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RCM TECHNOLOGIES, INC. - Quarter Report: 2023 September (Form 10-Q)

rcmt20230929_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

OR

 

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: 1-10245

 

RCM TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

95-1480559

(State or other Jurisdiction of Incorporation)

(I.R.S. Employer Identification No.)

 

2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613

(Address of Principal Executive Offices)                                     (Zip Code)

 

(856) 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

Common Stock, par value $0.05 per share

 

RCMT

 

The 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. 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). 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 ☐

Accelerated Filer ☒

Non-Accelerated Filer ☐

Smaller

Reporting

Company ☒

Emerging

Growth

Company ☐

 

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 ☐ 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, 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)

and December 31, 2022

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

 

 

2

 
 

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.

 

 

3

 

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,

  

December 31,

 
  

2023

  

2022

 
  

(Unaudited)

     

Current assets:

        

Cash and cash equivalents

 $654  $339 

Accounts receivable, net

  57,459   50,762 

Transit accounts receivable

  9,550   3,280 

Prepaid expenses and other current assets

  5,311   4,636 

Total current assets

  72,974   59,017 
         

Property and equipment, net

  2,221   2,098 
         

Other assets:

        

Deposits

  168   173 

Goodwill

  22,147   22,147 

Operating right of use asset

  2,976   3,665 

Intangible assets, net

  728   864 

Total other assets

  26,019   26,849 
         

Total assets

 $101,214  $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

  166   166 

Deferred income taxes, net, domestic

  1,652   1,495 

Finance lease payable

  -   232 

Contingent consideration from acquisitions, net of current position

  1,671   1,970 

Operating right of use liability, net of current position

  2,382   2,932 

Borrowings under line of credit

  6,657   8,783 

Total liabilities

  79,835   56,002 
         

Contingencies (note 15)

  -   - 
         

Stockholders’ equity:

        

Preferred stock, $1.00 par value; 5,000,000 shares authorized;

        

no shares issued or outstanding

  -   - 

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

  880   863 

Additional paid-in capital

  116,146   113,878 

Accumulated other comprehensive loss

  (2,858

)

  (2,863

)

Accumulated deficit

  (24,520

)

  (36,096

)

Treasury stock, 9,760,809 shares at September 30, 2023 and

        

8,002,649 shares at December 31, 2022, at cost

  (68,269

)

  (43,820

)

Total stockholders’ equity

  21,379   31,962 
         

Total liabilities and stockholders’ equity

 $101,214  $87,964 

 

4

 

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

 
 

September 30,

2023

   

October 1,

2022

   

September 30,

2023

   

October 1,

2022

 
                               

Revenue

$ 58,049     $ 58,152     $ 192,209     $ 214,459  

Cost of services

  40,768       40,794       137,144       151,998  

Gross profit

  17,281       17,358       55,065       62,461  
                               

Operating costs and expenses

                             

Selling, general and administrative

  12,662       12,551       38,782       39,962  

Depreciation and amortization of property

and equipment

  243       266       756       729  

Amortization of acquired intangible assets

  45       -       136       -  

Gain on sale of assets

  -       (219

)

    (395

)

    (219

)

Operating costs and expenses, net of gain on sale of assets

  12,950       12,598       39,279       40,472  
                               

Operating income

  4,331       4,760       15,786       21,989  
                               

Other expense (income)

                             

Interest expense and other, net

  185       35       970       201  

Gain on foreign currency transactions

  (44

)

    (90

)

    (5 )     (232

)

Other expense (income), net

  141       (55

)

    965       (31

)

                               

Income before income taxes

  4,190       4,815       14,821       22,020  

Income tax expense

  434       1,297       3,245       5,968  
                               

Net income

$ 3,756     $ 3,518     $ 11,576     $ 16,052  
                               

Basic net earnings per share

$ 0.47     $ 0.35     $ 1.37     $ 1.58  
                               

Diluted net earnings per share

$ 0.46     $ 0.33     $ 1.33     $ 1.52  

 

 

5

 
 

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

 
 

September 30,

2023

   

October 1,

2022

   

September 30,

2023

   

October 1,

2022

 
                               

Net income

$ 3,756     $ 3,518     $ 11,576     $ 16,052  

Other comprehensive (loss) income

  (1

)

    (181

)

    5       (442

)

Comprehensive income

$ 3,755     $ 3,337     $ 11,581     $ 15,610  

 

 

6

 

