UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2007
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 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) 486-1777
(Registrant's Telephone Number, Including Area Code)
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 X NO
----- -----
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
---- ----- ----
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- ----
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, 12,043,143 shares outstanding
as of November 7, 2007.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
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Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 29, 2007 (Unaudited)
and December 30, 2006 3
Unaudited Consolidated Statements of Income for the Thirteen Weeks and
Thirty-Nine Weeks Ended September 29, 2007
and September 30, 2006 5
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Thirteen Weeks and Thirty-Nine Weeks Ended September 29, 2007 6
and September 30, 2006
Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended September 29, 2007 and September 30, 2006 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 37
Item 4T - Controls and Procedures 37
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings 38
Item 1A. - Risk Factors 38
Item 6 - Exhibits 39
Signatures 40
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 29, 2007 and December 30, 2006
(In Thousands, Except Share Data)
ASSETS
September 29, December 30,
2007 2006
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets
Cash and cash equivalents $7,916 $2,449
Accounts receivable, net of allowance for doubtful accounts
of $1,827 (September 29, 2007) and $1,672
(December 30, 2006), respectively 53,097 48,141
Prepaid expenses and other current assets 2,422 1,716
Deferred tax assets 1,032 3,185
----------------------------------------------------------------------------------------------------------------
Total current assets 64,467 55,491
----------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Equipment and leasehold improvements 9,069 10,087
Less: accumulated depreciation and amortization 5,024 5,695
----------------------------------------------------------------------------------------------------------------
4,045 4,392
----------------------------------------------------------------------------------------------------------------
Other assets
Deposits 153 159
Goodwill 39,588 39,329
Intangible assets, net of accumulated amortization
of $646 (September 29, 2007) and $406
(December 30, 2006), respectively 429 669
----------------------------------------------------------------------------------------------------------------
40,170 40,157
----------------------------------------------------------------------------------------------------------------
Total assets $108,682 $100,040
================================================================================================================
3
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
September 29, 2007 and December 30, 2006
(In Thousands, Except Share Data)
-------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 29, December 30,
-------------- 2006
2007
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilities
Accounts payable and accrued expenses $8,915 $7,317
Accrued compensation 8,068 8,122
Payroll and withheld taxes 1,298 1,146
Income taxes payable 581 62
----------------------------------------------------------------------------------------------------------------
Total current liabilities 18,862 16,647
----------------------------------------------------------------------------------------------------------------
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;
12,035,643 and 11,822,126 shares issued and outstanding
at September 29, 2007 and December 30, 2006, respectively 602 591
Additional paid-in capital 102,580 101,559
Accumulated other comprehensive income 1,249 1,002
Accumulated deficit (14,611) (19,759)
----------------------------------------------------------------------------------------------------------------
89,820 83,393
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $108,682 $100,040
================================================================================================================
4
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
-------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------------------------- ------------------------------------- -- ---------------------------------
September 29, September 30, September 29, September 30,
2007 2006 2007 2006
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Revenues $54,079 $51,650 $165,418 $147,729
Cost of services (1)(3) 40,646 38,698 125,650 110,566
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Gross profit 13,433 12,952 39,768 37,163
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Operating costs and expenses
Selling, general and administrative (2)(4) 10,288 10,250 31,010 30,522
Depreciation 289 307 849 884
Amortization 80 87 240 230
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
10,657 10,644 32,099 31,636
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Operating income 2,776 2,308 7,669 5,527
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Other income (expenses)
Interest income (expense) 32 (75) 32 (204)
Gain (loss) on foreign currency transactions 41 (5) 53 (16)
Legal settlement 800
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
73 (80) 885 (220)
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Income before income taxes 2,849 2,228 8,554 5,307
Income tax expense 1,125 879 3,406 1,287
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Net income $1,724 $1,349 $5,148 $4,020
======================================================= ================= == ================ == ============== === ==============
Basic earnings per share $.14 $.11 $.43 $.34
Diluted earnings per share $.14 $.11 $.41 $.33
(1) Includes share-based compensation expense of $1 and share-based compensation credit of $1 for the thirteen weeks ended
September 29, 2007 and September 30, 2006, respectively.
