Resources Connection, Inc.: Form 10-Q for the period ended Aug 24, 2024

The following discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the three months ended August 24, 2024 should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended May 25, 2024 filed with the Securities and Exchange Commission (“SEC”). This discussion and analysis contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to expectations concerning matters that are not historical facts. For example, statements discussing, among other things, expected costs and liabilities, business strategies, growth strategies and initiatives, acquisition strategies, future revenues and future performance, are forward-looking statements. 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. In this Quarterly Report on Form 10-Q, such statements include statements regarding our growth, operational and strategic plans.

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. Risks and uncertainties include, but are not limited to, the following: risks related to an economic downturn or deterioration of general and ongoing macroeconomic conditions, the highly competitive nature of the market for professional services, risks related to the loss of a significant number of our consultants, or an inability to attract and retain new consultants, the possible impact on our business from the loss of the services of one or more key members of our senior management, risks related to potential significant increases in wages or payroll-related costs, our ability to secure new projects from clients, our inability to adapt to a changing competitive landscape including for technological advancements, our ability to achieve or maintain a suitable pay/bill ratio, our ability to compete effectively in the competitive bidding process, risks related to unfavorable provisions in our contracts which may permit our clients to, among other things, terminate the contracts partially or completely at any time prior to completion, potential adverse effects to our and our clients’ liquidity and financial performances from bank failures or other events affecting financial institutions, risks arising from epidemic diseases or pandemics, our ability to realize the level of benefit that we expect from our restructuring and reorganizational initiatives, risks that our digital expansion and technology transformation efforts may not be successful, our ability to build an efficient support structure as our business continues to grow and transform, our ability to grow our business, manage our growth or sustain our current business, our ability to serve clients internationally, additional operational challenges from our international activities including due to social, political, regulatory, legal and economic risks in the countries and regions in which we operate, possible disruption of our business from our past and future acquisitions, the possibility that our recent rebranding efforts may not be successful, our potential inability to adequately protect our intellectual property rights, risks that our computer hardware and software and telecommunications systems are damaged, breached or interrupted, risks related to the failure to comply with data privacy laws and regulations and the adverse effect it may have on our reputation, results of operations or financial condition, our ability to comply with governmental, regulatory and legal requirements and company policies, the possible legal liability for damages resulting from the performance of projects by our consultants or for our clients’ mistreatment of our personnel, risks arising from changes in applicable tax laws or adverse results in tax audits or interpretations, the possible adverse effect on our business model from the reclassification of our independent contractors by foreign tax and regulatory authorities, the possible difficulty for a third party to acquire us and resulting depression of our stock price, the operating and financial restrictions from our credit facility, risks related to the variable rate of interest in our credit facility, the possibility that we are unable to or elect not to pay our quarterly dividend payment, and other factors and uncertainties as are identified in our most recent Annual Report on Form 10-K for the year ended May 25, 2024 and our other public filings made with the SEC (File No. 0-32113). 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 of 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 Global Professionals,” the “Company,” “we,” “us,” and “our” refer to Resources Connection, Inc. and its subsidiaries.

Overview

Resources Global Professionals (“RGP,” “we" or “us”) is a global consulting firm based in Irvine, California (with offices worldwide) focused on delivering consulting execution services that power clients’ operational needs and change initiatives utilizing a combination of bench and on-demand, expert and diverse talent. As a next-generation human capital partner for our clients, we specialize in leadership and co-delivery of enterprise initiatives typically precipitated by business transformation, strategic transactions or regulatory change. Our engagements are designed to leverage human connection and collaboration to deliver practical solutions and more impactful results that power our clients’, employees’ and partners’ success.

We attract top-caliber professionals with in-demand skill sets who seek a workplace environment characterized by choice and control, collaboration and human connection. The trends in today’s marketplace favor flexibility and agility as businesses confront transformation pressures and skilled labor shortages even in the face of protracted economic uncertainty. Our client engagement and talent delivery model offer speed and agility, strongly positioning us to help clients transform their businesses and workforce. Our model is especially relevant at a time where cost reduction initiatives drive an enhanced reliance on a flexible workforce to execute transformational projects.

We are laser-focused on driving long-term growth in our business by seizing 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, enhancing our consulting capabilities in digital transformation to align with market demand, improving operating leverage through pricing and a more efficient cost structure, and driving growth through strategic acquisitions.