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

  17,287,967  $863  $113,878  $(2,863

)

 $(36,096

)

  8,002,649  $(43,820

)

 $31,962 

Issuance of stock under

employee stock purchase plan

  33,071   2   345   -   -   -   -   347 

Equity compensation expense from

awards issued

  -   -   496   -   -   -   -   496 

Issuance of stock upon vesting

of restricted share awards

  179,762   8   (8)  -   -   -   -   - 

Purchase of treasury stock

  -   -   -   -   -   640,578   (8,184

)

  (8,184

)

Foreign currency translation

adjustment

  -   -   -   54   -   -   -   54 

Net income

  -   -   -   -   3,837       -   3,837 
                                 

Balance, April 1, 2023

  17,500,800  $873  $114,711  $(2,809

)

 $(32,259

)

  8,643,227  $(52,004

)

 $28,512 

Issuance of stock upon vesting

of restricted share awards

  7,669   -   -   -   -   -   -   - 

Equity compensation expense from

awards issued

  -   -   471   -   -   -   -   471 

Common stock issued as

contingent consideration

  8,000   -   132   -   -   -   -   132 

Purchase of treasury stock

  -   -   -   -   -   939,154   (12,876

)

  (12,876

)

Foreign currency translation

adjustment

  -   -   -   (48

)

  -   -   -   (48

)

Net income

  -   -   -   -   3,983   -   -   3,983 
                                 

Balance, July 1, 2023

  17,516,469  $873  $115,314  $(2,857

)

 $(28,276

)

  9,582,381  $(64,880

)

 $20,174 

Issuance of stock under

employee stock purchase plan

  33,430   1   354   -   -   -   -   355 

Equity compensation expense from

awards issued

  -   -   484   -   -   -   -   484 

Issuance of stock upon vesting

of restricted share awards

  111,100   6   (6)  -   -   -   -   - 

Purchase of treasury stock

  -   -      -   -   178,428   (3,389

)

  (3,389

)

Foreign currency translation

adjustment

  -   -   -   (1

)

  -   -   -   (1

)

Net income

  -   -   -   -   3,756   -   -   3,756 
                                 

Balance, September 30, 2023

  17,660,999  $880  $116,146  $(2,858

)

 $(24,520

)

  9,760,809  $(68,269

)

 $21,379 

 

 

7

 

 

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

  16,903,157  $845  $111,068  $(2,699

)

 $(56,985

)

  6,612,222  $(26,260

)

 $25,969 

Issuance of stock under

employee stock purchase plan

  37,133   2   124   -   -   -   -   126 

Equity compensation expense from

awards issued

  -   -   403   -   -   -   -   403 

Issuance of stock upon vesting

of restricted share awards

  175,000   9   (9

)

  -   -   -   -   - 

Purchase of treasury stock

  -   -   -   -   -   406,480   (2,781

)

  (2,781

)

Foreign currency translation

adjustment

  -   -   -   (35

)

  -   -   -   (35

)

Net income

  -   -   -   -   6,520   -   -   6,520 
                                 

Balance, April 2, 2022

  17,115,290  $856  $111,586  $(2,734

)

 $(50,465

)

  7,018,702  $(29,041

)

 $30,202 

Equity compensation expense from

awards issued

  -   -   302   -   -   -   -   302 

Issuance of stock upon vesting

of restricted share awards

  38,175   1   (1

)

  -   -   -   -   - 

Foreign currency translation

adjustment

  -   -   -   (226

)

  -   -   -   (226

)

Net income

  -   -   -   -   6,014   -   -   6,014 
                                 

Balance, July 2, 2022

  17,153,465   857  $111,887  $(2,960

)

 $(44,451

)

  7,018,702  $(29,041

)

 $36,292 

Issuance of stock under

employee stock purchase plan

  46,746   2   280   -   -   -   -   282 

Equity compensation expense from

awards issued

  -   -   425   -   -   -   -   425 

Issuance of stock upon vesting

of restricted share awards

  21,000   2   (2

)

  -   -   -   -   - 

Purchase of treasury stock

  -   -   -   -   -   230,892   (3,613

)

  (3,613

)

Foreign currency translation

adjustment

  -   -   -   (181

)

  -   -   -   (181

)

Net income

  -   -   -   -   3,518   -   -   3,518 
                                 

Balance, October 1, 2022

  17,221,211  $861  $112,590  $(3,141

)

 $(40,933

)

