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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/09/23 RCM Technologies, Inc. 10-Q 9/30/23 74:6.8M RDG Filings/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.58M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
11: R1 Document And Entity Information HTML 73K
12: R2 Condensed Consolidated Balance Sheets (Current HTML 121K
Period Unaudited)
13: R3 Condensed Consolidated Balance Sheets (Current HTML 42K
Period Unaudited) (Parentheticals)
14: R4 Condensed Consolidated Statements of Operations HTML 94K
(Unaudited)
15: R5 Condensed Consolidated Statements of Comprehensive HTML 39K
Income (Unaudited)
16: R6 Condensed Consolidated Statements of Changes in HTML 104K
Stockholders' Equity (Unaudited)
17: R7 Condensed Consolidated Statements of Cash Flows HTML 121K
(Unaudited)
18: R8 Note 1 - Basis of Presentation HTML 33K
19: R9 Note 2 - Use of Estimates and Uncertainties HTML 27K
20: R10 Note 3 - Revenue Recognition HTML 72K
21: R11 Note 4 - Accounts Receivable, Transit Accounts HTML 35K
Receivable and Transit Accounts Payable
22: R12 Note 5 - Property and Equipment HTML 37K
23: R13 Note 6 - Acquisitions and Divestitures HTML 30K
24: R14 Note 7 - Goodwill HTML 29K
25: R15 Note 8 - Line of Credit HTML 30K
26: R16 Note 9 - Per Share Data HTML 45K
27: R17 Note 10 - Share-based Compensation HTML 58K
28: R18 Note 11 - Treasury Stock Transactions HTML 26K
29: R19 Note 12 - New Accounting Standards and Updates HTML 36K
30: R20 Note 13 - Segment Information HTML 156K
31: R21 Note 14 - Income Taxes HTML 28K
32: R22 Note 15 - Contingencies HTML 31K
33: R23 Note 16 - Leases HTML 107K
34: R24 Insider Trading Arrangements HTML 30K
35: R25 Note 3 - Revenue Recognition (Tables) HTML 59K
36: R26 Note 4 - Accounts Receivable, Transit Accounts HTML 32K
Receivable and Transit Accounts Payable (Tables)
37: R27 Note 5 - Property and Equipment (Tables) HTML 34K
38: R28 Note 6 - Acquisitions and Divestitures (Tables) HTML 25K
39: R29 Note 7 - Goodwill (Tables) HTML 30K
40: R30 Note 9 - Per Share Data (Tables) HTML 44K
41: R31 Note 10 - Share-based Compensation (Tables) HTML 39K
42: R32 Note 13 - Segment Information (Tables) HTML 155K
43: R33 Note 16 - Leases (Tables) HTML 108K
44: R34 Note 3 - Revenue Recognition (Details Textual) HTML 35K
45: R35 Note 3 - Revenue Recognition - Revenues HTML 40K
Disaggregated by Revenue Source (Details)
46: R36 Note 4 - Accounts Receivable, Transit Accounts HTML 27K
Receivable and Transit Accounts Payable (Details
Textual)
47: R37 Note 4 - Accounts Receivable, Transit Accounts HTML 32K
Receivable and Transit Accounts Payable - Accounts
Receivable (Details)
48: R38 Note 5 - Property and Equipment (Details Textual) HTML 23K
49: R39 Note 5 - Property and Equipment - Summary of HTML 35K
Property and Equipment (Details)
50: R40 Note 6 - Acquisitions and Divestitures (Details HTML 29K
Textual)
51: R41 Note 6 - Acquisitions and Divestitures - Maximum HTML 24K
Deferred Consideration Payments (Details)
52: R42 Note 7 - Goodwill (Details Textual) HTML 22K
53: R43 Note 7 - Goodwill - Changes in Carrying Amount of HTML 28K
Goodwill (Details)
54: R44 Note 8 - Line of Credit (Details Textual) HTML 35K
55: R45 Note 9 - Per Share Data (Details Textual) HTML 22K
56: R46 Note 9 - Per Share Data - Weighted Average Number HTML 28K
of Common Shares (Details)
57: R47 Note 9 - Per Share Data - Unissued Shares of HTML 33K
Common Stock Were Reserved for the Following
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58: R48 Note 10 - Share-based Compensation (Details HTML 111K
Textual)
59: R49 Note 10 - Share-based Compensation - Restricted HTML 48K
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60: R50 Note 11 - Treasury Stock Transactions (Details HTML 33K
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61: R51 Note 13 - Segment Information - Results of the HTML 83K
Segments (Details)
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Geographic Area (Details)
63: R53 Note 13 - Segment Information - Total Assets by HTML 35K
Geographic Area (Details)
64: R54 Note 14 - Income Taxes (Details Textual) HTML 33K
65: R55 Note 15 - Contingencies (Details Textual) HTML 28K
66: R56 Note 16 - Leases - Lease Expense (Details) HTML 29K
67: R57 Note 16 - Leases - Cash Flow Information (Details) HTML 31K
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(Details)
69: R59 Note 16 - Leases - Maturities of Lease Liabilities HTML 58K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
| i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i September 30, 2023
OR
| i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: i 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| i Nevada | i 95-1480559 |
| (State or other Jurisdiction of Incorporation) | (I.R.S. Employer Identification No.) |
i 2500 McClellan Avenue, Suite 350, i Pennsauken, i New Jersey i 08109-4613
(Address of Principal Executive Offices) (Zip Code)
( i 856) i 356-4500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| i Common Stock, par value $0.05 per share | i RCMT | The i NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. (See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). (Check one):
| Large Accelerated Filer ☐ | i Accelerated Filer ☒ | Non-Accelerated Filer ☐ | Smaller Reporting Company i ☒ | Emerging Growth Company i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i ☐ No ☒
Indicate the number of shares outstanding of the Registrant’s class of common stock, as of the latest practicable date.
Common Stock, $0.05 par value, i 7,832,393 shares outstanding as of November 8, 2023.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES |
| PART I - FINANCIAL INFORMATION |
||
| Page |
||
| Item 1. |
Condensed Consolidated Financial Statements |
|
| Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) |
4 |
|
| Unaudited Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 |
5 |
|
| Unaudited Condensed Consolidated Statements of Comprehensive Income for the Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 |
6 |
|
| Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 |
7 |
|
| Unaudited Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 |
9 |
|
| Notes to Unaudited Condensed Consolidated Financial Statements |
10 |
|
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
46 |
| Item 4. |
Controls and Procedures |
46 |
| PART II - OTHER INFORMATION |
||
| Item 1. |
Legal Proceedings |
48 |
| Item 1A. |
Risk Factors |
48 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
48 |
| Item 3. |
Defaults Upon Senior Securities |
48 |
| Item 4. |
Mine Safety Disclosures |
48 |
| Item 5. |
Other Information |
48 |
| Item 6. |
Exhibits |
49 |
| Signatures |
50 |
|
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report and documents incorporated by reference into it may contain 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, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statement. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing service to the healthcare industry; the impact of and future effects of the COVlD-19 pandemic or other potential pandemics; having a significant portion of our condensed consolidated revenues contributed by a concentrated group of customer during the thirty-nine weeks ended September 30, 2023; credit and collection risks; our claim experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing, the healthcare industry, our workforce and the services that we provide, including state and local regulations pertaining to the taxability of our services and other labor-related matters such a minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; and the risk factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and Part II, Item 1A “Risk Factors” of subsequent Quarterly Reports on Form 10-Q, including this Form 10-Q.
| ITEM 1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2023 and December 31, 2022
(In thousands, except share amounts)
| September 30, | ||||||||
| 2022 | ||||||||
| (Unaudited) | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | i 654 | $ | i 339 | ||||
| Accounts receivable, net | i 57,459 | i 50,762 | ||||||
| Transit accounts receivable | i 9,550 | i 3,280 | ||||||
| Prepaid expenses and other current assets | i 5,311 | i 4,636 | ||||||
| Total current assets | i 72,974 | i 59,017 | ||||||
| Property and equipment, net | i 2,221 | i 2,098 | ||||||
| Other assets: | ||||||||
| Deposits | i 168 | i 173 | ||||||
| Goodwill | i 22,147 | i 22,147 | ||||||
| Operating right of use asset | i 2,976 | i 3,665 | ||||||
| Intangible assets, net | i 728 | i 864 | ||||||
| Total other assets | i 26,019 | i 26,849 | ||||||
| Total assets | $ | i 101,214 | $ | i 87,964 | ||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 12,153 | $ | 14,147 | ||||
| Transit accounts payable | 38,421 | 9,767 | ||||||
| Accrued payroll and related costs | 14,619 | 13,023 | ||||||
| Finance lease payable | 348 | 462 | ||||||
| Income taxes payable | 247 | 85 | ||||||
| Operating right of use liability | 884 | 1,349 | ||||||
| Contingent consideration from acquisitions | 300 | 472 | ||||||
| Deferred revenue | 335 | 1,119 | ||||||
| Total current liabilities | 67,307 | 40,424 | ||||||
| Deferred income taxes, net, foreign | i 166 | i 166 | ||||||
| Deferred income taxes, net, domestic | i 1,652 | i 1,495 | ||||||
| Finance lease payable | i - | i 232 | ||||||
| Contingent consideration from acquisitions, net of current position | i 1,671 | i 1,970 | ||||||
| Operating right of use liability, net of current position | i 2,382 | i 2,932 | ||||||
| Borrowings under line of credit | i 6,657 | i 8,783 | ||||||
| Total liabilities | i 79,835 | i 56,002 | ||||||
| Contingencies (note 15) | - | - | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $1.00 par value; 5,000,000 shares authorized; | ||||||||
| no shares issued or outstanding | i - | i - | ||||||
| Common stock, $0.05 par value; 40,000,000 shares authorized; | ||||||||
| 17,660,999 shares issued and 7,900,190 shares outstanding at September 30, 2023 and 17,287,967 shares issued and 9,285,318 shares outstanding at December 31, 2022 | i 880 | i 863 | ||||||
| Additional paid-in capital | i 116,146 | i 113,878 | ||||||
| Accumulated other comprehensive loss | ( i 2,858 | ) | ( i 2,863 |
) | ||||
| Accumulated deficit | ( i 24,520 | ) | ( i 36,096 |
) | ||||
| Treasury stock, 9,760,809 shares at September 30, 2023 and | ||||||||
| 8,002,649 shares at December 31, 2022, at cost | ( i 68,269 | ) | ( i 43,820 |
) | ||||
| Total stockholders’ equity | i 21,379 | i 31,962 | ||||||
| Total liabilities and stockholders’ equity | $ | i 101,214 | $ | i 87,964 |
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Thirteen and Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 (Unaudited) (In thousands, except per share amounts) |
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
||||||||||||
| Revenue |
$ | i 58,049 | $ | i 58,152 | $ | i 192,209 | $ | i 214,459 | |||||||
| Cost of services |
i 40,768 | i 40,794 | i 137,144 | i 151,998 | |||||||||||
| Gross profit |
i 17,281 | i 17,358 | i 55,065 | i 62,461 | |||||||||||
| Operating costs and expenses |