In May 2024, we reorganized our business into three distinct engagement models to create greater clarity for all stakeholders and to better serve our clients. By offering On-Demand Talent, Consulting, and Outsourced Services within one enterprise, we can deliver what clients want today – flexibility, value and integrated service solutions. We believe our focus and execution around this new operating model will serve as the foundation for growth ahead. As further described under Operating Results of Segments below, in connection with this reorganization, management completed an assessment of our operating segments and concluded that we now have five reportable segments comprising each of these engagement models (On-Demand Talent, Consulting, and Outsourced Services), Europe & Asia Pacific and All Other (which includes our Sitrick operating segment).

On July 1, 2024, the Company acquired Reference Point LLC (“Reference Point”). See Note 4 – Acquisition for further discussion about the Company’s acquisition of Reference Point included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Reference Point is reported within the Consulting Services operating segment from the date of acquisition.

Fiscal 2025 Strategic Focus Areas

Building upon the foundation we established through fiscal 2024, we will continue to execute the following enterprise growth drivers in fiscal 2025:

• Evolve and execute under our new business segments
• Launch and activate new brand identity; and
• Enhance digital and AI capabilities.

Evolve and execute under our new business segments – Our first area of focus for fiscal 2025 is to evolve our business by focusing on three core engagement models: On-Demand Talent, Consulting, and Outsourced services. Our On-Demand Talent business is branded “On-Demand by RGPTM,” our Consulting business is called “Veracity by RGPTM” and our outsourced services business is Countsy®. We expect this shift to reduce market and buyer confusion, enhance our ability to focus on our core strengths and areas of expertise and provide greater optionality for our buying set to engage with RGP. This new organizational structure will enable us to better serve our clients along their transformation journey by providing targeted skill sets, high value consulting services and outsourced delivery under a single umbrella. Our approach combines flexibility, best of breed technology, and human-centered design with functional and subject matter expertise. This year, we will clarify and operationalize these models to unlock the cross selling of our diversified capabilities throughout our blue chip, loyal and longstanding client base. Part of the growth plan for our consulting business includes leveraging On-Demand by RGPTM for greater financial flexibility and better skill set alignment. Our growing consulting capability provides us with deeper visibility into our clients’ transformation agendas to drive greater opportunity for our on-demand execution capabilities. In our outsourced services business, we have expanded Countsy’s total addressable market beyond the start-up ecosystem to serve the finance, accounting and human resources needs surrounding spin-outs and carve-outs. Europe and Asia will continue to operate in the geographic regions as one business segment, serving our clients with consulting capabilities and On-Demand talent. Evolving our business through this reorganization ensures that we are well positioned to execute and succeed as the macro environment recovers.

Launch and activate new brand – Our second focus area for this fiscal year is to launch and activate a new brand identity and brand architecture in the marketplace. The central objective behind our brand refresh is to clarify to stakeholders what we do, who we serve, when to call us, and the impact we deliver. Under this new architecture, RGP will serve as an enterprise parent brand, representing a family of brands that are comprised of On-Demand by RGPTM, Veracity by RGPTM and Countsy by RGPTM. We have refreshed our digital properties to reflect our new brand identity and align them with our new brand architecture as part of this effort. We believe these changes will result in clarity around our full suite of capabilities and create greater understanding of the value we can bring to our clients across a broader spectrum.

Enhance digital and AI capabilities – Our third focus area for fiscal 2025 is continuing to expand and enhance our technology, digital and data capabilities across all business units. The increased adoption of digital tools, remote work styles, generative artificial intelligence, and globalization is driving new areas of need within our client base. We are actively adding skilled on-demand and consulting professionals in areas such as technology migration, cybersecurity, data modernization and data privacy, and user experience to proactively meet these evolving client needs. Under the Veracity by RGPTM consulting business we are bringing together our digital transformation business and the deep functional expertise within RGP’s legacy Project Consulting Services (PCS) group. We believe this combined offering will uniquely position us to offer our clients integrated end-to-end consulting solutions in the digital arena. With the addition of Reference Point, we are also now able to bring tailored technology and data modernization offerings to our many financial services industry clients.

Market Trends and Uncertainties

On a macro level, uncertain macroeconomic conditions including ambiguity around interest rates, softening labor markets and fluctuations in currency exchange rates have created significant uncertainty in the global economy, volatility in the capital markets and recessionary pressures. We expect these conditions will continue in fiscal 2025. While we are not able to fully predict the potential impact, we continue to see more caution in professional services spending within our client base. If these conditions persist and a prolonged economic downturn or recession develops, it could result in further decline in billable hours and negatively impact our bill rates which would adversely affect our financial results and operating cash flows.