  7,249,594  $(32,654

)

 $36,723 

 

 

8

 
 

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

 
   

September 30,

2023

   

October 1,

2022

 

Cash flows from operating activities:

               

Net income

  $ 11,576     $ 16,052  
                 

Adjustments to reconcile net income to net cash provided by

(used in) operating activities:

               

Depreciation and amortization

    892       729  

Gain on sale of assets

    (395

)

    (219

)

Equity compensation expense from awards issued

    1,451       1,130  

Provision for losses on accounts receivable

    -       (967

)

Deferred income tax expense

    158       88  

Change in operating right of use assets

    689       789  

Changes in operating assets and liabilities:

               

Accounts receivable

    (6,696

)

    (1,590

)

Prepaid expenses and other current assets

    (675

)

    603  

Net of transit accounts receivable and payable

    22,384       (998

)

Accounts payable and accrued expenses

    (1,798

)

    1,479  

Accrued payroll and related costs

    1,596       4,235  

Right of use liabilities

    (1,016

)

    (1,306

)

Income taxes payable

    162       2,574  

Deferred revenue

    (784

)

    (1,858

)

Deposits

    4       -  

Total adjustments and changes in operating assets and liabilities

    15,972       4,689  

Net cash provided by operating activities

    27,548       20,741  
                 

Cash flows from investing activities:

               

Property and equipment acquired

    (875

)

    (672

)

Proceeds from sale of assets

    395       219  

Net cash used in investing activities

    (480

)

    (453

)

                 

Cash flows from financing activities:

               

Borrowings under line of credit

    99,857       72,575  

Repayments under line of credit

    (101,982

)

    (85,566

)

Issuance of stock for employee stock purchase plan

    702       408  

Changes in finance lease obligations

    (347

)

    (392

)

Contingent consideration paid

    (339

)

    (99

)

Common stock repurchase

    (24,449

)

    (6,394

)

Net cash used in financing activities

    (26,558

)

    (19,468

)

Effect of exchange rate changes on cash and cash equivalents

    (195

)

    (294

)

Increase in cash and cash equivalents

    315       526  

Cash and cash equivalents at beginning of period

    339       235  
                 

Cash and cash equivalents at end of period

  $ 654     $ 761  
                 

Supplemental cash flow information:

               

Cash paid for:

               

Interest

  $ 1,005     $ 262  

Income taxes

  $ 2,810     $ 3,366  
                 

Non-cash investing activities:

               

Right of use assets obtained in exchange for lease obligations

  $ -     $ 1,353  

Value of shares issued as contingent consideration

  $ 132     $ -  

 

 

9

 

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

April 1, 2023

Thirteen

April 2, 2022

Thirteen

July 1, 2023

Thirteen

July 2, 2022

Thirteen

September 30, 2023

Thirteen

October 1, 2022

Thirteen

December 30, 2023

Thirteen

December 31, 2022

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:

 

 

Thirteen

Weeks Ended

  

Thirty-Nine

Weeks Ended

 
 

September 30,

2023

  

October 1,

2022

  

September 30,

2023

  

October 1,

2022

 

Specialty Health Care:

               

Time and Material

$24,485  $27,495  $98,595  $122,563 

Permanent Placement Services

 410   502   958   1,075 

Total Specialty Health Care

$24,895  $27,997  $99,553  $123,638 
                

Engineering:

               

Time and Material

$10,625  $11,774  $32,652  $31,601 

Fixed Fee

 11,827   9,148   29,304   30,125 

Total Engineering

$22,452  $20,922  $61,956  $61,726 
                

Life Sciences and Information Technology:

               

Time and Material

$8,898  $8,249  $25,757  $26,506 

Permanent Placement Services

 121   167   368   531 

Fixed Fee

 1,683   817   4,575   2,058 

Total Life Sciences and Information Technology

$10,702  $9,233  $30,700  $29,095 
 $58,049  $58,152  $192,209  $214,459 

 

 

12

 

 

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 $0.3 million of deferred revenue as of September 30, 2023. Deferred revenue was $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 $0.1 million and $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 $1.1 million and $3.4 million, respectively, that was included in deferred revenue at the beginning of the reporting period.