|||||||||||||||
| Selling, general and administrative |
i 12,662 | i 12,551 | i 38,782 | i 39,962 | |||||||||||
| Depreciation and amortization of property and equipment |
i 243 | i 266 | i 756 | i 729 | |||||||||||
| Amortization of acquired intangible assets |
i 45 | i - | i 136 | i - | |||||||||||
| Gain on sale of assets |
i - | ( i 219 | ) |
( i 395 | ) |
( i 219 | ) |
||||||||
| Operating costs and expenses, net of gain on sale of assets |
i 12,950 | i 12,598 | i 39,279 | i 40,472 | |||||||||||
| Operating income |
i 4,331 | i 4,760 | i 15,786 | i 21,989 | |||||||||||
| Other expense (income) |
|||||||||||||||
| Interest expense and other, net |
i 185 | i 35 | i 970 | i 201 | |||||||||||
| Gain on foreign currency transactions |
( i 44 | ) |
( i 90 | ) |
( i 5 | ) | ( i 232 | ) |
|||||||
| Other expense (income), net |
i 141 | ( i 55 | ) |
i 965 | ( i 31 | ) |
|||||||||
| Income before income taxes |
i 4,190 | i 4,815 | i 14,821 | i 22,020 | |||||||||||
| Income tax expense |
i 434 | i 1,297 | i 3,245 | i 5,968 | |||||||||||
| Net income |
$ | i 3,756 | $ | i 3,518 | $ | i 11,576 | $ | i 16,052 | |||||||
| Basic net earnings per share |
$ | i 0.47 | $ | i 0.35 | $ | i 1.37 | $ | i 1.58 | |||||||
| Diluted net earnings per share |
$ | i 0.46 | $ | i 0.33 | $ | i 1.33 | $ | i 1.52 | |||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 (Unaudited) (In thousands) |
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
||||||||||||
| Net income |
$ | i 3,756 | $ | i 3,518 | $ | i 11,576 | $ | i 16,052 | |||||||
| Other comprehensive (loss) income |
( i 1 | ) |
( i 181 | ) |
i 5 | ( i 442 | ) |
||||||||
| Comprehensive income |
$ | i 3,755 | $ | i 3,337 | $ | i 11,581 | $ | i 15,610 | |||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 (Unaudited) (In thousands, except share amounts) |
| Common Stock |
Additional Paid-in Capital | Accumulated Other Comprehensive Loss |
| Treasury Stock |
| |||||||||||||||||||||||||||
| Issued Shares | Amount | Accumulated Deficit | Shares | Amount |
| Total | ||||||||||||||||||||||||||
| Balance, December 31, 2022 | i 17,287,967 | $ | i 863 | $ | i 113,878 | $ | ( i 2,863 |
) | $ | ( i 36,096 | ) | i 8,002,649 | $ | ( i 43,820 |
) | $ | i 31,962 | |||||||||||||||
| Issuance of stock under employee stock purchase plan | i 33,071 | i 2 | i 345 | i - | i - | i - | i - | i 347 | ||||||||||||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 496 | i - | i - | - | i - | i 496 | ||||||||||||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 179,762 | i 8 | ( i 8 | ) | i - | i - | i - | i - | i - | |||||||||||||||||||||||
| Purchase of treasury stock | i - | i - | i - | i - | i - | i 640,578 | ( i 8,184 |
) | ( i 8,184 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | i 54 | i - | - | i - | i 54 | ||||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 3,837 | i - | i 3,837 | |||||||||||||||||||||||||
| Balance, April 1, 2023 | i 17,500,800 | $ | i 873 | $ | i 114,711 | $ | ( i 2,809 |
) | $ | ( i 32,259 | ) | i 8,643,227 | $ | ( i 52,004 |
) | $ | i 28,512 | |||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 7,669 | i - | i - | i - | i - | i - | i - | i - | ||||||||||||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 471 | i - | i - | - | i - | i 471 | ||||||||||||||||||||||||
| Common stock issued as contingent consideration | i 8,000 | i - | i 132 | i - | i - | i - | i - | i 132 | ||||||||||||||||||||||||
| Purchase of treasury stock | i - | i - | i - | i - | i - | i 939,154 | ( i 12,876 |
) | ( i 12,876 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | ( i 48 |
) | i - | - | i - | ( i 48 |
) | ||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 3,983 | - | i - | i 3,983 | ||||||||||||||||||||||||
| Balance, July 1, 2023 | i 17,516,469 | $ | i 873 | $ | i 115,314 | $ | ( i 2,857 |
) | $ | ( i 28,276 | ) | i 9,582,381 | $ | ( i 64,880 |
) | $ | i 20,174 | |||||||||||||||
| Issuance of stock under employee stock purchase plan | i 33,430 | i 1 | i 354 | i - | i - | i - | i - | i 355 | ||||||||||||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 484 | i - | i - | - | i - | i 484 | ||||||||||||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 111,100 | i 6 | ( i 6 | ) | i - | i - | i - | i - | i - | |||||||||||||||||||||||
| Purchase of treasury stock | i - | i - | i | i - | i - | i 178,428 | ( i 3,389 |
) | ( i 3,389 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | ( i 1 |
) | i - | - | i - | ( i 1 |
) | ||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 3,756 | - | i - | i 3,756 | ||||||||||||||||||||||||
| Balance, September 30, 2023 | i 17,660,999 | $ | i 880 | $ | i 116,146 | $ | ( i 2,858 |
) | $ | ( i 24,520 | ) | i 9,760,809 | $ | ( i 68,269 |
) | $ | i 21,379 | |||||||||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 (Unaudited) (In thousands, except share amounts) |
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss |
| Treasury Stock |
| |||||||||||||||||||||||||||
| Issued Shares | Amount | Accumulated Deficit | Shares | Amount | Total | |||||||||||||||||||||||||||
| Balance, January 1, 2022 | i 16,903,157 | $ | i 845 | $ | i 111,068 | $ | ( i 2,699 |
) | $ | ( i 56,985 | ) | i 6,612,222 | $ | ( i 26,260 |
) | $ | i 25,969 | |||||||||||||||
| Issuance of stock under employee stock purchase plan | i 37,133 | i 2 | i 124 | i - | i - | i - | i - | i 126 | ||||||||||||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 403 | i - | i - | - | i - | i 403 | ||||||||||||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 175,000 | i 9 | ( i 9 |
) | i - | i - | i - | i - | i - | |||||||||||||||||||||||
| Purchase of treasury stock | i - | i - | i - | i - | i - | i 406,480 | ( i 2,781 |
) | ( i 2,781 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | ( i 35 |
) | i - | - | i - | ( i 35 |
) | ||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 6,520 | - | i - | i 6,520 | ||||||||||||||||||||||||
| Balance, April 2, 2022 | i 17,115,290 | $ | i 856 | $ | i 111,586 | $ | ( i 2,734 |
) | $ | ( i 50,465 | ) | i 7,018,702 | $ | ( i 29,041 |
) | $ | i 30,202 | |||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 302 | i - | i - | - | i - | i 302 | ||||||||||||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 38,175 | i 1 | ( i 1 |
) | i - | i - | i - | i - | i - | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | ( i 226 |
) | i - | - | i - | ( i 226 |
) | ||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 6,014 | - | i - | i 6,014 | ||||||||||||||||||||||||
| Balance, July 2, 2022 | i 17,153,465 | i 857 | $ | i 111,887 | $ | ( i 2,960 |
) | $ | ( i 44,451 | ) | i 7,018,702 | $ | ( i 29,041 |
) | $ | i 36,292 | ||||||||||||||||
| Issuance of stock under employee stock purchase plan | i 46,746 | i 2 | i 280 | i - | i - | i - | i - | i 282 | ||||||||||||||||||||||||
| Equity compensation expense from awards issued | - | i - | i 425 | i - | i - | - | i - | i 425 | ||||||||||||||||||||||||
| Issuance of stock upon vesting of restricted share awards | i 21,000 | i 2 | ( i 2 |
) | i - | i - | i - | i - | i - | |||||||||||||||||||||||
| Purchase of treasury stock | i - | i - | i - | i - | i - | i 230,892 | ( i 3,613 |
) | ( i 3,613 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | i - | i - | ( i 181 |
) | i - | - | i - | ( i 181 |
) | ||||||||||||||||||||||
| Net income | - | i - | i - | i - | i 3,518 | - | i - | i 3,518 | ||||||||||||||||||||||||
| Balance, October 1, 2022 | i 17,221,211 | $ | i 861 | $ | i 112,590 | $ | ( i 3,141 |
) | $ | ( i 40,933 | ) | i 7,249,594 | $ | ( i 32,654 |
) | $ | i 36,723 | |||||||||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Thirty-Nine Weeks Ended September 30, 2023 and October 1, 2022 (Unaudited) (In thousands) |
| Thirty-Nine Weeks Ended |
||||||||
| 2023 |
2022 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | i 11,576 | $ | i 16,052 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
i 892 | i 729 | ||||||
| Gain on sale of assets |
( i 395 | ) |
( i 219 | ) |
||||
| Equity compensation expense from awards issued |
i 1,451 | i 1,130 | ||||||
| Provision for losses on accounts receivable |
i - | ( i 967 | ) |
|||||
| Deferred income tax expense |
i 158 | i 88 | ||||||
| Change in operating right of use assets |
i 689 | i 789 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( i 6,696 | ) |
( i 1,590 | ) |
||||
| Prepaid expenses and other current assets |
( i 675 | ) |
i 603 | |||||
| Net of transit accounts receivable and payable |
i 22,384 | ( i 998 | ) |
|||||
| Accounts payable and accrued expenses |
( i 1,798 | ) |
i 1,479 | |||||
| Accrued payroll and related costs |
i 1,596 | i 4,235 | ||||||
| Right of use liabilities |
( i 1,016 | ) |
( i 1,306 | ) |
||||
| Income taxes payable |
i 162 | i 2,574 | ||||||
| Deferred revenue |
( i 784 | ) |
( i 1,858 | ) |
||||
| Deposits |
i 4 | i - | ||||||
| Total adjustments and changes in operating assets and liabilities |
i 15,972 | i 4,689 | ||||||
| Net cash provided by operating activities |
i 27,548 | i 20,741 | ||||||
| Cash flows from investing activities: |
||||||||
| Property and equipment acquired |
( i 875 | ) |
( i 672 | ) |
||||
| Proceeds from sale of assets |
i 395 | i 219 | ||||||
| Net cash used in investing activities |
( i 480 | ) |
( i 453 | ) |
||||
| Cash flows from financing activities: |
||||||||
| Borrowings under line of credit |
i 99,857 | i 72,575 | ||||||
| Repayments under line of credit |
( i 101,982 | ) |
( i 85,566 | ) |
||||
| Issuance of stock for employee stock purchase plan |
i 702 | i 408 | ||||||
| Changes in finance lease obligations |
( i 347 | ) |
( i 392 | ) |
||||
| Contingent consideration paid |
( i 339 | ) |
( i 99 | ) |
||||
| Common stock repurchase |
( i 24,449 | ) |
( i 6,394 | ) |
||||
| Net cash used in financing activities |
( i 26,558 | ) |
( i 19,468 | ) |
||||
| Effect of exchange rate changes on cash and cash equivalents |
( i 195 | ) |
( i 294 | ) |
||||
| Increase in cash and cash equivalents |
i 315 | i 526 | ||||||
| Cash and cash equivalents at beginning of period |
i 339 | i 235 | ||||||
| Cash and cash equivalents at end of period |
$ | i 654 | $ | i 761 | ||||
| Supplemental cash flow information: |
||||||||
| Cash paid for: |
||||||||
| Interest |
$ | i 1,005 | $ | i 262 | ||||
| Income taxes |
$ | i 2,810 | $ | i 3,366 | ||||
| Non-cash investing activities: |
||||||||
| Right of use assets obtained in exchange for lease obligations |
$ | i - | $ | i 1,353 | ||||
| Value of shares issued as contingent consideration |
$ | i 132 | $ | i - | ||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 1. | Basis of Presentation |
The accompanying condensed consolidated interim financial statements of RCM Technologies, Inc. and subsidiaries (“RCM” or the “Company”) are unaudited. The year-end consolidated balance sheet was derived from the Company’s audited statements but does not include all disclosures required by accounting principles generally accepted in the United States. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report Form 10-K for such period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
The condensed consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods.