(2) Includes share-based compensation expense of $56 and $100 for the thirteen weeks ended September 29, 2007 and
September 30, 2006, respectively.
(3) Includes share-based compensation expense of $5 and $30 for the thirty-nine weeks ended September 29, 2007 and September 30,
2006, respectively.
(4) Includes share-based compensation expense of $146 and $663 for the thirty-nine weeks ended September 29, 2007 and September
30, 2006, respectively.
5
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands)
-------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------------------------- ------------------------------------- -- ---------------------------------
September 29, September 30, September 29, September 30,
2007 2006 2007 2006
------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Common stock
Beginning of period $599 $589 $591 $586
Issuance of stock under employee stock
purchase plan 1
Exercise of stock options 3 11 2
----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
End of period $602 $589 $602 $589
===== ================================================= ================= == ================ == ============== === ==============
Additional paid-in-capital
Beginning of period $102,265 $101,071 $101,559 $100,235
Issuance of stock under employee stock
purchase plan 66 65
Exercise of stock options 258 1 804 178
Stock-based compensation expense 57 99 151 693
----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
End of period $102,580 $101,171 $102,580 $101,171
===== ================================================= ================= == ================ == ============== === ==============
Accumulated other comprehensive income
Beginning of period $1,171 $1,054 $1,002 $982
Translation adjustment 78 (17) 247 55
----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
End of period $1,249 $1,037 $1,249 $1,037
===== ================================================= ================= == ================ == ============== === ==============
Accumulated deficit
Beginning of period ($16,335) ($23,444) ($19,759) ($26,115)
Net income 1,724 1,349 5,148 4,020
----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
End of period ($14,611) ($22,095) ($14,611) ($22,095)
===== ================================================= ================= == ================ == ============== === ==============
Comprehensive income
Net earnings $1,724 $1,349 $5,148 $4,020
Translation adjustment 78 (17) 247 55
----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Total $1,802 $1,332 $5,395 $4,075
===== ================================================= ================= == ================ == ============== === ==============
6
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
-------------------------------------------------------------------------------
Thirty-Nine Weeks Ended
-----------------------------------------------------------------------------------------------------------------
September 29, September 30,
---------------- 2006
2007
-----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,148 $4,020
-----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisition:
Depreciation and amortization 1,089 1,114
Share-based compensation expense 151 693
Provision for losses on accounts receivable 155 (109)
Deferred tax assets 2,153 (145)
Changes in assets and liabilities:
Accounts receivable (4,195) (3,797)
Restricted cash 8,572
Prepaid expenses and other current assets (690) 66
Accounts payable and accrued expenses 648 (5,270)
Accrued compensation (111) 1,337
Payroll and withheld taxes 131 250
Income taxes payable 547 (2,149)
-----------------------------------------------------------------------------------------------------------------
Total adjustments (122) 562
-----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $5,026 $4,582
-----------------------------------------------------------------------------------------------------------------
7
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(In Thousands)
-------------------------------------------------------------------------------
Thirty-Nine Weeks Ended
-----------------------------------------------------------------------------------------------------------------
September 29, September 30,
2007 2006
-----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property and equipment acquired ($502) ($1,340)
Decrease (increase) in deposits 5 (16)
Cash paid for acquisition, net of working capital acquired (259) (622)
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (756) (1,978)
-----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 66 66
Exercise of stock options 815 180
-----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 881 246
-----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 316 56
-----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 5,467 2,905
Cash and cash equivalents at beginning of period 2,449 3,761
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $7,916 $6,666
=================================================================================================================
Supplemental cash flow information:
Cash paid for:
Interest expense $147 $1,176
Income taxes $734 $3,166
8
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
1. Basis of Presentation
The accompanying consolidated interim financial statements of RCM Technologies,
Inc and Subsidiaries ("RCM" or the "Company") are unaudited. The balance sheet
as of December 30, 2006 is derived from the audited balance sheet of the Company
at that date. 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 30, 2006
included in the Company's Annual Report Form 10-K for such period, filed on
March 22, 2007. 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. Certain prior period information has been reclassified to conform
to the current period presentation.