 

 

13

 

 

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 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 16.1% and 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:

 

 

September 30,

2023

  

December 31,

2022

 

Billed

$37,632  $40,256 

Unbilled

 15,769   6,615 

Work-in-progress

 5,158   4,991 

Allowance for sales discounts and doubtful accounts

 (1,100

)

  (1,100

)

        

Accounts receivable, net

$57,459  $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 $9.5 million and related transit accounts payable was $38.4 million, for a net payable of $28.9 million, as of September 30, 2023.  The transit accounts receivable was $3.3 million and related transit accounts payable was $9.8 million, for a net payable of $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:

 

 

September 30,

2023

  

December 31,

2022

 

Computer hardware and software

$3,489  $4,077 

Furniture and office equipment

 260   220 

Leasehold improvements

 413   267 

Laboratory equipment

 143   67 
  4,305   4,630 
        

Less: accumulated depreciation and amortization

 2,084   2,532 
        

Property and equipment, net

$2,221  $2,098 

 

The Company periodically writes off fully depreciated and amortized assets.  The Company wrote off fully depreciated and amortized assets of $1,201 and $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 $243 and $266, respectively. Depreciation and amortization expense of property and equipment for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was $756 and $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:

 

 

Total

The four quarters following September 30, 2023

$300

Thereafter

 1,671

Estimated future contingent consideration payments

$1,971

 

 

15

 

 

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 $11.6 million. The Company paid $0.3 million and $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 $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, 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:

 

Engineering

  

Specialty

Health Care

  

Information

Technology

  

Total

 
$11,918  $2,398  $7,831  $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 $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 6.4% and 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 $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.

 

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:

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

September 30,

2023

 

October 1,

2022

 

September 30,

2023

 

October 1,

2022

 

Basic weighted average shares outstanding

 7,919,752  10,154,505  8,469,501  10,172,765 

Dilutive effect of outstanding restricted share awards

 276,578  367,653  261,497  394,051 

Diluted weighted average shares outstanding

 8,196,330  10,522,158  8,730,998  10,566,816 

 

For all periods presented, there were no anti-dilutive shares included in the calculation of common stock equivalents as there were no stock options outstanding.

 

 

17

 

 

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:

 

  

September 30,

2023

  

December 31,

2022

 

Time-based restricted stock awards outstanding

  383,961   274,939 

Performance-based restricted stock awards outstanding

  100,000   - 

Performance-based restricted stock awards outstanding

under plans to be approved by the shareholders

  -   225,000 

Future grants of options or shares

  608,129   890,682 

Shares reserved for employee stock purchase plan

  297,730   364,231 
         

Total

  1,389,820   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 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 $483 and $425, respectively.  Share-based compensation expense for the thirty-nine weeks ended September 30, 2023 and October 1, 2022 was $1,450 and $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 $3.4 million of total unrecognized compensation cost, with approximately $3.2 million related to time-based non-vested share-based awards outstanding and $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. 

 

 

18

 

 

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 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 10% of qualified compensation, subject to maximum purchases in any one fiscal year of 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 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 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 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 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 400,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 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 33,430. As of September 30, 2023, there were 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 $244 and $180, respectively.

 

 

19

 

 

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 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 500,000, 850,000 and 1,000,000 shares, respectively, so that the total number of shares of stock reserved for issuance under the Plan is 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 no accrued dividends. Dividends for stock awards that ultimately do not vest are forfeited.

 

As of September 30, 2023, under the 2014 Plan, 383,961 time-based shares were outstanding, 100,000 performance-based restricted stock awards were outstanding and 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:

 

 

Number of

Time-Based

Restricted

Stock Awards

  

Weighted

Average

Grant Date Fair

Value per Share

 

Outstanding non-vested at December 31, 2022

 274,939  $3.59 

Granted

 288,893  $13.00 

Vested

 (168,769

)

 $2.11 

Forfeited or expired

 (11,102

)

 $2.23 

Outstanding non-vested at September 30, 2023

 383,961  $11.36 

 

Based on the closing price of the Company’s common stock of $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 $4.7 million. As of September 30, 2023, there was approximately $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.

 

 

20

 

 

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

  225,000  $8.73 

Granted

  -   - 

Vested

  (125,000

)

 $6.15 

Forfeited or expired

  -   - 

Outstanding non-vested at September 30, 2023

  100,000  $11.96 

 

As of September 30, 2023, there was 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 100,000 shares, subject to increase up to 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 $0.1 million and $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 $0.4 million and $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 4,762 immediately vested share awards at an average price of $10.50. During the thirty-nine weeks ended October 1, 2022, the Company awarded 1,000 immediately vested share awards at an average price of $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 $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, 333,686 shares of common stock at a per-share price of $11.91 per share.