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in our Fiscal Year 2024 Form 10-K, and 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.

There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading “Critical Accounting Policies and Estimates” in Item 7 of Part II of our Fiscal Year 2024 Form 10-K.

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:
• Currency 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.
• Business 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.
• EBITDA is calculated as net (loss) income before amortization expense, depreciation expense, interest and income taxes.
• Adjusted EBITDA is calculated as EBITDA plus or minus stock-based compensation expense, technology transformation costs, acquisition costs, goodwill impairment, gain on sale of assets and restructuring adjustments. We also present herein Adjusted EBITDA at the segment level as a measure used to assess the performance of our segments. Segment Adjusted EBITDA excludes certain shared corporate administrative costs that are not practical to allocate. See Note 14 – Segment Information and Enterprise Reporting in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
• 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, a non-GAAP financial measure, to revenue as reported in the Consolidated Statements of Operations, the most directly comparable GAAP financial measure, by geography (in thousands, except number of business days).

Adjusted Revenue by Segment

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(1) This represents the number of business days in the U.S.

(2) The business days in international regions represent the weighted-average number of business days.

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 a 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 (loss) income and net (loss) income margin, the most directly comparable GAAP financial measures (in thousands, except percentages):

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(1) Technology transformation costs represent costs included in net income related to our initiative to upgrade our technology platform globally, including a cloud-based enterprise resource planning system and talent acquisition and management systems. Such costs primarily include hosting and certain other software licensing costs, third-party consulting fees and costs associated with dedicated internal resources that are not capitalized.

(2) Acquisition costs primarily represent costs included in net income related to our business acquisition. These costs include transaction bonuses, retention bonus accruals, and fees paid to the Company's broker, legal counsel, and other professional services firms. See Note 4 – Acquisition in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion about this acquisition.

(3) Goodwill impairment charge recognized during the three months ended August 24, 2024 was related to the Europe and Asia Pacific segment.

(4) The Company completed the sale of its Irvine office building on August 15, 2024.

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 that 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.

Results of Operations

The following table sets forth our Consolidated Statements of Operations data for the three months ended August 24, 2024 and August 26, 2023, respectively. These historical results are not necessarily indicative of future results. Our operating results for the periods indicated are expressed as a percentage of revenue (in thousands, except percentages).

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(1) The percentage of revenue may not foot due to rounding.

Consolidated Operating Results – Three Months Ended August 24, 2024 Compared to Three Months Ended August 26, 2023

Revenue. Revenue decreased $33.2 million, or 19.5%, to $136.9 million in the first quarter of fiscal 2025 from $170.2 million in the first quarter of fiscal 2024 primarily due to reduced client spending across a majority of our markets, client segments and solution offerings as a result of the persistently challenging global macroeconomic environment. Gross pipeline improved sequentially during the quarter across the globe, however, the time to close opportunities in the pipeline continued to be protracted, typical in a tougher macro environment when clients are more hesitant to spend on professional services. Billable hours decreased by 15.3% and the average bill rate declined by 5.0% (or 4.7% on a constant currency basis) from the prior year quarter. The change in average bill rate was due to a shift in revenue mix across the globe to regions with lower bill rates. The U.S. and Europe average bill rates increased by 2.3% and 4.6% (or 2.3% and 4.5% on a constant currency basis) respectively, compared to the prior year as a result of our initiative focused on value-based pricing, while average bill rates in the Asia Pacific region declined by 3.2% (although increased 0.2% on a constant currency basis). The decline in the average bill rates in the Asia Pacific region was due to a shift in the revenue mix to countries with a historically lower bill rate.

Direct Cost of Services. Direct cost of services decreased $16.2 million, or 15.7%, to $86.9 million for the first quarter of fiscal 2025 from $103.2 million for the first quarter of fiscal 2024. The decrease in direct cost of services was primarily attributable to a 15.3% decline in billable hours as a result of reduced client spending as noted above and a 5.0% (or 3.3% on a constant currency basis) decrease in average pay rate during the first quarter of fiscal 2025 compared to the prior year quarter.