The 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results could differ from those estimates. Results for the
thirteen weeks and thirty-nine weeks ended September 29, 2007 are not
necessarily indicative of results that may be expected for the full year.
2. Fiscal Year
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The fiscal
year ended December 30, 2006 was a 52-week reporting year. The third quarter of
2006, the 2006 fiscal year and the third quarter of 2007 ended on the following
dates, respectively:
Period Ended Weeks in Quarter Weeks in Year to Date
------------------------------------------ -------------------------
September 30, 2006 Thirteen Thirty-Nine
December 30, 2006 Thirteen Fifty-Two
September 29, 2007 Thirteen Thirty-Nine
3. Use of Estimates and Uncertainties
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
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 U.S. economy, competition, demand for the
Company's services, adverse litigation and claims, as well as the hiring,
training and retention of key employees.
9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
4. Acquisitions
On April 17, 2006, the Company purchased the operating assets of Techpubs, LLC
("Techpubs"), a Rhode Island limited liability company. Techpubs is a specialty
provider of engineering services. The acquisition has been accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141
"Business Combinations." Accordingly, the results of operations of the acquired
company have been included in the consolidated results of operations of the
Company from the date of acquisition and are included in the Engineering
segment.
The purchase consideration at closing consisted of $.6 million in cash and $.3
million of deferred consideration contingent upon achieving certain base levels
of operating income for each of the three twelve month periods following the
purchase.
The allocation of the purchase price, including the earnout of $.3 million paid
for the twelve months ended April 30, 2007 is as follows:
Period of
Amount Amortization
----------------- -- -----------------
Non-compete agreements $31 5 years
Customer relationships 140 5 years
Goodwill 710
---------------------------------- ----------------- -- -----------------
$881
================================== ================= == =================
In connection with certain acquisitions, the Company is obligated to pay
contingent consideration to the selling shareholders upon the acquired business
achieving certain earnings targets over periods ranging from two to three years
following the acquisition. In general, the contingent consideration amounts fall
into two categories: (a) Deferred Consideration - fixed amounts are due if the
acquisition achieves a base level of earnings which has been determined at the
time of acquisition and (b) Earnouts - amounts payable are not fixed and are
based on the growth in excess of the base level earnings. The Company's
outstanding Deferred Consideration obligations, which relate to various
acquisitions, are anticipated to result in approximately the following payments:
Year Ending Amount
-------------------------------------- -- ----------------
December 27, 2008 $800
January 2, 2010 100
-------------------------------------- -- ----------------
$900
====================================== == ================
The Deferred Consideration and Earnouts, when paid, will be recorded as
additional purchase consideration and added to goodwill on the consolidated
balance sheet. Earnouts cannot be estimated with any certainty.
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
4. Acquisitions (Continued)
The following results of operations have been prepared assuming the Techpubs
acquisition had occurred as of the beginning of the periods presented. These
results are not necessarily indicative of results of future operations nor of
results that would have occurred had the acquisition of Techpubs been occurred
as of the beginning of the periods presented.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------ -----------------------------------
Amounts September 30,
September 29, September 30, September 29, 2006
2007 2006 2007 (Proforma)
------------------------------- --------------- --- ---------------- -- --------------- --- ---------------
Revenues $54,079 $51,650 $165,418 $148,029
Operating income 2,776 2,308 7,669 5,584
Net income $1,724 $1,349 $5,148 $4,039
Earnings per share (Diluted) $.14 $0.11 $.41 $0.34
5. Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of assets at
the end of their estimated useful lives. The annual rates are 20% for computer
hardware and software as well as furniture and office equipment. Leasehold
improvements are amortized over the shorter of the estimated life of the asset
or the lease term.
The Company writes off fully depreciated assets periodically. During the nine
months ended September 29, 2007, the write offs were $1.4 million.
6. New Accounting Standards
In February 2007, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS
159 expands the use of fair value accounting but does not affect existing
standards, which require assets and liabilities to be carried at fair value.
