andBelgium in the first quarter, (3)$0.6 million of acquisition costs related to Veracity in the first quarter, (4)$0.5 million in retention bonuses in the first quarter and (5) a decrease of$0.7 million in business expenses as management continues to closely manage discretionary spend. Amortization and Depreciation Expense. Amortization of intangible assets was$1.5 million and$1.0 million in the second quarter of fiscal 2020 and fiscal 2019, respectively. The increase in amortization expense is primarily due to the amortization of identifiable intangible assets acquired from Veracity during the first quarter of fiscal 2020. 23
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Depreciation expense was$1.4 million and$1.2 million in the second quarter of fiscal 2020 and fiscal 2019, respectively. The increase is primarily the result of depreciation of our fiscal 2019 investments in new office furniture and fixtures as we transition to an open office footprint to enhance the ability to internally collaborate.
Interest Expense. Interest expense was approximately
Income Taxes. The Company's provision for income taxes was$5.3 million (effective tax rate of approximately 30%) and$5.1 million (effective tax rate of approximately 33%) for the three months endedNovember 23, 2019 andNovember 24, 2018 , respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions. The provision for income taxes in the three months endedNovember 23, 2019 andNovember 24, 2018 results from taxes on income in theU.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than theU.S. statutory rates. The provision for income taxes increased for the three months endedNovember 23, 2019 compared to the prior year quarter because of improved global income. The Company recognized a tax benefit of approximately$0.3 million and$0.1 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2020 and fiscal 2019, respectively. Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Company's effective tax rate will remain constant in the future because of the lower benefit from theU.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 eligible disqualifying incentive stock options exercises. Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.-Risk Factors of our Annual Report on Form 10-K for the year endedMay 25, 2019 . Due to these and other factors, we believe quarter-to-quarter comparisons of our results of operations may not be meaningful indicators of future performance.
Six Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue decreased$10.7 million , or 2.9%, to$356.7 million for the six months endedNovember 23, 2019 from$367.4 million for the six months endedNovember 24, 2018 . On a constant currency basis, revenue decreased 2.4%. Revenue in the first half of fiscal 2020 included$7.2 million of revenue inNorth America attributable to Veracity and reflected the impact of the Company exiting theSweden andBelgium markets and the wind-down of technical accounting implementation projects.
As presented in the table below, revenue decreased in the first six months of
fiscal 2020 compared to the same period of fiscal 2019 in
Revenue for the Six
Months Ended
November 23, November 24, %
2019 2018 Change
North America $ 292,798 82.1 % $ 299,994 81.7 % (2.4 )%
Europe 38,132 10.7 43,847 11.9 (13.0 )%
Asia Pacific 25,802 7.2 23,516 6.4 9.7 %
Total $ 356,732 100.0 % $ 367,357 100.0 % (2.9 )%
Our financial results are subject to fluctuations in the exchange rates of
foreign currencies in relation to the U.S. dollar. Revenues denominated in
foreign currencies are translated into U.S. dollars at the monthly average
exchange rates in effect during each period. Thus, as the value of the U.S.
dollar strengthens relative to the currencies of our non-U.S. based operations,
our translated revenue (and expenses) will be lower; conversely, if the value of
the U.S. dollar weakens relative to the currencies of our non-U.S.based
operations, our translated revenue (and expenses) will be higher. Using the
comparable fiscal 2019 conversion rates,
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international revenues would have been higher than reported under GAAP by approximately$1.6 million in the first six months of fiscal 2020. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue decreased inNorth America andEurope by 2.4% and 9.5%, respectively, and increased inAsia Pacific by 10.0% during the first six months of fiscal 2020. Direct Cost of Services. Direct cost of services decreased$10.9 million , or 4.8%, to$214.9 million for the six months endedNovember 23, 2019 from$225.8 million for the six months endedNovember 24, 2018 . The decrease in the amount of direct cost of services between periods was primarily attributable to a decrease of 2.0% in the number of hours worked as well as a decrease of 2.4% in the average pay rate per hour between the two periods. Direct cost of services as a percentage of revenue was 60.2% and 61.5% for the six months endedNovember 23, 2019 andNovember 24, 2018 , respectively. The direct cost of services as a percentage of revenue improved in fiscal 2020 primarily due to an improvement in the Company's bill/pay ratio compared to the prior year period as well as a decrease in holiday pay for consultants due to fewer holidays in theU.S. (first half of fiscal 2020 included two less holidays due to the timing of theThanksgiving holiday).
Our target direct cost of services percentage is 60% in all our markets.
Selling, General and Administrative Expenses. SG&A as a percentage of revenue was 31.0% and 30.3% for the six months endedNovember 23, 2019 andNovember 24, 2018 , respectively. SG&A was$110.7 million for the first half of fiscal 2020 and$111.3 million for the comparable prior year period. The year over year decrease is primarily attributable to: (1) a decrease of$3.3 million in incentive compensation expense as a result of the decrease in revenue during the first six months of fiscal 2020, (2) a decrease of$1.3 million in transformation and system implementation costs, and (3) a decrease of$1.2 million in business expenses as management continues to closely manage discretionary spend, partially offset by an increase of$4.3 million in payroll and benefits due to additional headcount related to project delivery and digital transformation efforts, including Veracity and$0.8 million of acquisition costs in the first half of fiscal 2020. Amortization and Depreciation Expense. Amortization of intangible assets was$2.6 million and$1.9 million in the first six months of fiscal 2020 and fiscal 2019, respectively. The increase in amortization expense is primarily due to the amortization of identifiable intangible assets acquired during the first quarter of fiscal 2020 from Veracity. Depreciation expense was$2.8 million and$2.3 million in the first six months of fiscal 2020 and fiscal 2019, respectively. The increase is primarily the result of depreciation of our fiscal 2019 investments in new office furniture and fixtures as we transition to an open office footprint to enhance the ability to internally collaborate.