Direct cost of services as a percentage of revenue was 63.5% for the first quarter of fiscal 2025 compared to 60.6% for the first quarter of fiscal 2024. The increased percentage compared to the prior year quarter was primarily due less favorable leverage on indirect cost of services as a result of lower revenue, lower salaried consultants and a 60 basis point increase in the pay/bill ratio. We continue to seek improvement in the overall pay/bill ratio and indirect cost leverage through strategic pricing, while offering competitive compensation and benefits to our consultants to attract and retain the best talent in the marketplace.

The number of consultants on assignment at the end of the first quarter of fiscal 2025 was 2,570 compared to 2,885 at the end of the first quarter of fiscal 2024.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) was $48.9 million, or 35.7% of revenue, for the first quarter of fiscal 2025 compared to $59.9 million, or 35.2% of revenue, for the first quarter of fiscal 2024. The $11.0 million improvement in SG&A year-over-year was primarily attributed to a lower management compensation expense of $5.1 million largely attributable to the cost reduction plan (the "U.S. Restructuring Plan") initiated in October 2023, a $3.4 million gain on the sale of the Irvine office building, a $1.3 million decrease in bonuses and commissions as a result of lower revenue and profitability achievement compared to incentive compensation targets in the current fiscal year, and a $1.0 million decrease in stock compensation expense primarily as a result of remeasurement of achievement associated with performance based equity awards. These reductions were partially offset by $1.3 million of costs related to the acquisition of Reference Point, which closed on July 1, 2024.

Management and administrative headcount was 757 at the end of the first quarter of fiscal 2025 and 909 at the end of the first quarter of fiscal 2024. Management and administrative headcount includes full time equivalent headcount for our seller-doer group, a consulting term for a professional who balances business development activities with billable work for clients, which is determined by utilization levels achieved by the seller-doers. Any unutilized time is converted to full time equivalent headcount.

Goodwill Impairment. During the first quarter of fiscal 2025, the Company completed a goodwill impairment analysis as part of its business segment reorganization. As a result of that analysis, a non-cash impairment charge of $3.9 million was recorded in the Europe and Asia Pacific segment in the first quarter of fiscal 2025.

Income Taxes. Income tax expense was $1.1 million, reflecting an effective tax rate of (22.7%), for the first quarter of fiscal 2025 compared to $2.1 million, or an effective tax rate of 40.0%, for the first quarter of fiscal 2024. 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. The income tax expense in the first quarter of fiscal 2025 measured against a pretax loss resulted in the negative effective tax rate. Despite the consolidated pretax loss in the first quarter of fiscal 2025, the Company recorded an income tax expense related to foreign income tax expense on international profits, along with rate impacting non-deductible items including tax adjustments associated with goodwill impairment, changes in valuation allowance and stock-based compensation.

We recognized a tax benefit of approximately $0.5 million and $0.2 million for the three months ended August 24, 2024 and August 26, 2023, respectively, associated with the exercise of nonqualified stock options, vesting of restricted stock awards, restricted stock units, and disqualifying dispositions by employees of shares acquired under the Employee Stock Purchase Plan (“ESPP”).

Periodically, we review the components of both book and taxable income to prepare the tax provision. There can be no assurance that our effective tax rate will remain constant in the future because of the lower benefit from the 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.

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 I, Item 1A of our Fiscal Year 2024 Form 10-K and our other public filings made with the SEC. 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.

Operating Results of Segments

During the first quarter of fiscal 2025, the Company reorganized its business segments to better align with changes in its internal operating model and financial reporting, which is used for performance assessment and resource allocation by the Chief Operating Decision Makers. We identified the following newly defined operating segments:

• On-Demand Talent – operating under the On-Demand by RGPTM brand, this segment provides businesses with a go-to source for bringing in experts when they need them.
• Consulting – operating under the Veracity by RGPTM brand, this segment drives transformation across people, processes and technology across domain areas including finance, technology and digital, risk and compliance and supply chain transformation.
• Europe & Asia Pacific – is a geographically defined segment that offers both on-demand and consulting services (excluding the digital consulting business, which is included in our Consulting segment) to clients throughout Europe and Asia Pacific.
• Outsourced Services – operating under the Countsy by RGP™ brand, this segment offers finance, accounting and HR services provided to startups, spinouts and scale-up enterprises, utilizing a technology platform and fractional team.
• Sitrick – a crisis communications and public relations firm that operates under the Sitrick brand, providing corporate, financial, transactional and crisis communication and management services.

Our reportable segments are comprised of On-Demand Talent, Consulting, Outsourced Services, and Europe & Asia Pacific. Sitrick does not individually meet the quantitative thresholds to qualify as a reportable segment. Therefore, Sitrick is disclosed under the “All Other” Segment. All prior year periods presented were recast to reflect the impact of the preceding segment changes.