Under SFAS 159, a company may elect to use fair value to measure accounts and
loans receivable, available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees, issued debt and other eligible
financial instruments. SFAS 159 is effective for fiscal years beginning after
November 15, 2007.
Effective January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), an interpretation of FASB Statement No. 109 ("SFAS
109"). FIN 48 prescribes a model for the recognition and measurement of a tax
position taken or expected to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties, disclosure and
transition. Implementation of FIN 48 did not result in a cumulative effect
adjustment to retained earnings. With few exceptions, the Company is no longer
subject to audits by tax authorities for tax years prior to 2001. At September
29, 2007, the Company did not have any unrecognized tax benefits.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies the principle that fair value should be based
on assumptions market participants would use when pricing an asset or liability
and establishes a fair value hierarchy that prioritizes information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS 157 is
effective for the Company beginning after November 15, 2007.
The Company's is currently evaluating the impact, if any, that the adoption of
SFAS 157 and 159 will have on the Company's consolidated financial statements.
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
7. Line of Credit
The Company and its subsidiaries are party to a loan agreement with Citizens
Bank of Pennsylvania, administrative agent for a syndicate of banks, which
provides for a $25 million revolving credit facility and includes a sub-limit of
$5.0 million for letters of credit (the "Revolving Credit Facility"). 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) LIBOR (London Interbank Offered Rate), plus applicable
margin, or (ii) the agent bank's prime rate.
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 restrictions on the Company's ability to pay
dividends.
The Revolving Credit Facility expires in August 2011. The weighted average
interest rates, which include unused line fees, under the Revolving Credit
Facility for the thirty-nine weeks ended September 29, 2007 and September 30,
2006 were 26.7% and 8.8%, respectively. The weighted average interest rate for
the 2007 period was disproportionately high in relation to the interest expense
incurred because of the inclusion of unused line fees. During the thirty-nine
weeks ended September 29, 2007 and September 30, 2006, the Company's outstanding
borrowings ranged from $-0- to $1.5 million and $.2 million to $1.0 million,
respectively. At September 29, 2007 and December 30, 2006, there were no
outstanding borrowings under this facility. At September 29, 2007, there were
letters of credit outstanding for $.4 million. At September 29, 2007, the
Company had availability for additional borrowings under the Revolving Credit
Facility of $24.6 million.
8. Interest Expense, Net
Interest expense, net consisted of the following:
Thirty-Nine Weeks Ended Thirteen Weeks Ended
----------------------------------------------------------------------------------------------
September 29, September 30, September 29, September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------------------------
Interest expense ($53) ($464) ($15) ($115)
Interest income 85 260 47 40
----------------------------------------------------------------------------------------------
$32 ($204) $32 ($75)
==============================================================================================
9. Goodwill and Intangibles
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires the
Company to perform a goodwill impairment test on at least an annual basis.
Application of the goodwill impairment test requires significant judgments
including estimation of future cash flows, which is dependent on internal
forecasts, estimation of the long-term rate of growth for the businesses, the
useful life over which cash flows will occur and determination of the Company's
weighted average cost of capital. Changes in these estimates and assumptions
could materially affect the determination of fair value and/or conclusions on
goodwill impairment for each reporting unit. The Company conducts its annual
goodwill impairment test as of November 30. The Company compares the fair value
of each of its reporting units to their respective carrying values, including
related goodwill. There were no triggering events during the thirty-nine weeks
ended September 29, 2007 that have indicated a need to perform the impairment
test prior to the Company's annual test date.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-------------------------------------------------------------------------------
9. Goodwill and Intangibles (Continued)
The following table reflects the components of intangible assets, excluding
goodwill:
September 29, 2007 December 30, 2006
---------------------------------- --------------------------------- --- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Amount Amortization Amount Amortization
---------------------------------- ------------- -- ---------------- --- ------------- -- ----------------
Definite-lived intangible assets
Non-compete agreements $145 $57 $145 $35
Customer relationships 930 589 930 371
---------------------------------- ------------- -- ---------------- --- ------------- -- ----------------
Total $1,075 $646 $1,075 $406
================================== ============= == ================ === ============= == ================
10. Stockholders' Equity
Common Stock Reserved
Unissued Shares of common stock were reserved for the following purposes:
September 29, December 30,
2007 2006
------------------------------------------------------------------------------------
Exercise of options outstanding 1,502,500 1,768,000
Future grants of options 728,694 29,194
------------------------------------------------------------------------------------
Total 2,231,194 1,797,194
====================================================================================
11. Earnings Per Share
Both basic and diluted earnings per share for all periods are calculated based
on the reported earnings in the Company's consolidated statements of income.