Results for the thirteen and thirty-nine weeks ended September 30, 2023 and October 1, 2022 are not necessarily indicative of results that may be expected for the full year or any future period.
Fiscal Year
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. Both the current fiscal year ending December 30, 2023 (fiscal 2023) and the prior fiscal year ended December 31, 2022 (fiscal 2022) are 52-week reporting years. The fiscal quarters for fiscal 2023 and fiscal 2022 align as follows:
| Fiscal 2023 Quarters | Weeks | Fiscal 2022 Quarters | Weeks |
| Thirteen | Thirteen | ||
| Thirteen | Thirteen | ||
| Thirteen | Thirteen | ||
| Thirteen | Thirteen |
| 2. | Use of Estimates and Uncertainties |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Company uses estimates to determine an allowance for doubtful accounts on its accounts receivable, litigation, medical claims, vacation, goodwill impairment, if any, equity compensation, the tax rate applied and the valuation of certain assets and liability accounts. In addition, the Company reviews its estimated costs to complete a contract and adjusts those costs when necessary. These estimates can be significant to the operating results and financial position of the Company. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company’s costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company’s services, adverse litigation and claims and the hiring, training and retention of key employees.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest rate. The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.
The Company re-measures the fair value of the contingent consideration at each reporting period and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in earnings in the accompanying consolidated statement of operations.
| 3. | Revenue Recognition |
The Company records revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services, Life Sciences and Information Technology segments perform consulting and project solution services. The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenue disaggregated by revenue source for the thirteen and thirty-nine weeks ended September 30, 2023 and October 1, 2022:
i
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Specialty Health Care: | |||||||||||||||
| Time and Material | $ | i 24,485 | $ | i 27,495 | $ | i 98,595 | $ | i 122,563 | |||||||
| Permanent Placement Services | i 410 | i 502 | i 958 | i 1,075 | |||||||||||
| Total Specialty Health Care | $ | i 24,895 | $ | i 27,997 | $ | i 99,553 | $ | i 123,638 | |||||||
| Engineering: | |||||||||||||||
| Time and Material | $ | i 10,625 | $ | i 11,774 | $ | i 32,652 | $ | i 31,601 | |||||||
| Fixed Fee | i 11,827 | i 9,148 | i 29,304 | i 30,125 | |||||||||||
| Total Engineering | $ | i 22,452 | $ | i 20,922 | $ | i 61,956 | $ | i 61,726 | |||||||
| Life Sciences and Information Technology: | |||||||||||||||
| Time and Material | $ | i 8,898 | $ | i 8,249 | $ | i 25,757 | $ | i 26,506 | |||||||
| Permanent Placement Services | i 121 | i 167 | i 368 | i 531 | |||||||||||
| Fixed Fee | i 1,683 | i 817 | i 4,575 | i 2,058 | |||||||||||
| Total Life Sciences and Information Technology | $ | i 10,702 | $ | i 9,233 | $ | i 30,700 | $ | i 29,095 | |||||||
| $ | i 58,049 | $ | i 58,152 | $ | i 192,209 | $ | i 214,459 | ||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
3. Revenue Recognition (Continued)
Time and Material
The Company’s Health Care segment predominantly recognizes revenue through time and material work while its Engineering and Life Sciences and Information Technology segments recognize revenue through both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed Fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on these contracts are incurred. From time-to-time, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable and the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the person placed with the Company’s client. The Company guarantees its permanent placements on a prorated basis for 90 days. In the event a candidate is not retained for the 90-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. An allowance for refunds, based upon the Company’s historical experience, is recorded in the financial statements.
Deferred Revenue
There was $ i 0.3 million of deferred revenue as of September 30, 2023. Deferred revenue was $ i 1.1 million as of December 31, 2022. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. For the thirteen weeks ended September 30, 2023 and October 1, 2022, the Company recognized revenue of $ i 0.1 million and $ i 0.5 million, respectively, that was included in deferred revenue at the beginning of the reporting period. For the thirty-nine weeks ended September 30, 2023 and October 1, 2022, the Company recognized revenue of $ i 1.1 million and $ i 3.4 million, respectively, that was included in deferred revenue at the beginning of the reporting period.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
3. Revenue Recognition (Continued)
Concentration
During the thirty-nine weeks ended September 30, 2023, the Company had one customer exceed 10% of consolidated revenue, representing i 16.2% of consolidated revenue. During the thirty-nine weeks ended October 1, 2022, the Company had two customers exceed 10% of consolidated revenue, representing i 16.1% and i 12.3% of consolidated revenue. In both periods presented, the customers are included in the Company’s Specialty Health Care segment.
/4. Accounts Receivable, Transit Accounts Receivable and Transit Accounts Payable
The Company’s accounts receivable comprise the following:
i
| 2023 | 2022 | ||||||
| Billed | $ | i 37,632 | $ | i 40,256 | |||
| Unbilled | i 15,769 | i 6,615 | |||||
| Work-in-progress | i 5,158 | i 4,991 | |||||
| Allowance for sales discounts and doubtful accounts | ( i 1,100 | ) | ( i 1,100 |
) | |||
| Accounts receivable, net | $ | i 57,459 | $ | i 50,762 | |||
Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenue earned under contracts which the Company contractually invoices at future dates.
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. In such situations, the Company acts as an agent under the provisions of FASB ASC 606 “Revenue from Contracts with Customers” and therefore recognizes revenue on a “net-basis.” The Company records revenue on a “net” basis on relevant engineering and construction management projects, which require subcontractor/procurement costs or transit costs. In those situations, the Company charges the client a negotiated fee, which is reported as net revenue when earned.
Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency, the Company records this amount simultaneously as both a “transit account receivable” and “transit account payable,” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $ i 9.5 million and related transit accounts payable was $ i 38.4 million, for a net payable of $ i 28.9 million, as of September 30, 2023. The transit accounts receivable was $ i 3.3 million and related transit accounts payable was $ i 9.8 million, for a net payable of $ i 6.5 million, as of December 31, 2022.
5. Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization, and are depreciated or amortized on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives. Computer hardware and software, and furniture and office equipment are typically depreciated over five years. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term.
Property and equipment comprise the following:
i
| 2023 | 2022 | ||||||
| Computer hardware and software | $ | i 3,489 | $ | i 4,077 | |||
| Furniture and office equipment | i 260 | i 220 | |||||
| Leasehold improvements | i 413 | i 267 | |||||
| Laboratory equipment | i 143 | i 67 | |||||
| i 4,305 | i 4,630 | ||||||
| Less: accumulated depreciation and amortization | i 2,084 | i 2,532 | |||||
| Property and equipment, net | $ | i 2,221 | $ | i 2,098 | |||
The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $ i 1,201 and $ i 901 during the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively. Depreciation and amortization expense of property and equipment for the thirteen weeks ended September 30, 2023 and October 1, 2022 was $ i 243 and $ i 266, respectively. Depreciation and amortization expense of property and equipment for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was $ i 756 and $ i 729, respectively.
/6. Acquisitions and Divestitures
Future Contingent Payments
As of September 30, 2023, the Company had two acquisition agreements whereby additional contingent consideration may be earned by the sellers: 1) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC, and 2) effective October 2, 2022, the Company acquired certain assets of TalentHerder LLC. The Company estimates future contingent payments at September 30, 2023 as follows:
i
| Total | ||
| The four quarters following September 30, 2023 | $ | i 300 |
| Thereafter | i 1,671 | |
| Estimated future contingent consideration payments | $ | i 1,971 |
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
6. Acquisitions and Divestitures (Continued)
Future Contingent Payments (Continued)
For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of September 30, 2023. Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.
Potential future contingent payments for acquisitions after September 30, 2023 are capped at a cumulative maximum of $ i 11.6 million. The Company paid $ i 0.3 million and $ i 0.1 million of contingent consideration during the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively. The contingent consideration paid in the thirty-nine weeks ended September 30, 2023 included $ i 0.1 million of the Company's common stock.
/7. Goodwill
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company tests goodwill for impairment on an annual basis as of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of goodwill may be below the carrying amount. The Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and determined that no indicators of impairment of goodwill existed during the thirty-nine weeks ended September 30, 2023. As such, i no impairment loss on the Company’s intangible assets during the thirty-nine weeks ended September 30, 2023 was recorded as a result of such review.
The carrying amount of goodwill as of September 30, 2023 and December 31, 2022 was as follows:
i
| Engineering | Specialty Health Care | Information Technology | Total | |||||||||||
| $ | i 11,918 | $ | i 2,398 | $ | i 7,831 | $ | i 22,147 | |||||||
/
8. Line of Credit
On April 24, 2023, the Company entered into a Fourth Amended and Restated Loan Agreement (the “Fourth Amended and Restated Loan Agreement”) with Citizens Bank, N.A., as lender (in such capacity, the “Lender”) and as administrative agent and arranger (in such capacity, the “Administrative Agent”), to amend and restate in its entirety that certain Third Amended and Restated Agreement dated as of the August 9, 2018 (as the same has been amended and modified prior to the date hereof, the “Existing Loan Agreement”).
The Fourth Amended and Restated Loan Agreement provides for a $ i 45.0 million revolving credit facility (the “Revolving Credit Facility”), has no sub-limit for letters of credit, and expires on April 24, 2026.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) SOFR (Secured Overnight Financing Rate) (which replaced LIBOR (London Interbank Offered Rate) upon the phasing out of LIBOR), plus applicable margin, typically borrowed in fixed 30-day increments, plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 were i 6.4% and i 2.7%, respectively.
All borrowings under the Fourth Amended and Restated Loan Agreement remain collateralized with substantially all of the Company’s assets, as well as the capital stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts the Company’s ability to borrow in order to pay dividends. As of September 30, 2023, the Company was in compliance with all covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
Borrowings under the line of credit as of September 30, 2023 and December 31, 2022 were $ i 6.7 million and $ i 8.8 million, respectively. There were letters of credit outstanding at September 30, 2023 and December 31, 2022 for $ i 2.0 million and $ i 1.9 million, respectively. At September 30, 2023 and December 31, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of $ i 36.3 million and $ i 34.3 million, respectively.
/9. Per Share Data
The Company uses the treasury stock method to calculate the weighted-average shares outstanding used for diluted earnings per share. The number of weighted-average shares used to calculate basic and diluted earnings per share for the thirteen and thirty-nine weeks ended September 30, 2023 and October 1, 2022 was determined as follows:
i
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Basic weighted average shares outstanding | i 7,919,752 | i 10,154,505 | i 8,469,501 | i 10,172,765 | ||||||||
| Dilutive effect of outstanding restricted share awards | i 276,578 | i 367,653 | i 261,497 | i 394,051 | ||||||||
| Diluted weighted average shares outstanding | i 8,196,330 | i 10,522,158 | i 8,730,998 | i 10,566,816 | ||||||||
For all periods presented, there were i no anti-dilutive shares included in the calculation of common stock equivalents as there were no stock options outstanding.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
9. Per Share Data (Continued)
Unissued shares of common stock were reserved for the following purposes:
i
| 2023 | 2022 | |||||||
| Time-based restricted stock awards outstanding | i 383,961 | i 274,939 | ||||||
| Performance-based restricted stock awards outstanding | i 100,000 | i - | ||||||
| Performance-based restricted stock awards outstanding under plans to be approved by the shareholders | i - | i 225,000 | ||||||
| Future grants of options or shares | i 608,129 | i 890,682 | ||||||
| Shares reserved for employee stock purchase plan | i 297,730 | i 364,231 | ||||||
| Total | i 1,389,820 | i 1,754,852 | ||||||
10. Share-Based Compensation
At September 30, 2023, the Company had two share-based employee compensation plans, the Employee Stock Purchase Plan and the 2014 Omnibus Equity Compensation Plan.