On July 1, 2024, we acquired Reference Point LLC (“Reference Point”), which is reported within the Consulting operating segment from the date of acquisition.

The following table presents our current operating results by segment for the three months ended August 24, 2024 and August 26, 2023, respectively (in thousands, except percentages and average bill rates).

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(1) Segment Adjusted EBITDA Margin is calculated by dividing segment Adjusted EBITDA by segment revenue.

(2) Unallocated 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.

(3) 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 systems. Such costs primarily include hosting and certain other software licensing costs, third-party consulting fees and costs associated with dedicated internal resources that are not capitalized.

(4) Acquisition costs primarily represent costs included in net income related to the Company’s business acquisition. These costs include transaction bonuses, retention bonus accruals, and fees paid to the Company's broker, legal counsel, and other professional services firms.

(5) Goodwill impairment charge recognized during the three months ended August 24, 2024 was related to the Europe Asia Pacific segment.

(6) The Company completed the sale of its Irvine office building on August 15, 2024.

Revenue by Segment

On-Demand Talent – Revenue in the On-Demand segment declined by $25.5 million or 32.7%, to $52.5 million compared to $78.0 million in the prior year quarter. The decline was primarily due to lower demand across solution areas amongst economic uncertainty, with billable hours decreasing by 30.2%. Additionally, there was a reduction in average bill rate as a result of the competitive economic environment with a year over year decline of 3.2% (also 3.2% on a constant currency basis).

Consulting – Revenue in the Consulting segment decreased by $1.8 million or 3.2%, to $55.0 million compared to $56.8 million in the prior year quarter. The decline was primarily due to the lower demand and a reduction in average bill rate in response to the continued challenging global macroeconomic environment. Billable hours decreased by 3.4% and the average bill rate declined by 1.5% (or 1.9% on a constant currency basis). Most notably, the Consulting business saw a decrease year over year in finance and accounting transformation-related projects, as customers delayed starting new projects amongst economic uncertainty. The decrease in revenue for the segment was partially offset by the addition of revenue from the CloudGo and Reference Point acquisitions, which were not included in the prior year results.

Europe and Asia Pacific – Revenue in the Europe and Asia Pacific segment declined by $5.3 million or 22.7%, to $18.0 million in the quarter compared to $23.3 million in the prior year quarter. This segment saw a significant delay in decision making and project starts as clients sorted through their own organizational challenges amidst economic uncertainty most notably in Europe, which resulted in billable hours decreasing by 8.8% year over year. Asia Pacific is performing relatively more resiliently than Europe. Pricing competition remained fierce across the region, from the Big 4 firms as well as local boutique firms. Additionally, with a higher proportion of revenue in Asia Pacific in the first quarter of fiscal 2025, which carries significantly lower average bill rates, the weighted average bill rate for the Europe and Asia Pacific segment declined by 15.5% (or 12.5% on a constant currency basis) year over year.

Outsourced Services – Revenue in the Outsourced services segment of $9.5 million remained flat compared to the prior year quarter.

All Other – Revenue in the All Other segment declined by $0.7 million or 26.3%, to $2.0 million in the quarter compared to $2.7 million in the prior year quarter. Demand for crisis communications and public relations services continued to be sluggish. The billable hours decreased by 33.5% partially offset by the increase in average bill rate by 14.8% (also 14.8% on a constant currency basis).

Adjusted EBITDA by Segment

On-Demand Talent – The On-Demand segment’s Adjusted EBITDA decreased by $6.0 million or 70.1%, to $2.6 million for the first quarter of fiscal 2025, compared to $8.6 million for the first quarter of fiscal 2024. Compared to the prior year quarter, revenue decreased $25.5 million for the first quarter of fiscal 2025, which was partially offset by the decrease in the related cost of services of $14.2 million. Additionally, SG&A costs decreased by $5.3 million for the first quarter of fiscal 2025 as compared to the first quarter of fiscal 2024 primarily due to decreases in management compensation expense of $2.6 million due to the reduction in force during fiscal 2024, a $0.8 million decrease in bonuses and commissions as a result of lower revenue and profitability achievement compared to the incentive targets, and a $2.1 million decrease in all other general and administration expenses.