Interest Expense. Interest expense for the first half of fiscal 2020 was
approximately
Income Taxes. The Company's provision for income taxes was$8.0 million (effective tax rate of approximately 32%) and$8.6 million (effective tax rate of approximately 35%) for the six months endedNovember 23, 2019 andNovember 24, 2018 , respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions. The provision for income taxes in the six months endedNovember 23, 2019 andNovember 24, 2018 results from taxes on income in theU.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than theU.S. statutory rates. The provision for income taxes decreased for the six months endedNovember 23, 2019 compared to the prior year quarter because of lower international related taxes and fewer stock expirations. The Company recognized a tax benefit of approximately$0.7 million and$0.1 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first half of fiscal 2020 and fiscal 2019, respectively. Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Company's effective tax rate will remain constant in the future because of the lower benefit from theU.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 eligible disqualifying incentive stock options exercises. 25
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Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by our operations, our$120 million secured revolving credit facility ("Facility") withBank of America and, historically, to a lesser extent, stock option exercises and ESPP purchases. We have generated annual 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 continued stable global economic conditions. As ofNovember 23, 2019 , the Company had$43.0 million of cash and cash equivalents including$26.2 million held in international operations. InOctober 2016 , we entered into the Facility which is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. Borrowings under the Facility bear interest at a rate per annum of either, at the Company's option, (i) LIBOR plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company's consolidated leverage ratio. The alternate base rate is the highest of (i)Bank of America's prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Company's consolidated leverage ratio. The Facility expiresOctober 17, 2021 . Additional information regarding the Facility is included in Note 7 - Long Term Debt in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. As ofNovember 23, 2019 , the Company had borrowings of$54.0 million under the Facility and directedBank of America to issue approximately$1.5 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As ofNovember 23, 2019 , the Company was in compliance with the financial covenants in the Facility. 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. We currently believe that our current cash, ongoing cash flows from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to sell additional equity securities, increase use 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.
Operating Activities
Operating activities for the six months endedNovember 23, 2019 provided cash of$17.2 million compared to$1.7 million for the six months endedNovember 24, 2018 . Cash provided by operations in the first six months of fiscal 2020 resulted from net income of$17.3 million and non-cash items of$8.6 million . These amounts were partially offset by a net increase in operating assets and liabilities of$8.7 million primarily due to a decrease in accrued salaries and related obligations. In the first six months of fiscal 2019, cash provided by operations resulted from net income of$16.3 million and non-cash items of$12.3 million , partially offset by an increase in operating assets and liabilities of$27.0 million primarily related to an increase in accounts receivable and a decrease in accrued salary and related obligations.
Investing Activities
Net cash used in investing activities was$25.5 million for the first six months of fiscal 2020, compared to$3.4 million in the comparable prior year period. The Company used$30.3 million of cash (net of cash acquired) to acquire Veracity. There were no acquisitions in the first six months of fiscal 2019. In the first half of fiscal 2020, we redeemed short-term investments of$6.0 million and purchased$2.1 million less property and equipment compared to the first half of fiscal 2019.
Financing Activities
The primary sources of cash in financing activities are borrowings under the
Company's revolving credit facility, cash proceeds from the exercise of employee
stock options and proceeds from issuance of Employee Stock Purchase Plan
("ESPP"). The primarily uses of cash in financing activities are repayments
under the Company revolving credit facility, repurchase of the Company's common
stock and cash dividend payments to shareholders.
Net cash provided by financing activities totaled $8.5 million for the six
months ended November 23, 2019 compared to a use of cash of $13.3 million during
the six months ended November 24, 2018 . Net cash provided by financing
activities during the six months ended November 23, 2019 consisted of
$6.0 million of proceeds from employee stock option exercises and purchases of
shares under the ESPP, and $35.0 million of borrowings to finance the
acquisition of Veracity, partially offset by principal repayments of
$24.0 million under the revolving credit facility and $8.6 million of cash
dividend payments.
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Net cash used in financing activities during the six months endedNovember 24, 2018 consisted of$13.0 million of cash paid to repurchase the Company's own common stock, a principal repayment of$5.0 million under the revolving credit facility and$7.9 million of cash dividend payments, partially offset by$12.6 million of proceeds from employee stock option exercises and purchases of shares under the ESPP.
The increase in dividends paid was due to an increase in dividends declared from
As described in Note 3 - Acquisitions and Dispositions, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the purchase agreement for Veracity requires earn-out payments to be made. The Company estimated the fair value of the obligation to pay contingent consideration based on a number of different projections of the estimated EBITDA. The estimated fair value of the contingent consideration as ofNovember 23, 2019 was$6.4 million .
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 I, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
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