The Company measures the fair value of share-based awards, if and when granted, based on the Black-Scholes method and using the closing market price of the Company’s common stock on the date of grant. Awards typically vest over periods ranging from one to five years and expire within i 10 years of issuance. The Company may also issue immediately vested equity awards. Share-based compensation expense related to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method. The Company expenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest. Performance-based share awards that are likely to vest are also expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest, or in the case of a reversal when they are later determined to be unlikely to vest or forfeited.
Share-based compensation expense for the thirteen weeks ended September 30, 2023 and October 1, 2022 was $ i 483 and $ i 425, respectively. Share-based compensation expense for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was $ i 1,450 and $ i 1,130, respectively. Share-based compensation expense is included in selling, general and administrative expense in the Company’s statement of operations.
As of September 30, 2023, the Company had $ i 3.4 million of total unrecognized compensation cost, with approximately $ i 3.2 million related to time-based non-vested share-based awards outstanding and $ i 0.2 million related to performance-based non-vested share-based awards outstanding. The Company expects to recognize the expense associated with time-based non-vested share-based awards through fiscal 2027. If earned, the Company will recognize the expense associated with performance-based non-vested share-based awards straight-line through fiscal 2023. These amounts do not include a) the cost of any additional share-based awards granted in future periods or b) the impact of any potential changes in the Company’s forfeiture rate.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
10. Share-Based Compensation (Continued)
Incentive Share-Based Plans
Employee Stock Purchase Plan
The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001. Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of i 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to i 10% of qualified compensation, subject to maximum purchases in any one fiscal year of i 3,000 shares.
In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Purchase Plan by an additional i 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be i 1,100,000 shares and to extend the expiration date of the Purchase Plan to December 31, 2025. In fiscal 2018, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Purchase Plan by an additional i 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be i 1,400,000 shares. In fiscal 2021, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Purchase Plan by an additional i 400,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be i 1,800,000 shares and the termination date of the Purchase Plan was extended to December 31, 2030.
The Company has two offering periods in the Purchase Plan coinciding with the Company’s first two fiscal quarters and the last two fiscal quarters. Actual shares are issued on the first business day of the subsequent offering period for the prior offering period payroll deductions. The number of shares issued on July 3, 2023 (the first business day following the previous offering period) was i 33,430. As of September 30, 2023, there were i 297,730 shares available for issuance under the Purchase Plan. Compensation expense, representing the discount to the quoted market price, for the Purchase Plan for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was $ i 244 and $ i 180, respectively.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
10. Share-Based Compensation (Continued)
2014 Omnibus Equity Compensation Plan (the 2014 Plan)
The 2014 Plan, approved by the Company’s shareholders in December 2014, initially provided for the issuance of up to i 625,000 shares of the Company’s common stock to officers, non-employee directors, employees of the Company and its subsidiaries, or consultants and advisors utilized by the Company. In fiscal 2016, fiscal 2020 and fiscal 2022, the Company amended, or amended and restated, the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an additional i 500,000, i 850,000 and i 1,000,000 shares, respectively, so that the total number of shares of stock reserved for issuance under the Plan is i 2,975,000 shares. The expiration date of the Plan is December 17, 2030, unless the 2014 Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant.
All stock awards typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s stock award fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. As of September 30, 2023, there were i no accrued dividends. Dividends for stock awards that ultimately do not vest are forfeited.
As of September 30, 2023, under the 2014 Plan, i 383,961 time-based shares were outstanding, i 100,000 performance-based restricted stock awards were outstanding and i 608,129 shares were available for awards.
Time-Based Restricted Stock Awards
From time-to-time the Company issues time-based restricted stock awards. The following summarizes the activity in the time-based restricted stock awards under the 2014 Plan during the thirty-nine weeks ended September 30, 2023:
i
| Number of Time-Based Restricted Stock Awards | Weighted Average Grant Date Fair Value per Share | ||||||
| Outstanding non-vested at December 31, 2022 | i 274,939 | $ | i 3.59 | ||||
| Granted | i 288,893 | $ | i 13.00 | ||||
| Vested | ( i 168,769 | ) | $ | i 2.11 | |||
| Forfeited or expired | ( i 11,102 | ) | $ | i 2.23 | |||
| Outstanding non-vested at September 30, 2023 | i 383,961 | $ | i 11.36 | ||||
Based on the closing price of the Company’s common stock of $ i 19.54 per share on September 29, 2023 (the last trading day prior to September 30, 2023), the intrinsic value of the time-based non-vested restricted stock awards at September 30, 2023 was approximately $ i 4.7 million. As of September 30, 2023, there was approximately $ i 3.2 million of total unrecognized compensation cost related to time-based restricted stock awards, which is expected to be recognized over the average weighted remaining vesting period of the restricted stock awards through fiscal 2027.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
10. Share-Based Compensation (Continued)
Performance-Based Restricted Stock Awards
From time-to-time the Company issues performance-based restricted stock awards to its executives. Performance-based restricted stock awards are typically vested based on certain multi-year performance metrics as determined by the Board of Directors Compensation Committee.
The following summarizes the activity in the performance-based restricted stock awards during the thirty-nine weeks ended September 30, 2023:
| Number of Performance-Based Restricted Stock Awards | Weighted Average Grant Date Fair Value per Share | |||||||
| Outstanding non-vested at December 31, 2022 | i 225,000 | $ | i 8.73 | |||||
| Granted | i - | i - | ||||||
| Vested | ( i 125,000 | ) | $ | i 6.15 | ||||
| Forfeited or expired | i - | i - | ||||||
| Outstanding non-vested at September 30, 2023 | i 100,000 | $ | i 11.96 | |||||
As of September 30, 2023, there was i one outstanding grant for performance-based restricted stock awards issued to Bradley Vizi, the Company’s Chief Executive Officer. In December 2022, the Company issued a performance-based restricted stock unit grant of i 100,000 shares, subject to increase up to i 125,000 shares, based on fiscal 2023 performance (the “2023 Grant”). The Company has not made a determination as to how many shares it expects to issue under the 2023 Grant.
The Company assesses at each reporting date whether achievement of any performance condition is probable and recognizes the expense when achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the remaining requisite service period. If at a later measurement date, the Company determines that performance-based restricted stock awards deemed as likely to vest are deemed as unlikely to vest, the expense recognized will be reversed.
Share-based compensation for performance-based equity agreement was $ i 0.1 million and $ i 0.2 million for the thirteen weeks ended September 30, 2023 and October 1, 2022, respectively. Share-based compensation for performance-based equity agreement was $ i 0.4 million and $ i 0.6 million for the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively
During the thirty-nine weeks ended September 30, 2023, the Company awarded i 4,762 immediately vested share awards at an average price of $ i 10.50. During the thirty-nine weeks ended October 1, 2022, the Company awarded i 1,000 immediately vested share awards at an average price of $ i 18.48.
/
11. Treasury Stock Transactions
On April 25, 2023, the Board authorized a program to repurchase shares of its common stock up to an amount not to exceed $ i 25.0 million. This newly approved program succeeds the Company’s prior repurchase program authorized in November 2021, which was substantially completed in April 2023. The program is designed to provide the Company with enhanced flexibility over the long term to optimize its capital structure. Shares of the Common Stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of the Company. The Company may enter into a Rule 10b5-1 trading plan to effect a portion of the authorized purchases if the criteria set forth in the plan are met. Such a plan would enable the Company to repurchase its shares during periods outside of its normal trading windows when the Company typically would not be active in the market.
On April 24, 2023, the Company agreed to repurchase, in a private transaction approved by the Board, i 333,686 shares of common stock at a per-share price of $ i 11.91 per share.
During the thirty-nine weeks ending September 30, 2023, the Company purchased i 1,758,160 shares at an average price of $ i 13.80 per share, including the aforementioned private transaction. During the thirty-nine weeks ended October 1, 2022, the Company purchased i 637,372 shares at an average price of $ i 10.03 per share. As of September 30, 2023, the Company had $ i 14.3 million available for future treasury stock purchases.
The Company accrued $ i 0.2 million in excise tax associated with its Treasury Stock Repurchase Plan during the thirty-nine weeks ended September 30, 2023.
/12. New Accounting Standards and Updates
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. CECL estimates of expected credit losses on trade receivables over their life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts. The Company adopted the standard in its first quarter of 2023. There was no material impact on the results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard only applies to contracts and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. In December 2022, the FASB issued ASU No. 2022-06, Deferral of the sunset date of Topic 848. This update defers the sunset date from December 31, 2022 to December 31, 2024. The Company may elect to apply the amendments prospectively through December 31, 2024. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
13. Segment Information
The Company follows ASC 280, “Segment Reporting,” which establishes standards for companies to report information about operating segments, geographic areas and major customers. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies (see Note 1 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2022).