The number of common shares used to calculate basic and diluted earnings per
share for the thirteen weeks and thirty-nine weeks ended September 29, 2007 and
September 30, 2006 was determined as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------------------- ------------------------------------- -- ---------------------------------
September 29, September 30, September 29, September 30,
2007 2006 2007 2006
----------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
Basic
Weighted average shares outstanding 12,019,951 11,788,581 11,946,085 11,764,056
========================================= ================= == ================ == ============== === ==============
Diluted
Shares used for basic calculation 12,019,951 11,788,581 11,946,085 11,764,056
Dilutive effect of options granted
under the Company's Stock Option
Plans 596,454 215,169 546,514 256,845
----------------------------------------- ----------------- -- ---------------- -- -------------- --- --------------
12,616,405 12,003,750 12,492,599 12,020,901
========================================= ================= == ================ == ============== === ==============
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts
, unless otherwise indicated)
------------------------------------------------------------------------------
12. Share - Based Compensation
Effective as of January 1, 2006, the Company adopted SFAS 123R, "Share Based
Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost is measured based on the fair value of the equity or liability instruments
issued.
SFAS 123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.
In addition to the accounting standard that sets forth the financial reporting
objectives and related accounting principles, SFAS 123R includes an appendix of
implementation guidance that provides expanded guidance on measuring the fair
value of share-based payment awards. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123R.
At September 29, 2007, the Company had five share-based employee
compensation plans. Share-based compensation expense of $.2 million, or $0.01
per share, and of $.7 million, or $0.06 per share, was recognized for the
thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively.
Share-based compensation expense of $.1 million, or $0.0 per share, and $.1
million, or $0.01 per share, were recognized for the thirteen weeks ended
September 29, 2007 and September 30, 2006, respectively. The Company anticipates
that share-based compensation expense will not exceed approximately $.2 million,
or $0.02 per share, for the year ending December 29, 2007.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model. There were options to purchase 40,000
shares and 35,000 shares of common stock granted during the thirty-nine weeks
and the thirteen weeks ended September 29, 2007, respectively. The share-based
compensation expense attributable to the 40,000 options was $8 for the
thirty-nine weeks and $6 for the thirteen weeks ended September 29, 2007,
respectively.
Expected volatility is based on the historical volatility of the price of
the Company's common stock since September 30, 2002. The Company uses historical
information to estimate expected life and forfeitures within the valuation
model. The expected term of awards represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the expected life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Compensation cost is recognized using a
straight-line method over the vesting or service period and is net of estimated
forfeitures. The share price volatility, risk free interest rate and annualized
forfeiture rate were 56.7%, 4.2% and 29.5% for the thirty-nine weeks ended
September 29, 2007, respectively. The share price volatility, risk free interest
rate and annualized forfeiture rate were 58.0%, 4.6% and 5.7% for the
thirty-nine weeks ended September 30, 2006, respectively.
As of September 29, 2007, the Company had approximately $.3 million of
total unrecognized compensation cost related to non-vested awards granted under
the Company's various share-based plans, which the Company expects to recognize
over a weighted-average period of three years. These amounts do not include the
cost of any additional options that may be granted in future periods or reflect
any potential changes in the Company's forfeiture rate.