Consulting – The Consulting segment’s Adjusted EBITDA decreased by $0.8 million or 9.1%, to $7.8 million for the first quarter of fiscal 2025, compared to $8.5 million for the first quarter of fiscal 2024. Compared to the prior year quarter, revenue decreased $1.8 million and the related cost of services increased by $0.7 million. Additionally, SG&A costs decreased by $1.8 million for the first quarter of fiscal 2025 as compared to the first quarter of fiscal 2024 primarily due to the decreases in management compensation expense and bonus and commission expense.

Europe & Asia Pacific – The Europe & Asia Pacific segment’s Adjusted EBITDA decreased by $1.5 million or 86.7%, to $0.2 million for the first quarter of fiscal 2025, compared to $1.7 million for the first quarter of fiscal 2024. Compared to the prior year quarter, revenue decreased $5.3 million, which was partially offset by the decrease in the related cost of services of $3.1 million. Additionally, SG&A costs decreased by $0.7 million for the first quarter of fiscal 2025 as compared to the first quarter of fiscal 2024 primarily due to the decreases in management compensation expense and bonus and commission expense.

Outsourced Services – The Outsourced Services segment’s Adjusted EBITDA declined slightly by $0.2 million to $1.4 million in the first quarter of fiscal 2025. This decline was primarily driven by less favorable leverage on indirect cost of services relative to revenue.

All Other – The All Other segment's Adjusted EBITDA declined by $0.5 million or 757.7%, to $(0.5) million for the first quarter of fiscal 2025 compared to $0.1 million for the first quarter of fiscal 2024 due to lower revenue performance.

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities, our $175.0 million senior secured revolving credit facility (as discussed further below) and historically, to a lesser extent, stock option exercises and ESPP purchases. During the three months ended August 24, 2024, we generated negative cash flow from operations. However, on an annual basis, we have generated positive cash flows from operations since inception. Our ability to generate positive cash flows from operations in the future will depend, at least in part, on global economic conditions and our ability to remain resilient during periods of deteriorating macroeconomic conditions and any economic downturns. As of August 24, 2024, we had $89.6 million of cash and cash equivalents, including $44.9 million held in international operations.

On November 12, 2021, we and Resources Connection LLC, as borrowers, and all of our domestic subsidiaries, as guarantors, entered into a credit agreement with the lenders that are party thereto and Bank of America, N.A. as administrative agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for a $175.0 million senior secured revolving loan (the “Credit Facility”), which includes a $10.0 million sublimit for the issuance of standby letters of credit and a swingline sublimit of $20.0 million. The 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 Credit Agreement. The Credit Facility matures on November 12, 2026. The obligations under the Credit Facility are secured by substantially all of our assets, and assets of Resources Connection LLC and all of our domestic subsidiaries.

Future borrowings under the Credit Facility bear interest at a rate per annum of either, at our election, (i) Term SOFR (as defined in the Credit Agreement) plus a margin ranging from 1.25% to 2.00% or (ii) the Base Rate (as defined in the Credit Agreement), plus a margin of 0.25% to 1.00% with the applicable margin depending on our consolidated leverage ratio. In addition, we pay an unused commitment fee on the average daily unused portion of the Credit Facility, which ranges from 0.20% to 0.30% depending upon our consolidated leverage ratio. As of August 24, 2024, we had no debt outstanding under the Credit Facility and $173.5 million remaining capacity under the Credit Facility.

The Credit Facility is available for working capital and general corporate purposes, including potential acquisitions, dividend distribution and stock repurchases. Additional information regarding the Credit Facility is included in Note 8 – Long-Term Debt in the Notes to Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

On November 2, 2022, Resources Global Enterprise Consulting (Beijing) Co., Ltd, (our wholly owned subsidiary), as borrower, and we, as guarantor, entered into a RMB 13.4 million ($1.8 million based on the prevailing exchange rate on November 2, 2022) revolving credit facility with Bank of America, N.A. (Beijing) as the lender (the “Beijing Revolver”). The Beijing Revolver bears interest at a loan prime rate plus 0.80%. Interest incurred on borrowings will be payable monthly in arrears. As of August 24, 2024, we had no debt outstanding under the Beijing Revolver.