Segment operating income includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. The following tables reflect the results of the reportable segments consistent with the Company’s management system:
i
| Thirteen Weeks Ended | Specialty Health Care | Engineering | Life Sciences and IT | Corporate | Total | |||||||||||||||
| Revenue | $ | i 24,895 | $ | i 22,452 | $ | i 10,702 | $ | i - | $ | i 58,049 | ||||||||||
| Cost of services | i 17,438 | i 16,846 | i 6,484 | i - | i 40,768 | |||||||||||||||
| Gross profit | i 7,457 | i 5,606 | i 4,218 | i - | i 17,281 | |||||||||||||||
| Selling, general and administrative | i 5,977 | i 4,327 | i 2,358 | i - | i 12,662 | |||||||||||||||
| Depreciation and amortization of property and equipment | i 88 | i 122 | i 33 | i - | i 243 | |||||||||||||||
| Amortization of acquired intangible assets | i - | i - | i 45 | i - | i 45 | |||||||||||||||
| Operating income | i 1,392 | i 1,157 | i 1,782 | $ | i - | $ | i 4,331 | |||||||||||||
| Total assets as of September 30, 2023 | $ | i 32,272 | $ | i 45,949 | $ | i 17,662 | $ | i 5,331 | $ | i 101,214 | ||||||||||
| Property and equipment acquired | $ | i 62 | $ | i 162 | $ | i 69 | $ | i 22 | $ | i 315 | ||||||||||
| Thirteen Weeks Ended | Specialty Health Care | Engineering | Life Sciences and IT | Corporate | Total | |||||||||||||||
| Revenue | $ | i 27,997 | $ | i 20,922 | $ | i 9,233 | $ | i - | $ | i 58,152 | ||||||||||
| Cost of services | i 19,014 | i 15,594 | i 6,186 | i - | i 40,794 | |||||||||||||||
| Gross profit | i 8,983 | i 5,328 | i 3,047 | i - | i 17,358 | |||||||||||||||
| Selling, general and administrative | i 5,933 | i 4,531 | i 2,087 | i - | i 12,551 | |||||||||||||||
| Depreciation and amortization of property and equipment | i 101 | i 136 | i 29 | i - | i 266 | |||||||||||||||
| Gain on sale of assets | i - | ( i 219 |
) | i - | i - | ( i 219 |
) | |||||||||||||
| Operating income | $ | i 2,949 | $ | i 880 | $ | i 931 | $ | i - | i 4,760 | |||||||||||
| Total assets as of October 1, 2022 | $ | i 33,280 | $ | i 32,343 | $ | i 8,579 | $ | i 2,607 | $ | i 76,809 | ||||||||||
| Capital expenditures | $ | i 9 | $ | i 207 | $ | i 39 | $ | i 266 | $ | i 521 | ||||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
13. Segment Information (Continued)
| Thirty-Nine Weeks Ended | Specialty Health Care | Engineering | Life Sciences and IT | Corporate | Total | |||||||||||||||
| Revenue | $ | i 99,553 | $ | i 61,956 | $ | i 30,700 | $ | i - | $ | i 192,209 | ||||||||||
| Cost of services | i 70,623 | i 47,482 | i 19,039 | i - | i 137,144 | |||||||||||||||
| Gross profit | i 28,930 | i 14,474 | i 11,661 | i - | i 55,065 | |||||||||||||||
| Selling, general and administrative | i 19,211 | i 12,626 | i 6,945 | i - | i 38,782 | |||||||||||||||
| Depreciation and amortization of property and equipment | i 281 | i 370 | i 105 | i - | i 756 | |||||||||||||||
| Amortization of acquired intangible assets | i - | i - | i 136 | i - | i 136 | |||||||||||||||
| Gain on sale of assets | i - | ( i 395 |
) | i - | $ | i - | ( i 395 |
) | ||||||||||||
| Operating income | i 9,438 | i 1,873 | i 4,475 | i | i 15,786 | |||||||||||||||
| Total assets as of September 30, 2023 | $ | i 32,272 | $ | i 45,949 | $ | i 17,662 | $ | i 5,331 | $ | i 101,214 | ||||||||||
| Property and equipment acquired | $ | i 109 | $ | i 640 | $ | i 88 | $ | i 38 | $ | i 875 | ||||||||||
| Thirty-Nine Weeks Ended | Specialty Health Care | Engineering | Life Sciences and IT | Corporate | Total | |||||||||||||||
| Revenue | $ | i 123,638 | $ | i 61,726 | $ | i 29,095 | $ | i - | $ | i 214,459 | ||||||||||
| Cost of services | i 86,772 | i 45,653 | i 19,573 | i - | i 151,998 | |||||||||||||||
| Gross profit | i 36,866 | i 16,073 | i 9,522 | i - | i 62,461 | |||||||||||||||
| Selling, general and administrative | i 21,203 | i 12,659 | i 6,100 | i - | i 39,962 | |||||||||||||||
| Depreciation and amortization of property and equipment | i 322 | i 332 | i 75 | i - | i 729 | |||||||||||||||
| Gain on sale of assets | i - | ( i 219 |
) | i - | i - | ( i 219 |
) | |||||||||||||
| Operating income | $ | i 15,341 | $ | i 3,301 | $ | i 3,347 | $ | i - | $ | i 21,989 | ||||||||||
| Total assets as of October 1, 2022 | $ | i 33,280 | $ | i 32,343 | $ | i 8,579 | $ | i 2,607 | $ | i 76,809 | ||||||||||
| Capital expenditures | $ | i 57 | $ | i 496 | $ | i 102 | $ | i 275 | $ | i 930 | ||||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
13. Segment Information (Continued)
The Company derives a majority of its revenue from offices in the United States. Revenues reported for each operating segment are all from external customers. The Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Europe. Revenue by geographic area for the thirteen and thirty-nine weeks ended September 30, 2023 and October 1, 2022 was as follows:
i
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenue | |||||||||||||||
| United States | $ | i 53,679 | $ | i 55,180 | $ | i 179,800 | $ | i 205,162 | |||||||
| Canada | i 1,647 | i 1,091 | i 5,060 | i 3,555 | |||||||||||
| Puerto Rico | i 1,643 | i 1,261 | i 4,745 | i 3,760 | |||||||||||
| Europe | i 1,080 | i 620 | i 2,604 | i 1,982 | |||||||||||
| $ | i 58,049 | $ | i 58,152 | $ | i 192,209 | $ | i 214,459 | ||||||||
Total assets by geographic area as of the reported periods were as follows:
i
| 2023 | 2022 | ||||||
| Total assets | |||||||
| United States | $ | i 91,141 | $ | i 81,558 | |||
| Canada | i 1,829 | i 1,640 | |||||
| Puerto Rico | i 4,157 | i 1,401 | |||||
| Europe | i 4,087 | i 3,365 | |||||
| $ | i 101,214 | $ | i 87,964 | ||||
14. Income Taxes
The Company recognized $ i 3.2 million of income tax expense for the thirty-nine weeks ended September 30, 2023, as compared to $ i 6.0 million for the comparable prior-year period. The consolidated effective income tax rate for the current period was i 21.9% as compared to i 27.1% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of September 30, 2023, were approximately i 21.5%, i 26.1% and i 13.3% in the United States, Canada and Europe, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and European pretax income versus U.S. pretax income. The comparable prior-year period estimated income tax rates were i 27.5%, i 25.1% and i 15.7% in the United States, Canada and Europe, respectively. The primary reason for the decrease in the consolidated effective rate in the current period was due to a permanent tax difference associated with the tax deduction for equity grants in the United States that vested during the thirteen weeks ended September 30, 2023.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits available to the Company. The actual 2023 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting of share-based awards.
/
| 15. | Contingencies |
From time to time, the Company is a defendant in various legal actions that arise in the ordinary business course. These matters may relate to professional liability, tax, compensation, contract, competitor disputes, and employee-related matters and include individual and class action lawsuits, as well as inquiries and investigations by governmental agencies regarding the Company’s employment and compensation practices. Additionally, some of the Company’s clients may also become subject to claims, governmental inquiries and investigations, and legal actions relating to the Company’s professional services. Depending upon the particular facts and circumstances, the Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters.
As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The Company records a liability when management believes an adverse outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated. From time to time, the Company must estimate the potential loss even though the party adverse to the Company has not asserted any specific amounts. Significant judgment is required to determine both the probability of loss and the estimated amount. The Company reviews its loss contingencies at least quarterly and it adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or other new information, as deemed necessary. Once established, a provision may change in the future due to new developments or changes in circumstances. The Company could increase or decrease its earnings in the period that the changes are made.
The Company is exposed to various asserted claims as of September 30, 2023, where the Company believes it has a probability of loss. Additionally, the Company is exposed to other asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As of September 30, 2023, the Company has accrued $ i 2.8 million for asserted claims.
In April 2022, a client of the Company’s Industrial Processing Group alleged that a system partially designed by the Company is not operating as intended and that the Company is responsible. The Company has not determined if it has any liability. In the event of liability, the Company believes its damages are contractually limited to an amount no higher than $ i 3.3 million. Furthermore, the Company believes that if it were found liable, any damages would be covered by insurance, subject to a deductible of $ i 0.5 million and maximum coverage of $ i 5.0 million. While the Company attempts to find a mutually agreeable solution, the Company has reserved $0.5 million for this project. The Company can give no assurance that its liability is limited to $3.3 million or that liability over $0.5 million, if any, will be covered by insurance.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.
| 16. | Leases |
Leases are recorded in accordance with FASB ASC 842, Leases which requires lessees to recognize a right of use (“ROU”) asset and an operating right of use liability for all leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases.
The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The right of use asset also consists of any lease incentives received. The lease terms used to calculate the right of use asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company has lease agreements which require payments for lease and non-lease components. The Company has elected to account for these as a single lease component with the exception of its real estate leases.
The components of lease expense were as follows:
i
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Operating lease cost | $ | i 349 | $ | i 341 | $ | i 1,078 | $ | i 1,245 | |||||||
| Finance lease cost | |||||||||||||||
| Amortization of right of use assets | $ | i 116 | $ | i 134 | $ | i 368 | $ | i 350 | |||||||
| Interest on lease liabilities | i 1 | i 2 | i 3 | i 6 | |||||||||||
| Total finance lease cost | $ | i 117 | $ | i 136 | $ | i 371 | $ | i 356 | |||||||
Supplemental Cash Flow information related to leases was as follows:
i
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
| Operating cash flows from operating leases | $ | i 359 | $ | i 357 | $ | i 1,102 | $ | i 1,272 | ||||||||
| Operating cash flows from finance leases | $ | i 1 | $ | i - | $ | i 4 | $ | i 6 | ||||||||
| Financing cash flows from finance leases | $ | i 115 | $ | i 117 | $ | i 346 | $ | i 388 | ||||||||
| Right of use assets obtained in exchange for lease obligations | ||||||||||||||||
| Operating leases | $ | i 364 | $ | i 364 | $ | i - | $ | i 1,096 | ||||||||
| Finance leases | $ | i 257 | $ | i 257 | $ | i - | $ | i 257 | ||||||||
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 16. | Leases (Continued) |
Supplemental Balance Sheet information as of September 30, 2023 and December 31, 2022 related to leases was as follows:
i
| 2023 | 2022 | |||||||
| Operating leases | ||||||||
| Operating lease right of use assets | $ | i 2,976 | $ | i 3,665 | ||||
| Operating right of use liability - current | $ | ( i 884 | ) | $ | ( i 1,349 |
) | ||
| Operating right of use liability - non-current | ( i 2,382 | ) | ( i 2,932 |
) | ||||
| Total operating lease liabilities | $ | ( i 3,266 | ) | $ | ( i 4,281 |
) | ||
| Finance leases | ||||||||
| Property and equipment - (right of use assets) | $ | i 926 | $ | i 1,177 | ||||
| Accumulated depreciation | ( i 579 | ) | ( i 461 |
) | ||||
| Property and equipment, net | $ | i 347 | $ | i 716 | ||||
| Finance lease liability - current | $ | ( i 348 | ) | $ | ( i 462 |
) | ||
| Finance lease liability - non-current | i - | ( i 232 |
) | |||||
| Total finance lease liabilities | $ | ( i 348 | ) | $ | ( i 694 |
) | ||
| Weighted average remaining lease term in years | ||||||||
| Operating leases | i 8.23 | i 6.78 | ||||||
| Finance leases | i 0.75 | i 1.50 | ||||||
| Weighted average discount rate | ||||||||
| Operating leases | i 3.15 | % | i 3.10 |
% | ||||
| Finance leases | i 0.87 | % | i 0.87 |
% | ||||
Maturities of lease liabilities are as follows:
i
| Fiscal Year | Operating Leases | Finance Leases | ||||||
| 2023 (After September 30, 2023) | $ | i 357 | $ | i 117 | ||||
| 2024 | i 754 | i 233 | ||||||
| 2025 | i 493 | i - | ||||||
| 2026 | i 409 | i - | ||||||
| 2027 | i 302 | i - | ||||||
| Thereafter | i 1,455 | i - | ||||||
| Total lease payments | $ | i 3,770 | $ | i 350 | ||||
| Less: imputed interest | ( i 504 | ) | ( i 2 |
) | ||||
| Total | $ | i 3,266 | $ | i 348 | ||||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. (“RCM” or the “Company”) are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption; the Company’s strategic and business initiatives and growth strategies; and the outcome of litigation (at both the trial and appellate levels) and arbitrations, or other business disputes, involving the Company. Readers are cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,” and similar expressions, are only predictions and are subject to risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i) unemployment and general economic conditions affecting the provision of life sciences, information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the effects of the COVID-19 pandemic and endemic; (iii) the Company’s ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iv) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (v) the Company’s relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (vi) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vii) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (viii) the adverse effect a potential decrease in the trading price of the Company’s common stock would have upon the Company’s ability to acquire businesses through the issuance of its securities; (ix) the Company’s ability to obtain financing on satisfactory terms; (x) the reliance of the Company upon the continued service of its executive officers; (xi) the Company’s ability to remain competitive in the markets that it serves; (xii) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums; (xiii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiv) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xvi) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xvii) uncertainties in predictions as to the future need for the Company’s services; (xviii) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (ixx) the costs of conducting and the outcome of litigation, arbitrations and other business disputes involving the Company, and the applicability of insurance coverage with respect to any such litigation; (xx) the results of, and costs relating to, any interactions with shareholders of the Company who may pursue specific initiatives with respect to the Company’s governance and strategic direction, including without limitation a contested proxy solicitation initiated by such shareholders, or any similar such interactions; and (xxi) other economic, competitive, health and governmental factors affecting the Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by law, the Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Overview
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenue and operations can be substantial, resulting in significant volatility in the Company’s financial performance.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by current and prospective clients for many emerging new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced life sciences, information technology and engineering solutions to upgrade their systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems, applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are generally higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenue from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.