 

During the thirty-nine weeks ending September 30, 2023, the Company purchased 1,758,160 shares at an average price of $13.80 per share, including the aforementioned private transaction.  During the thirty-nine weeks ended October 1, 2022, the Company purchased 637,372 shares at an average price of $10.03 per share.  As of September 30, 2023, the Company had $14.3 million available for future treasury stock purchases.

 

The Company accrued $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:

 

Thirteen Weeks Ended

September 30, 2023

 

Specialty

Health Care

  

Engineering

  

Life Sciences

and IT

  

Corporate

  

Total

 

Revenue

 $24,895  $22,452  $10,702  $-  $58,049 

Cost of services

  17,438   16,846   6,484   -   40,768 

Gross profit

  7,457   5,606   4,218   -   17,281 

Selling, general and administrative

  5,977   4,327   2,358   -   12,662 

Depreciation and amortization of

property and equipment

  88   122   33   -   243 

Amortization of acquired

intangible assets

  -   -   45   -   45 

Operating income

  1,392   1,157   1,782  $-  $4,331 

Total assets as of September 30, 2023

 $32,272  $45,949  $17,662  $5,331  $101,214 

Property and equipment acquired

 $62  $162  $69  $22  $315 

 

 

Thirteen Weeks Ended

October 1, 2022

 

Specialty

Health Care

  

Engineering

  

Life Sciences

and IT

  

Corporate

  

Total

 

Revenue

 $27,997  $20,922  $9,233  $-  $58,152 

Cost of services

  19,014   15,594   6,186   -   40,794 

Gross profit

  8,983   5,328   3,047   -   17,358 

Selling, general and administrative

  5,933   4,531   2,087   -   12,551 

Depreciation and amortization of

property and equipment

  101   136   29   -   266 

Gain on sale of assets

  -   (219

)

  -   -   (219

)

Operating income

 $2,949  $880  $931  $-   4,760 

Total assets as of October 1, 2022

 $33,280  $32,343  $8,579  $2,607  $76,809 

Capital expenditures

 $9  $207  $39  $266  $521 

 

 

23

 

 

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

September 30, 2023

 

Specialty

Health Care

  

Engineering

  

Life Sciences and IT

  

Corporate

  

Total

 

Revenue

 $99,553  $61,956  $30,700  $-  $192,209 

Cost of services

  70,623   47,482   19,039   -   137,144 

Gross profit

  28,930   14,474   11,661   -   55,065 

Selling, general and administrative

  19,211   12,626   6,945   -   38,782 

Depreciation and amortization of

property and equipment

  281   370   105   -   756 

Amortization of acquired

intangible assets

  -   -   136   -   136 

Gain on sale of assets

  -   (395

)

  -  $-   (395

)

Operating income

  9,438   1,873   4,475      15,786 

Total assets as of September 30, 2023

 $32,272  $45,949  $17,662  $5,331  $101,214 

Property and equipment acquired

 $109  $640  $88  $38  $875 

 

 

Thirty-Nine Weeks Ended

October 1, 2022

 

Specialty Health Care

  

Engineering

  

Life Sciences and IT

  

Corporate

  

Total

 

Revenue

 $123,638  $61,726  $29,095  $-  $214,459 

Cost of services

  86,772   45,653   19,573   -   151,998 

Gross profit

  36,866   16,073   9,522   -   62,461 

Selling, general and administrative

  21,203   12,659   6,100   -   39,962 

Depreciation and amortization of

property and equipment

  322   332   75   -   729 

Gain on sale of assets

  -   (219

)

  -   -   (219

)

Operating income

 $15,341  $3,301  $3,347  $-  $21,989 

Total assets as of October 1, 2022

 $33,280  $32,343  $8,579  $2,607  $76,809 

Capital expenditures

 $57  $496  $102  $275  $930 

 

 

24

 

 

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:

 

 

Thirteen Weeks Ended

  

Thirty-Nine Weeks Ended

 
 

September 30,

2023

  

October 1,

2022

  

September 30,

2023

  

October 1,

2022

 

Revenue

               

United States

$53,679  $55,180  $179,800  $205,162 

Canada

 1,647   1,091   5,060   3,555 

Puerto Rico

 1,643   1,261   4,745   3,760 

Europe

 1,080   620   2,604   1,982 
 $58,049  $58,152  $192,209  $214,459 

 

Total assets by geographic area as of the reported periods were as follows:

 

 

September 30,

2023

  

December 31,

2022

 

Total assets

       

United States

$91,141  $81,558 

Canada

 1,829   1,640 

Puerto Rico

 4,157   1,401 

Europe

 4,087   3,365 
 $101,214  $87,964 
 

14.    Income Taxes

 

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 27.1% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of September 30, 2023, were approximately 21.5%, 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 comparable prior-year period estimated income tax rates were 27.5%, 25.1% and 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 $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.