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 2025 Strategic Focus Areas” above, requires significant investments over multiple years. Such costs primarily include software licensing fees, third-party implementation and consulting fees, incremental costs associated with additional internal resources needed on the project and other costs in areas including change management and training. The actual amount of investment and the timing will depend on a number of variables, including progress made on the implementation. As of August 24, 2024, we capitalized $18.1 million related to the technology platform initiative; in addition, we recorded $1.9 million of expenses in the first quarter of fiscal 2025 relating to these investments. At the end of the first quarter of fiscal 2025, the remaining investments required for this multi-year initiative is estimated to be in the range of $11.0 million to $16.0 million. We expect the majority of the investment will take place in fiscal 2025. 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 efforts 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 Credit Facility will provide sufficient funds for these initiatives. As of August 24, 2024, we have non-cancellable purchase obligations totaling $11.1 million, which primarily consists of payments pursuant to the licensing arrangements that we have entered into in connection with the technology platform initiative: $4.6 million due during fiscal 2025; $3.4 million due during fiscal 2026; $2.1 million due during fiscal 2027; $1.0 million due during fiscal 2028; and zero due thereafter.

In addition, we pay a regular quarterly dividend to our stockholders, subject to approval each quarter by our board of directors. Most recently, on September 20, 2024 we paid a dividend of $0.14 per share of our common stock to stockholders of record at the close of business on August 23, 2024. Continuation of the quarterly dividend is at the discretion of the board of directors and depends upon our financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in the Credit Facility and other agreements, and other factors deemed relevant by our board of directors.

We entered into a Membership Interest Purchase Agreement, dated as of March 27, 2024, and as amended and restated as of June 30, 2024 (the “Reference Point MIPA”) with Reference Point LLC (“Reference Point”) and the sole member of Reference Point, pursuant to which we acquired 100% of the membership interests of Reference Point. We paid an initial cash consideration of $23.0 million (net of $0.2 million cash acquired). See Note 4 – Acquisition in the Notes to Consolidated Financial Statements for further information.

As described under “Market Trends and Uncertainties” above, uncertain macroeconomic conditions and ambiguity around interest rates have created significant uncertainty in the global economy, volatility in the capital markets and recessionary pressures, which have adversely impacted, and may continue to adversely impact, our financial results, operating cash flows, and liquidity needs. 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 additional 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 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 the use of our Credit Facility, expand the size of our 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 the use of our 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.

Other than as described herein, there have been no material changes to our material cash requirements, including commitments for capital expenditures, described under the heading “Liquidity and Capital Resources” in Item 7 of Part II of our Fiscal Year 2024 Form 10-K.

Operating Activities

Operating activities for the first three months of fiscal 2025 used cash of $0.3 million compared to $2.2 million for the first three months of fiscal 2024. The cash used in operations for the first three months of fiscal 2025 was due to a net loss of $5.7 million, which was partially offset by non-cash adjustments of $4.5 million and net favorable changes in operating assets and liabilities of $0.9 million. These net favorable changes in operating assets and liabilities were driven by a $4.3 million decrease in trade accounts receivable, a $0.4 million increase in accrued salaries and related obligations, mainly due to the timing of our pay cycle, and a $0.5 million increase in other liabilities. Offsetting these favorable changes were a $1.9 million increase in other assets largely related to the investments in our technology implementation, a $1.3 million decrease in accounts payable and other accrued expenses, and a $1.0 million increase in prepaid income taxes.

In the first three months of fiscal 2024, cash used in operations resulted from net income of $3.1 million and non-cash adjustments of $4.5 million. Additionally, net unfavorable changes in operating assets and liabilities totaled $9.8 million, primarily consisting of a $13.9 million decrease in accrued salaries and related obligations, mainly due to the timing of our pay cycle and the payout of the annual incentive compensation during the first three months of fiscal 2024, a $3.0 million increase in other assets primarily due to the capitalized implementation costs for hosting arrangements, and a $0.6 million increase in prepaid expenses and other current assets, partially offset by a $5.7 million decrease in trade accounts receivable, a $1.2 million increase in accounts payable and other accrued expenses, and a $0.8 million increase in income taxes payable and other liabilities.

Investing Activities

Net cash used in investing activities was $10.9 million for the first three months of fiscal 2025 compared to $0.5 million for the first three months of fiscal 2024. Net cash used in investing activities for the first three months of fiscal 2025 was primarily related to $23.0 million of net cash used towards the acquisition of Reference Point, partially offset by the $12.3 million net proceed from the sale of the Irvine office building. Net cash used in investing activities in the first three months of fiscal 2024 was primarily related to the development of internal-use software and acquisition of property and equipment.