The majority of the Company’s services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days’ notice. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. Typically, these contracts are for less than one year. The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Overview (Continued)
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when incurred. Corporate overhead expenses are allocated to the segments based on revenue for the purpose of segment financial reporting.
Critical Accounting Policies and Use of Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions 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 amount of revenue and expenses during the reporting period. In our consolidated financial statements, estimates are used for, but not limited to, accounts receivable and allowance for doubtful accounts, goodwill, long-lived intangible assets, accounting for stock options and restricted stock awards, insurance liabilities, accounting for income taxes and accrued bonuses.
A summary of our significant accounting policies is included in our Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.
Recently Issued Accounting Pronouncements
A discussion of the recently issued accounting pronouncements is set forth in Note 12, New Accounting Standards and Updates from the Securities and Exchange Commission, in the unaudited condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Forward-looking Information
The Company’s growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for engineering, life sciences and information technology services. When the U.S., Canadian or global economies decline, the Company’s operating performance could be adversely impacted. In addition, global events such as the recent COVID-19 pandemic and endemic also have a substantial impact on our operations and financial results. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, general economic declines could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce the Company’s future earnings. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing.
The consulting and employment services market is highly competitive with limited barriers to entry. The Company competes in global, national, regional and local markets with numerous competitors in all of the Company’s service lines. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. The Company expects that the level of competition will remain high in the future, which could limit the Company’s ability to maintain or increase its market share or profitability.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Weeks Ended September 30, 2023 Compared to Thirteen Weeks Ended October 1, 2022
A summary of operating results for the thirteen weeks ended September 30, 2023 and October 1, 2022 is as follows (in thousands):
| Amount |
% of Revenue |
Amount |
% of Revenue |
|||||||||||||
| Revenue |
$ | 58,049 | 100.0 | $ | 58,152 | 100.0 | ||||||||||
| Cost of services |
40,768 | 70.2 | 40,794 | 70.1 | ||||||||||||
| Gross profit |
17,281 | 29.8 | 17,358 | 29.9 | ||||||||||||
| Selling, general and administrative |
12,662 | 21.8 | 12,551 | 21.6 | ||||||||||||
| Depreciation and amortization of property and equipment |
243 | 0.4 | 266 | 0.4 | ||||||||||||
| Amortization of acquired intangible assets |
45 | 0.1 | - | 0.0 | ||||||||||||
| Gain on sale of assets |
- | - | (219 | ) |
(0.4 | ) |
||||||||||
| Operating costs and expenses |
12,950 | 22.3 | 12,598 | 21.6 | ||||||||||||
| Operating income |
4,331 | 7.5 | 4,760 | 8.3 | ||||||||||||
| Other expense (income), net |
141 | 0.2 | (55 | ) |
0.0 | |||||||||||
| Income before income taxes |
4,190 | 7.3 | 4,815 | 8.3 | ||||||||||||
| Income tax expense |
434 | 0.8 | 1,297 | 2.2 | ||||||||||||
| Net income |
$ | 3,756 | 6.5 | $ | 3,518 | 6.1 | ||||||||||
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 30, 2023 and October 1, 2022 consisted of thirteen weeks each.
Revenue. Revenue decreased by $0.1 million for the thirteen weeks ended September 30, 2023 as compared to the thirteen weeks ended October 1, 2022 (the “comparable prior-year period”). Revenue decreased $3.1 million in the Specialty Health Care segment, increased $1.5 million in the Engineering segment and increased $1.5 million in the Life Sciences and Information Technology segment. See more detailed disclosure by segment in our Segment Discussion.
Cost of Services and Gross Profit. Cost of services decreased by a negligible amount for the thirteen weeks ended September 30, 2023 as compared to the comparable prior-year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the thirteen weeks ended September 30, 2023 and October 1, 2022 was 70.2% and 70.1%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $12.7 million for the thirteen weeks ended September 30, 2023 as compared to $12.6 million for the comparable prior-year period. As a percentage of revenue, SGA expenses were 21.8% for the thirteen weeks ended September 30, 2023 and 21.6% for the comparable prior-year period. See Segment Discussion for further information on SGA expense changes.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Weeks Ended September 30, 2023 Compared to Thirteen Weeks Ended October 1, 2022 (Continued)
Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income and gains and losses on foreign currency transactions. Other expense, net increased by $0.2 million as compared to the comparable prior year period, primarily due to an increase in interest expense, net. Interest expense increased due to increased borrowing. Borrowings increased primarily to fund treasury stock purchases.
Income Tax Expense. The Company recognized $0.4 million of income tax expense for the thirteen weeks ended September 30, 2023, as compared to $1.3 million for the comparable prior-year period. The consolidated effective income tax rate for the current period was 10.4% as compared to 26.9% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of September 30, 2023, were approximately 7.3%, 26.7% and 15.1% in the United States, Canada, and Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The effective income tax rate can also be impacted by discrete permanent differences affecting any period presented. The primary reason for the decrease in the consolidated effective rate in the current period was due to a permanent tax difference associated with the tax deduction for equity grants in the United States that vested during the thirteen weeks ended September 30, 2023.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits available to the Company. The actual 2023 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting of share-based awards.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Weeks Ended September 30, 2023 Compared to Thirteen Weeks Ended October 1, 2022 (Continued)
Segment Discussion
Specialty Health Care
Specialty Health Care revenue of $24.9 million for the thirteen weeks ended September 30, 2023 decreased 11.1%, or $3.1 million, as compared to the comparable prior-year period. The decrease in revenue was driven by the Company’s non-school clients, slightly offset by an increase in revenue from the Company’s school clients. Revenue from school clients for the thirteen weeks ended September 30, 2023 was $17.3 million as compared to $16.6 million for the comparable prior-year period. Revenue from non-school clients for the thirteen weeks ended September 30, 2023 was $7.6 million as compared to $11.4 million for the comparable prior-year period. The revenue decrease for non-school clients was primarily due to decreased demand associated with COVID-19 transitioning from a high level of activity relating to the pandemic during the thirteen weeks ended October 1, 2022 to a lesser level activity associated with the change of COVID-19 to an endemic during the thirteen weeks ended September 30, 2023. The Specialty Health Care segment’s gross profit decreased by 17.0%, or $1.5 million, to $7.5 million for the thirteen weeks ended September 30, 2023, as compared to $9.0 million for the prior-year period. The decrease in gross profit was primarily driven by the decrease in revenue and a decrease in gross profit margin. Gross profit margin for the thirteen weeks ended September 30, 2023 decreased to 30.0% as compared to 32.1% for the comparable prior-year period. The decrease in gross profit margin was primarily due to a mix shift to lower margin services. Specialty Health Care experienced operating income of $1.4 million for the thirteen weeks ended September 30, 2023, as compared to $2.9 million for the comparable prior-year period. The primary reason for the decrease in operating income was the decrease in gross profit.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Weeks Ended September 30, 2023 Compared to Thirteen Weeks Ended October 1, 2022 (Continued)
Segment Discussion (Continued)
Engineering
Engineering revenue of $22.5 million for the thirteen weeks ended September 30, 2023, increased 7.3%, or $1.5 million, compared to the comparable prior-year period. The increase in revenue comprised the following: an increase in Energy Services revenue of $3.1 million, offset by decreases in Aerospace revenue of $1.4 million and Industrial Processing revenue of $0.2 million. Aerospace revenue decreased primarily due to a contract reduction for the Company’s major outsourcing client. The Company believes the decrease in Industrial Processing revenue was primarily due to the irregular timing of large contracts with its Industrial Processing clients. Gross profit decreased by 5.2%, or $0.3 million, compared to the prior-year period. Gross profit increased because of the increase in revenue, offset by a decrease in gross profit margin. The gross profit margin of 25.0% for the current period decreased from 25.5% for the comparable prior-year period. The decrease in gross profit margin was primarily due to lower utilization resulting from an increase in staff in anticipation of higher revenue. The Engineering segment experienced operating income of $1.2 million for the thirteen weeks ended September 30, 2023, as compared to $0.9 million for the comparable prior-year period. The operating income increased due to the increase in gross profit and a decrease in SGA expense. The Engineering segment’s SGA expense of $4.3 million decreased from $4.5 million, primarily due to a focus on reducing SGA expenses.
Life Sciences and Information Technology
Life Sciences and Information Technology revenue of $10.7 million for the thirteen weeks ended September 30, 2023 increased by 15.9%. or $1.5 million, as compared to $9.2 million for the comparable prior-year period. Gross profit of $4.2 million for the thirteen weeks ended September 30, 2023 increased 38.4%, or $1.2 million, as compared to $3.0 million for the comparable prior-year period. The increase in gross profit was primarily due to an increase in gross profit margin. The Life Sciences and Information Technology gross profit margin for the thirteen weeks ended September 30, 2023 was 39.4% as compared to 33.0% for the comparable prior-year period. The Company attributes the gross profit margin increase to a concerted effort to increase gross profit margin through its managed service offerings and higher revenue from its recruitment process outsourcing (RPO) offering. The Life Sciences and Information Technology segment experienced operating income of $1.8 million as compared to $0.9 million for the comparable prior-year period. The increase in operating income was primarily due to an increase in gross profit, offset by an increase to SGA expense. SGA expense increased to $2.4 million as compared to $2.1 million in the comparable prior-year period. The increase in SGA expense was primarily due the acquisition of TalentHerder in the fourth quarter of fiscal 2022.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirty-Nine Weeks Ended September 30, 2023 Compared to Thirty-Nine Weeks Ended October 1, 2022
A summary of operating results for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 is as follows (in thousands):
| Amount |
% of Revenue |
Amount |
% of Revenue |
|||||||||||||
| Revenue |
$ | 192,209 | 100.0 | $ | 214,459 | 100.0 | ||||||||||
| Cost of services |
137,144 | 71.4 | 151,998 | 70.9 | ||||||||||||
| Gross profit |
55,065 | 28.6 | 62,461 | 29.1 | ||||||||||||
| Selling, general and administrative |
38,782 | 20.2 | 39,962 | 18.6 | ||||||||||||
| Depreciation and amortization of property and equipment |
756 | 0.4 | 729 | 0.3 | ||||||||||||
| Amortization of acquired intangible assets |
136 | 0.1 | - | 0.0 | ||||||||||||
| Gain on sale of assets |
(395 | ) |
(0.3 | ) |
(219 | ) |
(0.1 | ) |
||||||||
| Operating costs and expenses |
39,279 | 20.4 | 40,472 | 18.8 | ||||||||||||
| Operating income |
15,786 | 8.2 | 21,989 | 10.3 | ||||||||||||
| Other expense (income), net |
965 | 0.5 | (31 | ) |
0.0 | |||||||||||
| Income before income taxes |
14,821 | 7.7 | 22,020 | 10.3 | ||||||||||||
| Income tax expense |
3,245 | 1.7 | 5,968 | 2.8 | ||||||||||||
| Net income |
$ | 11,576 | 6.0 | $ | 16,052 | 7.5 | ||||||||||
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 30, 2023 and October 1, 2022 consisted of thirty-nine weeks each.
Revenue. Revenue decreased 10.4%, or $22.3 million, for the thirty-nine weeks ended September 30, 2023 as compared to the thirty-nine weeks ended October 1, 2022 (the “comparable prior-year period”). Revenue decreased $24.1 million in the Specialty Health Care segment, increased $0.2 million in the Engineering segment and increased $1.6 million in the Life Sciences and Information Technology segment. See more detailed disclosure by segment in our Segment Discussion.