 

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:

 

 

Thirteen Weeks Ended

  

Thirty-Nine Weeks Ended

 
 

September 30,

2023

  

October 1,

2022

  

September 30,

2023

  

October 1,

2022

 
                

Operating lease cost

$349  $341  $1,078  $1,245 
                

Finance lease cost

             

Amortization of right of use assets

$116  $134  $368  $350 

Interest on lease liabilities

 1   2   3   6 

Total finance lease cost

$117  $136  $371  $356 

 

Supplemental Cash Flow information related to leases was as follows:

 

  

Thirteen Weeks Ended

  

Thirty-Nine Weeks Ended

 
  

September 30,

2023

  

October 1,

2022

  

September 30,

2023

  

October 1,

2022

 
                 

Cash paid for amounts included in the measurement

of lease liabilities

                

Operating cash flows from operating leases

 $359  $357  $1,102  $1,272 

Operating cash flows from finance leases

 $1  $-  $4  $6 

Financing cash flows from finance leases

 $115  $117  $346  $388 
                 

Right of use assets obtained in exchange for lease

obligations

                

Operating leases

 $364  $364  $-  $1,096 

Finance leases

 $257  $257  $-  $257 

 

 

27

 

 

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:

 

  

September 30,

2023

  

December 31,

2022

 

Operating leases

        

Operating lease right of use assets

 $2,976  $3,665 
         

Operating right of use liability - current

 $(884

)

 $(1,349

)

Operating right of use liability - non-current

  (2,382

)

  (2,932

)

Total operating lease liabilities

 $(3,266

)

 $(4,281

)

         

Finance leases

     

Property and equipment - (right of use assets)

 $926  $1,177 

Accumulated depreciation

  (579

)

  (461

)

Property and equipment, net

 $347  $716 
         

Finance lease liability - current

 $(348

)

 $(462

)

Finance lease liability - non-current

  -   (232

)

Total finance lease liabilities

 $(348

)

 $(694

)

         

Weighted average remaining lease term in years

        

Operating leases

  8.23   6.78 

Finance leases

  0.75   1.50 
         

Weighted average discount rate

        

Operating leases

  3.15

%

  3.10

%

Finance leases

  0.87

%

  0.87

%

 

 

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 

 

 

28

 
 

ITEM 2.

MANAGEMENTS 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.

 

 

29

 

ITEM 2.

MANAGEMENTS 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.

 

 

30

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

31

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

32

 

 

ITEM 2.

MANAGEMENTS 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):

 

   

September 30, 2023

   

October 1, 2022

 
   

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.

 

 

33

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

34

 

 

ITEM 2.

MANAGEMENTS 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.

 

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 typically 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.

 

 

35

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

36

 

 

ITEM 2.

MANAGEMENTS 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):

 

   

September 30, 2023

   

October 1, 2022

 
   

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.

 

 

37

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

38

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

39

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

40

 

 

ITEM 2.

MANAGEMENTS 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

 
   

September 30,

2023

   

October 1,

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.

 

 

41

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

42

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

43

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

44

 

 

ITEM 2.

MANAGEMENTS 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.

 

 

45

 

 

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.

 

 

46

 

 

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.

 

 

47

 

 

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

 

July 2, 2023 -

July 31, 2023

  97,016   $ 19.09     97,016   $ 16,471,000  

 

August 1, 2023 -

August 31, 2023

  59,177   $ 18.56     59,177   $ 15,372,000  

 

September 1, 2023 -

September 30, 2023

  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.

 

48

 
 

ITEM 6.

EXHIBITS

 

31.1*

Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

   

31.2*

Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

   

32.1**

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.)

   

32.2**

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)

 

__________

 

*          Filed herewith

**         Furnished herewith

 

49

 

 

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

     

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

     

Kevin D. Miller

Chief Financial Officer

(Principal Financial Officer and

Duly Authorized Officer of the Registrant)

 

 

50