The Company received cash from options exercised during the first
thirty-nine weeks of fiscal years 2007 and 2006 of $.8 million and $.2 million,
respectively. The impact of these cash receipts is included in financing
activities in the accompanying consolidated statements of cash flows.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
12. Stock - Based Compensation (Continued)
Incentive Stock Option Plans
1992 Incentive Stock Option Plan (the 1992 Plan)
The 1992 Plan, approved by the Company's stockholders in April 1992 and
amended in April 1998, provided for the issuance of up to 500,000 shares of
common stock per individual to officers, directors, and key employees of the
Company and its subsidiaries through February 13, 2002, at which time the 1992
Plan expired. The options issued were intended to be incentive stock options
pursuant to Section 422A of the Internal Revenue Code. The option terms were not
permitted to exceed ten years and the exercise price was not permitted to be
less than 100% of the fair market value of the shares at the time of grant. The
Compensation Committee of the Board of Directors determined the vesting period
at the time of grant for each of these options. As of September 29, 2007,
options to purchase 68,455 shares of common stock were outstanding.
1994 Non-employee Directors Stock Option Plan (the 1994 Plan)
The 1994 Plan, approved by the Company's stockholders in May 1994 and
amended in April 1998, provided for issuance of up to 110,000 shares of common
stock to non-employee directors of the Company through February 19, 2004, at
which time the 1994 Plan expired. Options granted under the 1994 Plan were
granted at fair market value at the date of grant, and the exercise of options
is contingent upon service as a director for a period of one year. Options
granted under the 1994 Plan terminate when an optionee ceases to be a Director
of the Company. As of September 29, 2007, options to purchase 50,000 shares of
common stock were outstanding.
1996 Executive Stock Option Plan (the 1996 Plan)
The 1996 Plan, approved by the Company's stockholders in August 1996 and
amended in April 1999, provides for issuance of up to 1,250,000 shares of common
stock to officers and key employees of the Company and its subsidiaries through
January 1, 2006, at which time the 1996 Plan expired. Options are generally
granted at fair market value at the date of grant. The Compensation Committee of
the Board of Directors determines the vesting period at the time of grant. As of
September 29, 2007, options to purchase 909,545 shares of common stock were
outstanding.
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001,
provides for issuance of up to 1,500,000 shares of the Company's common stock to
officers and key employees of the Company and its subsidiaries or to consultants
and advisors utilized by the Company. The Compensation Committee of the Board of
Directors may award incentive stock options or non-qualified stock options, as
well as stock appreciation rights, and determines the vesting period at the time
of grant. As of September 29, 2007, options to purchase 28,694 shares of common
stock were available for future grants, and options to purchase 474,500 shares
of common stock were outstanding.
2007 Omnibus Equity Compensation Plan (the 2007 Plan)
The 2007 Plan, approved by the Company's stockholders in June 2007,
provides for the issuance of up to 700,000 shares of the Company's common stock
to officers, non-employee directors, employees of the Company and its
subsidiaries or to consultants and advisors utilized by the Company. No more
than 350,000 shares of common stock in the aggregate may be issued pursuant to
grants of stock awards, stock units, performance shares and other stock-based
awards. No more than 300,000 shares of common stock with respect to awards may
be granted to any individual during any fiscal year. The Compensation Committee
of the Board of Directors determines the vesting period at the time of grant. As
of September 29, 2007, options to purchase 700,000 shares of common stock were
available for future grants, and there were no options to purchase shares of
common stock outstanding.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
12. Stock - Based Compensation (Continued)
Incentive Stock Option Plans (Continued)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with stockholder approval, effective January 1, 2002. 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 common stock through payroll deductions for up to
10% of qualified compensation. During the thirty-nine weeks ended September 29,
2007, there were 13,017 shares issued under the Purchase Plan for net proceeds
of $66. As of September 29, 2007, there were 212,171 shares available for
issuance under the Purchase Plan. The share-based compensation expense
attributable to the 13,017 shares issued was $.02 million and $.01 million for
the thirty-nine weeks ended September 29, 2007 and September 30, 2006,
respectively.
13. Income Taxes
As of December 31, 2002, the Company had accrued approximately $2.5 million
for income tax liabilities, which related to the potential repayment of tax
benefits associated with previously claimed tax deductions claimed from goodwill
impairments. On June 8, 2006, the goodwill impairment deductions of
approximately $13.5 million were disallowed by the Internal Revenue Service as a
deduction in the December 31, 2002 income tax return. Based upon the methodology
applied by the Internal Revenue Service, these deductions were best
substantiated by facts and circumstances arising during 2005 and therefore the
deductions were included in the December 31, 2005 federal income tax return.