Cost of Services and Gross Profit. Cost of services decreased 9.8%, or $14.9 million, for the thirty-nine weeks ended September 30, 2023 as compared to the comparable prior-year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was 71.4% and 70.9%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $38.8 million for the thirty-nine weeks ended September 30, 2023 as compared to $40.0 million for the comparable prior-year period. As a percentage of revenue, SGA expenses were 20.2% for the thirty-nine weeks ended September 30, 2023 and 18.6% for the comparable prior-year period. See Segment Discussion for further information on SGA expense changes.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirty-Nine Weeks Ended September 30, 2023 Compared to Thirty-Nine Weeks Ended October 1, 2022 (Continued)
Gain on Sale of Assets. On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These two offices were often referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment. During the thirty-nine weeks ended September 30, 2023, the Company recorded a discrete gain on the sale of these assets and liabilities of $0.4 million due to the final collection of escrow funds from the transaction.
Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income and gains and losses on foreign currency transactions. Other expense, net increased by $1.0 million as compared to the comparable prior year period, primarily due to an increase in interest expense, net. Interest expense increased due to increased borrowing. Borrowings increased primarily to fund treasury stock purchases.
Income Tax Expense. The Company recognized $3.2 million of income tax expense for the thirty-nine weeks ended September 30, 2023, as compared to $6.0 million for the comparable prior-year period. The consolidated effective income tax rate for the current period was 21.9% as compared to 21.5% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of September 30, 2023, were approximately 23.9%, 26.1% and 13.3% in the United States, Canada, and Europe, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and European pretax income versus U.S. pretax income. The effective income tax rate can also be impacted by discrete permanent differences affecting any period presented. The primary reason for the decrease in the consolidated effective rate in the current period was due to a permanent tax difference associated with the tax deduction for equity grants in the United States that vested during the thirty-nine weeks ended September 30, 2023.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits available to the Company. The actual 2023 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting of share-based awards.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirty-Nine Weeks Ended September 30, 2023 Compared to Thirty-Nine Weeks Ended October 1, 2022 (Continued)
Segment Discussion
Specialty Health Care
Specialty Health Care revenue of $99.6 million for the thirty-nine weeks ended September 30, 2023 decreased 19.5%, or $24.1 million, as compared to the comparable prior-year period. The decrease in revenue was driven by both the Company’s school and non-school clients. Revenue from school clients for the thirty-nine weeks ended September 30, 2023 was $73.2 million as compared to $90.4 million for the comparable prior-year period. Revenue from non-school clients for the thirty-nine weeks ended September 30, 2023 was $26.4 million as compared to $33.2 million for the comparable prior-year period. Revenue decreases were primarily due to decreased demand associated with COVID-19 transitioning from a high level of activity relating during the thirty-nine weeks ended October 1, 2022 to a lesser level of activity associated with the change of COVID-19 to an endemic during the thirty-nine weeks ended September 30, 2023. The Specialty Health Care segment’s gross profit decreased by 21.5%, or $7.9 million, to $28.9 million for the thirty-nine weeks ended September 30, 2023, as compared to $36.9 million for the prior-year period. The decrease in gross profit was primarily driven by the decrease in revenue. Gross profit margin for the thirty-nine weeks ended September 30, 2023 decreased to 29.1% as compared to 29.8% for the comparable prior-year period. The decrease in gross profit margin was primarily due to a mix shift for certain lower margin services. Specialty Health Care experienced operating income of $9.4 million for the thirty-nine weeks ended September 30, 2023, as compared to $15.3 million for the comparable prior-year period. The primary reason for the decrease in operating income was the decrease in gross profit, offset by a decrease in SGA expense. SGA expense decreased by $2.0 million to $19.2 million, as compared to $21.2 million in the comparable prior-year period. The decrease in SGA expense was primarily due to a decrease in expenses associated with lower revenue and a lower allocation of corporate SGA expenses.
The Company believes that the impact of the COVID-19 pandemic helped to increase Specialty Health Care revenue and gross margin in the fourth quarter of fiscal 2021 and the first half of fiscal 2022. The Company also believes the COVID-19 pandemic began to shift to an endemic in the second half of fiscal 2022. As a result, COVID-19-related revenue has decreased. However, the Company also believes that the demand for its Healthcare services is greater than it had been before the COVID-19 pandemic. While the overall impact of these offsetting dynamics is uncertain, the Company believes that, except for seasonality, it is well positioned for growth in revenue going forward.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirty-Nine Weeks Ended September 30, 2023 Compared to Thirty-Nine Weeks Ended October 1, 2022 (Continued)
Segment Discussion (Continued)
Engineering
Engineering revenue of $61.9 million for the thirty-nine weeks ended September 30, 2023 increased by $0.2 million, compared to the comparable prior-year period. The increase in revenue comprised the following: decreases in Aerospace revenue of $3.0 million and Industrial Processing revenue of $2.5 million, offset by an increase to Energy Services revenue of $5.7 million. The decrease in Aerospace revenue was primarily due to a contract reduction for the Company’s major outsourcing client. The Company believes the decrease in Industrial Processing revenue was primarily due to the irregular timing of large contracts with its Industrial Processing clients. Gross profit decreased by 9.9%, or $1.6 million, as compared to the comparable prior-year period. Gross profit decreased because of a decrease in gross profit margin. Gross profit margin of 23.4% for the current period decreased from 26.0% for the comparable prior-year period. The decrease in gross profit margin was primarily due to lower utilization resulting from an increase in staff associated with lower revenue as the Company absorbed fixed salaried costs over lower revenue. The Engineering segment experienced operating income of $1.9 million for the thirty-nine weeks ended September 30, 2023, as compared to $3.3 million for the comparable prior-year period. The decrease in operating income was primarily due to the decrease in gross profit.
Life Sciences and Information Technology
Life Sciences and Information Technology revenue of $30.7 million for the thirty-nine weeks ended September 30, 2023 increased by 5.5%, or $1.6 million, as compared to $29.1 million for the comparable prior-year period. Gross profit of $11.7 million for the thirty-nine weeks ended September 30, 2023 increased 22.5%, or $2.1 million, as compared to $9.5 million for the comparable prior-year period. The increase in gross profit was due to the increase in revenue and an increase in gross profit margin. The Life Sciences and Information Technology gross profit margin for the thirty-nine weeks ended September 30, 2023 was 38.0% as compared to 32.7% for the comparable prior-year period. The Company attributes the gross profit margin increase to a concerted effort to increase gross profit margin through its managed service offerings. The Life Sciences and Information Technology segment experienced operating income of $4.5 million as compared to $3.3 million for the comparable prior-year period. The increase in operating income was primarily due to an increase in gross profit, offset by an increase to SGA expense. SGA expense increased to $6.9 million as compared to $6.1 million in the comparable prior-year period. The increase in SGA expense was primarily due to the acquisition of TalentHerder in the fourth quarter of fiscal 2022 and a higher allocation of corporate SGA expenses.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources
The following table summarizes the major captions from the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
| Thirty-Nine Weeks Ended |
||||||||
| 2023 |
2022 |
|||||||
| Cash (used in) provided by: |
||||||||
| Operating activities |
$ | 27,548 | $ | 20,741 | ||||
| Investing activities |
$ | (480 | ) |
$ | (576 | ) |
||
| Financing activities |
$ | (26,558 | ) |
$ | (19,468 | ) |
||
Operating Activities
Operating activities provided $27.5 million of cash for the thirty-nine weeks ended September 30, 2023 as compared to providing $20.7 million in the comparable prior-year period. The major components of cash provided by operating activities in the thirty-nine weeks ended September 30, 2023 and the comparable prior-year period are as follows: net income, and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and accrued payroll and related costs, and deferred revenue.
For the thirty-nine weeks ended September 30, 2023, the Company experienced net income of $11.6 million as compared to $16.1 million for the comparable prior-year period. An increase in accounts receivables in the thirty-nine weeks ended September 30, 2023 used $6.7 million of cash as compared to using $1.6 million in the comparable prior-year period. The Company primarily attributes this increase in accounts receivables for the thirty-nine weeks ended September 30, 2023 to normal fluctuations in accounts receivable relative to revenue.
While highly variable, the Company’s transit accounts payable typically exceeds the Company’s transit accounts receivable, but absolute amounts and differences fluctuate significantly from quarter to quarter in the normal course of business. The net of transit accounts payable and transit accounts receivable was a net payable of $28.9 million as of September 30, 2023 and a net payable of $6.5 million as of December 31, 2022, providing $22.4 million of cash during the thirty-nine weeks ended September 30, 2023. The net of transit accounts payable and transit accounts receivable was a net payable of $0.1 million as of October 1, 2022 and a net payable of $1.1 million as of January 1, 2022, using $1.0 million of cash during the thirty-nine weeks ended October 1, 2022. The increase to net transit payable as of September 30, 2023 was due to several large, multiyear EPC (Engineering, Procurement and Construction) projects starting in the Company’s second fiscal quarter. In a typical EPC contract, the Company receives significant cash upfront to fund equipment procurement and construction subcontractors throughout the project.
Prepaid expenses and other current assets used cash of $0.7 million for the thirty-nine weeks ended September 30, 2023 as compared to providing $0.6 million of cash for the comparable prior-year period. The Company attributes changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of business. Since certain expenses are paid before a fiscal year concludes and are amortized over the next fiscal year, prepaid expenses and other current assets generally tend to increase at the end of a fiscal year and decrease during the first three quarters of the following fiscal year.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
A decrease in accounts payable and accrued expenses used cash of $1.8 million for the thirty-nine weeks ended September 30, 2023 as compared to providing $1.5 million for the comparable prior-year period. The Company attributes these changes to typical fluctuations in the normal course of business.
Changes in accrued payroll and related costs provided $1.6 million for the thirty-nine weeks ended September 30, 2023 as compared to $4.2 million for the comparable prior-year period. There are four primary factors that generally impact accrued payroll and related costs: 1) there is a general correlation to operating expenses as payroll and related costs is the Company’s largest expense group, so as operating costs increase or decrease, absent all other factors, so will the accrued payroll and related costs; 2) the Company pays the majority of its payroll every two weeks and normally has thirty-nine weeks in a fiscal quarter, which means that the Company normally has a major payroll on the last business day of every other quarter; 3) the timing of various payroll related payments varies in the normal course of business; and 4) most of the Company’s senior management participate in annual incentive plans and while progress advances are sometimes made during the fiscal year, these accrued bonus balances, to the extent they are projected to be achieved, generally accumulate throughout the year. A significant portion of these incentive plan accruals are typically paid at the beginning of one fiscal year, pertaining to the prior fiscal year. The Company’s last major payroll for the thirty-nine weeks ended September 30, 2023 was paid on September 22, 2023. During fiscal 2020, the Company deferred $3.3 million of employer payroll taxes under the CARES Act. Half of these deferred payroll taxes were paid in fiscal December 2021 and the remaining portion was paid in fiscal December 2022.
Historically, the Company has experienced small deferred revenue balances. In fiscal 2022, the Company’s Industrial Processing group secured several contracts with front-loaded payments, thereby generating larger deferred revenue balances than typically generated. As a result, the Company’s deferred revenue balance as of September 30, 2023 was $0.3 million, compared to $1.1 million as of December 31, 2022, using cash from operations of $0.8 million for the thirty-nine weeks ended September 30, 2023. While the Company expects to receive future upfront payments from its Industrial Processing clients, the Company cannot reasonably forecast deferred revenue balances as the timing of contract wins and front-loaded payments are typically haphazard.
Investing Activities
Investing activities used $0.9 million for the purchase of property and equipment in the current period as compared to using $0.7 million in the comparable prior-year period. The thirty-nine weeks ended September 30, 2023 and October 1, 2022 both included discrete gains associated with the Company’s sale of its Canada Power Systems business unit.