Financing Activities

Net cash used in financing activities totaled $7.7 million in the first three months of fiscal 2025 compared to $1.6 million in the first three months of fiscal 2024. Net cash used in financing activities during the first three months of fiscal 2025 consisted of $5.0 million to purchase 430,284 shares of common stock on the open market, and cash dividend payments of $4.7 million; these uses were partially offset by $2.0 million in proceeds received from ESPP share purchases. Net cash used in financing activities during the first three months of fiscal 2024 consisted of cash dividend payments of $4.7 million and was partially offset by $3.1 million in proceeds received from ESPP share purchases and employee stock option exercises.

Interest Rate Risk. We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash and cash equivalents and our borrowings under the Credit Facility that bear interest at a variable market rate.

As of August 24, 2024, we had approximately $89.6 million of cash and cash equivalents. The earnings on cash and cash equivalents are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.

As of August 24, 2024, we had no outstanding debt under our Credit Facility. We are exposed to interest rate risk related to fluctuations in the term SOFR rate and, to a lesser extent, the loan prime rate on the Beijing Revolver. See “Liquidity and Capital Resources” above and Note 8 – Long-Term Debt in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion about the interest rate on our Credit Facility and the Beijing Revolver. To the extent that there is a significant increase in the level of borrowings, a sharp rise in interest rate could have a material impact on our consolidated financial position or results of operations.

Foreign Currency Exchange Rate Risk. For the three months ended August 24, 2024, approximately 18.3% of our revenues were generated outside of the U.S. As a result, our operating results are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates prevailing during the period. Thus, as the value of the U.S. dollar fluctuates relative to the currencies in our non-U.S.-based operations, our reported results may vary.

Assets and liabilities of our non-U.S.-based operations are translated into U.S. dollars at the exchange rate effective at the end of each monthly reporting period. Approximately 49.9% of our balances of cash and cash equivalents as of August 24, 2024 were denominated in U.S. dollars. The remaining amount of approximately 50.1% was comprised primarily of cash balances translated from Euros, British Pound Sterling, Japanese Yen, Canadian Dollar, Chinese Yuan, Indian Rupee, and Mexican Pesos. This compares to approximately 59.2% of our cash and cash equivalents balances as of May 25, 2024 that were denominated in U.S. dollars and approximately 40.8% that were comprised primarily of cash balances translated from Euros, Japanese Yen, Mexican Pesos, Chinese Yuan, Canadian Dollar, Indian Rupee and British Pound Sterling. The difference resulting from the translation in each period of assets and liabilities of our non-U.S.-based operations is recorded as a component of stockholders’ equity in accumulated other comprehensive income or loss.

Although we monitor our exposure to foreign currency fluctuations, we do not currently use financial hedges to mitigate risks associated with foreign currency fluctuations including in a limited number of circumstances when we may be asked to transact with our client in one currency but are obligated to pay our consultants in another currency. Our foreign entities typically transact with clients and consultants in their local currencies and generate enough operating cash flows to fund their own operations. We believe our economic exposure to exchange rate fluctuations has not been material. However, we cannot provide assurance that exchange rate fluctuations will not adversely affect our financial results in the future.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of August 24, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of a material weakness in internal control over financial reporting that is described below, our disclosure controls and procedures were not effective as of August 24, 2024.

Material Weakness in Internal Control over Financial Reporting

As discussed above, during the first quarter of fiscal 2025, the Company reorganized its business segments and, as a result, the Company was required to perform an interim goodwill impairment analysis on the new reporting units as of May 26, 2024. During completion of such goodwill impairment analysis, the management review control that related to certain inputs into the valuation analysis did not operate effectively, resulting in a change to the goodwill impairment amount recorded for the Europe and Asia Pacific segment as of August 24, 2024. The total goodwill impairment recorded is $3.9 million. This misstatement was identified and corrected prior to release of the Company’s Form 10-Q for the first quarter of fiscal 2025.

Remediation of Material Weakness

Management is implementing remediation steps to address the material weakness described above and to improve our internal control over financial reporting. While we have processes to review inputs into valuation analyses, we are improving our policies and procedures to document more robust supporting evidence related to the work performed by any valuation specialists used in preparing the Company’s goodwill impairment analysis.

Changes in Internal Controls over Financial Reporting

Other than the remediation measures described above, there were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended August 24, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Fiscal Year 2024 Form 10-K, which was filed with the SEC on July 22, 2024 See “Risk Factors” in Item 1A of Part I of such Fiscal Year 2024 Form 10-K for a complete description of the material risks we face.