This reclassification of the deduction from the year ended December 31, 2002 to
the year ended December 31, 2005 resulted in the reversal of the income tax
reserve of approximately $1.6 million, of which approximately $1.0 million was
recorded in the thirty-nine weeks ended September 30, 2006.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
14. Segment Information
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for companies to report information about operating segments, geographic areas,
and major customers. The accounting policies of each segment are the same as
those described in the summary of significant accounting policies (see Note 1 to
the consolidated financial statements).
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. 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 segments consistent with the Company's
management system:
Thirty-Nine Weeks Ended Information
September 29, 2007 Technology Engineering Commercial Corporate Total
------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------
Revenue $76,813 $56,346 $32,259 $165,418
Operating expenses (1) (2) 71,940 53,509 31,211 156,660
------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------
EBITDA ((4)) 4,873 2,837 1,048 8,758
Depreciation 386 350 113 849
Amortization of intangibles 215 25 240
------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------
Operating income 4,272 2,462 935 7,669
Interest income, net of
interest expense (18) (10) (4) (32)
Gain on foreign currency
transactions (53) (53)
Legal settlement (800) (800)
Income taxes 1,708 1,005 373 320 3,406
------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------
Net income $2,582 $1,520 $566 $480 $5,148
============================== = =============== = =============== == ============== ============= = ============
Total assets $53,161 $29,978 $11,647 $13,896 $108,682
Capital expenditures $272 $58 $10 $162 $502
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
14. Segment Information (Continued)
Thirty-Nine Weeks Ended Information
September 30, 2006 Technology Engineering Commercial Corporate Total
------------------------------------------------------------------------------------------------------------------
Revenue $74,759 $40,589 $32,381 $147,729
Operating expenses (1) 70,157 39,942 30,989 141,088
-------------------------------------------------------------------------------------------------------------------
EBITDA (4) 4,602 647 1,392 6,641
Depreciation 394 363 127 884
Amortization of intangibles 215 15 230
-------------------------------------------------------------------------------------------------------------------
Operating income 3,993 269 1,265 5,527
Interest expense, net of
interest income 103 56 45 204
Loss on foreign currency
transactions 16 16
Income taxes 931 49 307 1,287
-------------------------------------------------------------------------------------------------------------------
Net income $2,959 $148 $913 $4,020
===================================================================================================================
Total assets $50,152 $26,316 $13,069 $16,417 $105,954
Capital expenditures $146 $890 $305 $1,341
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
14. Segment Information (Continued)
Thirteen Weeks Ended Information
September 29, 2007 Technology Engineering Commercial Corporate Total
---------------------------------------------------------------------------------------------------------------------
Revenue $24,507 $19,115 $10,457 $54,079
Operating expenses (1) (3) 22,960 17,805 10,169 50,934
---------------------------------------------------------------------------------------------------------------------
EBITDA (4) 1,547 1,310 288 3,145
Depreciation 133 118 38 289
Amortization of intangibles 72 8 80
---------------------------------------------------------------------------------------------------------------------
Operating income 1,342 1,184 250 2,776
Interest income, net of
interest expense (17 ) (11 ) (4 ) (32 )
Gain on foreign currency
transactions (41 ) (41 )
Income taxes 536 490 99 1,125
---------------------------------------------------------------------------------------------------------------------
Net income $823 $746 $155 $1,724
=====================================================================================================================
Total assets $53,161 $29,978 $11,647 $13,896 $108,682
Capital expenditures $32 $6 $3 $87 $128
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
14. Segment Information (Continued)
Thirteen Weeks Ended Information
September 30, 2006 Technology Engineering Commercial Corporate Total
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Revenue $25,872 $15,504 $10,274 $51,650
Operating expenses (1) 24,045 14,985 9,919 48,949
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
EBITDA (4) 1,827 519 355 2,701
Depreciation 136 130 40 306
Amortization intangibles 72 15 87
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Operating income 1,619 374 315 2,308
Interest expense, net of
interest income 37 22 16 75
Gain on foreign currency
transactions 5 5
Income taxes 624 70 185 879
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Net income $958 $277 $114 $1,349
============================== = =============== = ============== == ============== = ============ == =============
Total assets $50,152 $26,316 $13,069 $16,417 $105,954
Capital expenditures $149 $149
(1) Operating expenses exclude depreciation and amortization.