Financing Activities
Financing activities used $26.6 million of cash for the thirty-nine weeks ended September 30, 2023 as compared to using $19.5 million in the comparable prior-year period. The Company made net payments under its line of credit of $2.1 million during the thirty-nine weeks ended September 30, 2023 as compared to making net payments of $13.0 million in the comparable prior-year period. The Company used $24.4 million to repurchase shares of its common stock in the current period as compared to $6.4 million in the comparable prior-year period. The Company generated cash of $0.7 million from sales of shares from its equity plans for the current period and $0.4 million for the comparable prior-year period.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) SOFR (Secured Overnight Financing Rate) (which replaced LIBOR (London Interbank Offered Rate) upon the phasing out of LIBOR), plus applicable margin, typically borrowed in fixed 30-day increments, plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was 6.4% and 2.7%, respectively.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts the Company’s ability to borrow in order to pay dividends. As of September 30, 2023, the Company was in compliance with all covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
Borrowings under the line of credit as of September 30, 2023 and December 31, 2022 were $6.7 million and $8.8 million, respectively. There were letters of credit outstanding at September 30, 2023 and December 31, 2022 for $2.0 million and $1.9 million, respectively. At September 30, 2023 and December 31, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of $36.3 million and $34.3 million, respectively.
In addition to borrowings and sales of shares from its equity plans, the Company may raise capital through sales of shares of common stock under its at the market issuance program (the “ATM Program”) established under its May 2021 At Market Issuance Sales Agreement with B. Riley Securities, Inc., as the agent (the “Agent”). The ATM Program allows the Company to offer and sell shares of the common stock having an aggregate sales price of up to $25.0 million from time to time through the Agent. To date, the Company has not sold any shares under the ATM Program.
Current Liquidity and Revolving Credit Facility
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, and meet the other general cash needs of our business. Our liquidity is impacted by general economic, financial, competitive, and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay our expenses, principally labor-costs, and other related expenditures. We generally satisfy our liquidity needs through cash provided by operations and, when necessary, our revolving line of credit from Citizens Bank. The Company believes it has a great deal of flexibility to reduce its costs if it becomes necessary. The Company believes that it can satisfy its liquidity needs for at least the next 12 months.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Current Liquidity and Revolving Credit Facility (Continued)
The Company’s liquidity and capital resources as of September 30, 2023, included accounts receivable and total current asset balances of $57.5 million and $73.0 million, respectively. Current liabilities were $67.3 million as of September 30, 2023 and were exceeded by total current assets by $5.7 million.
The Company experiences volatility in its daily cash flow and, at times, relies on the revolving line of credit to provide daily liquidity for the Company’s financial operations. As of September 30, 2023, the Company was in compliance with all financial covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations.
The Company’s business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company’s future acquisition and expansion opportunities or how such opportunities will be financed.
The Company is exposed to various asserted claims as of September 30, 2023, where the Company believes it has a probability of loss. Additionally, the Company is exposed to other asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As of September 30, 2023, the Company has accrued $2.8 million for asserted claims.
In April 2022, a client of the Company’s Industrial Processing Group alleged that a system partially designed by the Company is not operating as intended and that the Company is responsible. The Company has not determined if it has any liability. In the event of liability, the Company believes its damages are contractually limited to an amount no higher than $3.3 million. Furthermore, the Company believes that if it were found liable, any damages would be covered by insurance, subject to a deductible of $0.5 million and maximum coverage of $5.0 million. While the Company attempts to find a mutually agreeable solution, the Company has reserved $0.5 million for this project. The Company can give no assurance that its liability is limited to $3.3 million or that liability over $0.5 million, if any, will be covered by insurance.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Commitments and Contingencies (Continued)
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.
The Company utilizes SAP software for its financial reporting and accounting system which was implemented in 1999 and has not undergone significant upgrades since its initial implementation. The Company is currently implementing an upgrade of its current system and expects to go live in 2024. The Company estimates this upgrade or replacement of its financial reporting and accounting system will cost between $0.5 million and $1.0 million. These estimates are subject to material change.
The Company’s current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for at least the next 12 months.
The Company leases office facilities and various equipment under non-cancelable leases expiring at various dates through November 2027. Certain leases are subject to escalation clauses based upon changes in various factors.
Maturities of lease liabilities are as follows:
| Fiscal Year |
Operating Leases |
Finance Leases |
||||||
| 2023 (After September 30, 2023) |
$ | 357 | $ | 117 | ||||
| 2024 |
754 | 233 | ||||||
| 2025 |
493 | - | ||||||
| 2026 |
409 | - | ||||||
| 2027 |
302 | - | ||||||
| Thereafter |
1,455 | - | ||||||
| Total lease payments |
$ | 3,770 | $ | 350 | ||||
| Less: imputed interest |
(504 | ) |
(2 | ) |
||||
| Total |
$ | 3,266 | $ | 348 | ||||
Future Contingent Payments
As of September 30, 2023, the Company had two acquisition agreements whereby additional contingent consideration may be earned by the sellers: 1) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC, and 2) effective October 2, 2022, the Company acquired certain assets of TalentHerder LLC. The Company estimates future contingent payments at September 30, 2023 as follows:
| Total |
||||
| The four quarters following September 30, 2023 |
$ | 300 | ||
| Thereafter |
1,671 | |||
| Estimated future contingent consideration payments |
$ | 1,971 | ||
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of September 30, 2023. Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and debt instruments, which primarily consist of the Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of September 30, 2023, the Company’s investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. Based on the Company’s variable-rate line of credit balances during the thirty-nine weeks ended September 30, 2023, if the interest rate on the Company’s variable-rate line of credit (using an incremental borrowing rate) during the period had been 1.0% higher, the Company’s interest expense on an annualized basis would have increased by $0.1 million. The Company does not expect any material loss with respect to its investment portfolio.
| ITEM 4. |
CONTROLS AND PROCEDURES |
The Company’s management, under the supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. As previously disclosed under “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2022, we identified deficiencies described below that existed as of December 31, 2022, and continued to exist at September 30, 2023. Based on our evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures (as such term is defined in Rule(s) 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of September 30, 2023, because of the material weaknesses in our internal control over financial reporting described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified the following control deficiencies that resulted in material weaknesses in our internal control over financial reporting as of December 31, 2022. The Company did not design and maintain information technology controls relevant to preparing its financial statements, specifically concerning (i) separation of duties to the SAP ERP and General Ledger, (ii) adequate restriction of administrator-type access to SAP, (iii) program change management controls, and (iv) user access controls that ensure appropriate segregation of duties and adequately restrict user access to financial applications, programs, and data. As a result, the Company's related process-level IT-dependent manual and automated controls that rely upon the affected ITGCs, or information coming from IT systems with affected ITGCs, were also deemed ineffective.
This material weakness did not result in a misstatement of our annual or interim consolidated financial statements.
| ITEM 4. |
CONTROLS AND PROCEDURES (CONTINUED) |
Planned Material Weakness Remediation Activities
To address these material weaknesses, we have commenced actions to formalize the Company's framework and policies to maintain evidence in the operation of control procedures and improve our IT general controls. Our planned remediation efforts related to the above-identified material weaknesses include, but are not limited to:
| ● |
Investments to upgrade or replace existing systems that do not have the appropriate infrastructure to meet the requirements of our internal control framework. |
| ● |
Expand the available resources at the Company with experience designing and implementing control activities, including information technology general controls, with the advice from third-party consultants and specialists. |
| ● |
Assess segregation of duties and implement an annual user access review, including role design and process transformation to appropriately mitigate significant risks associated with conflicting responsibilities in financial systems. |
| ● |
Design and implement IT controls in change management that will ensure all changes are tested in staging, approved, and documented, and ensure that developers cannot deploy their own code to production. |
| ● |
Perform additional training to ensure a clear understanding of risk assessment, controls, and monitoring activities related to automated processes, systems, and ITGCs related to financial reporting. |
We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously. The implementation of these remediation efforts is in progress, may require additional expenditures to implement, and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and as a result, the timing of when we will be able to remediate the material weaknesses fully is uncertain. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting, which may necessitate further implementation and evaluation time.
Changes in Internal Control Over Financial Reporting
In the third quarter, management has implemented and designed information technology general controls to address and mitigate the identified material weakness assessment. These controls encompass various measures, such as enhancing role design, eliminating sensitive access types, and segregating developers to prevent them from promoting their own changes. The company remains vigilant in its oversight of IT controls, continuously evaluating their effectiveness, and proactively upgrading existing systems and processes to rectify the material weakness in financial reporting controls, as defined by Rules 13a-1S(f) and 15d-15(f) of the Exchange Act.
Significant progress has been made in executing the remediation plan to rectify the previously disclose material weakness. A comprehensive and final assessment of these remediation efforts will be carried out as part of our annual review of internal controls over financial reporting.
| RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION |
| ITEM 1. |
LEGAL PROCEEDINGS |
See discussion of Contingencies in Note 15 to the Condensed Consolidated Financial Statements included in Item 1 of this report.
| ITEM 1A. |
RISK FACTORS |
For information regarding factors that could affect the Company’s business, see the risk factors discussed under Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
| ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The following table presents the Company’s purchases of common stock completed during the third quarter of 2023:
| Period |
Total Number of Shares Purchased |
Weighted Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
||||||||
| 97,016 | $ | 19.09 | 97,016 | $ | 16,471,000 | |||||||
|
|
59,177 | $ | 18.56 | 59,177 | $ | 15,372,000 | ||||||
|
|
22,235 | $ | 19.46 | 22,235 | $ | 14,940,000 | ||||||
|
Total |
178,428 | $ | 18.96 | 178,428 | ||||||||
| ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None of the Company’s directors and officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company's fiscal quarter ended September 30, 2023.
| ITEM 6. |
EXHIBITS |
| Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
|
| Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
|
| Certification of Principal Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
|
| Certification of Principal Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
|
| 101.INS* |
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Documents |
| 101.DEF* |
Inline XBRL Taxonomy Definition Linkbase Document |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
__________
** Furnished herewith
| RCM TECHNOLOGIES, INC.
SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RCM Technologies, Inc.
|
|||
| Date: November 9, 2023 |
By: /s/ Bradley S. Vizi |
||
| Executive Chairman and President (Principal Executive Officer and Duly Authorized Officer of the Registrant) |
|||
| Date: November 9, 2023 |
By: /s/ Kevin D. Miller |
||
| Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of the Registrant) |
|||
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/31/30 | ||||
| 12/17/30 | ||||
| 4/24/26 | ||||
| 12/31/25 | ||||
| 12/31/24 | ||||
| 12/31/23 | ||||
| 12/30/23 | ||||
| Filed on: | 11/9/23 | |||
| 11/8/23 | 8-K | |||
| For Period end: | 9/30/23 | |||
| 9/29/23 | ||||
| 9/22/23 | ||||
| 9/1/23 | ||||
| 8/31/23 | ||||
| 8/1/23 | 4 | |||
| 7/31/23 | ||||
| 7/3/23 | ||||
| 7/2/23 | ||||
| 7/1/23 | 10-Q | |||
| 4/25/23 | ||||
| 4/24/23 | 8-K | |||
| 4/1/23 | 10-Q | |||
| 12/31/22 | 10-K, 10-K/A | |||
| 12/15/22 | 3, 8-K, DEF 14A | |||
| 10/2/22 | ||||
| 10/1/22 | 10-Q | |||
| 7/2/22 | 10-Q, 8-K | |||
| 4/2/22 | 10-Q | |||
| 1/1/22 | 10-K, 10-K/A | |||
| 7/30/21 | 8-K | |||
| 9/30/18 | ||||
| 8/9/18 | ||||
| 1/1/01 | ||||
| List all Filings | ||||