(2) Operating expenses include $151 and $693 of share-based compensation
expense for the thirty-nine weeks ended September 29, 2007 and September 30,
2006, respectively.
(3) Operating expenses include $57 and $99 of share-based compensation
expense for the thirteen weeks ended September 29, 2007 and September 30, 2006,
respectively.
(4) EBITDA means earnings before interest, taxes, depreciation and
amortization. The Company believes that EBITDA, as presented, represents a
useful measure of assessing the performance of the Company's operating
activities, as it reflects the Company's earnings trends without the impact of
certain non-cash and unusual charges or income. EBITDA is also used by the
Company's creditors in assessing debt covenant compliance. The Company
understands that, although security analysts frequently use EBITDA in the
evaluation of companies, it is not necessarily comparable to EBITDA of other
companies due to potential inconsistencies in the method of calculation. EBITDA
is not intended as an alternative to cash flow provided by operating activities
as a measure of liquidity, nor as an alternative to net income as an indicator
of the Company's operating performance, nor as an alternative to any other
measure of performance in conformity with generally accepted accounting
principles.
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
14. Segment Information (Continued)
Revenues reported for each operating segment are from external customers.
The Company is domiciled in the United States and its segments operate in
the United States and Canada. Revenues and fixed assets by geographic area as of
and for the thirty-nine weeks ended September 29, 2007 and September 30, 2006
are as follows:
Thirty-Nine Weeks Ended
-----------------------------------------------------------------------------------
September 29, September 30,
2007 2006
-----------------------------------------------------------------------------------
Revenues
U. S. $153,777 $139,524
Canada 11,641 8,205
-----------------------------------------------------------------------------------
$165,418 $147,729
===================================================================================
Fixed Assets
U. S. $4,045 $4,397
Canada 79
-----------------------------------------------------------------------------------
$4,045 $4,476
===================================================================================
Revenues by geographic area for the thirteen weeks ended September 29, 2007
and September 30, 2006 are as follows:
Thirteen Weeks Ended
-----------------------------------------------------------------------------------
September 29, September 30,
2007 2006
-----------------------------------------------------------------------------------
Revenues
U. S. $49,282 $48,564
Canada 4,797 3,086
-----------------------------------------------------------------------------------
$54,079 $51,650
===================================================================================
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
15. Contingencies
In late 1998, two shareholders who were formerly officers and directors of
the Company filed suit against the Company. The former officers and
directors alleged that the Company wrongfully limited the number of shares
of the Company's common stock that could have been sold by the plaintiffs
under a registration rights agreement entered into in connection with an
acquisition transaction pursuant to which the plaintiffs became
shareholders of the Company.
A trial in 2002 resulted in a judgment in favor of the plaintiffs for $7.6
million that was affirmed on appeal. In June 2006, the Company paid $8.6
million, which included post-judgment interest and other items totaling
$1.0 million to the plaintiffs to satisfy the judgment.
In November 2002, the Company filed suit on professional liability claims
against the attorneys and law firms who had served as its counsel in the
acquisition transaction and in connection with its subsequent dealings with
the plaintiffs concerning their various relationships with the Company
resulting from that transaction. In its lawsuit against its former counsel,
the Company is seeking complete indemnification with respect to (1) its
costs and counsel fees incurred in defending itself against the claims of
the plaintiffs; (2) the amount it paid to satisfy the judgment; and (3) its
costs and counsel fees incurred in the prosecution of the legal malpractice
action itself. In February 2007, the Company reached a settlement with one
of the law firm defendants resulting in the recovery of $.8 million.
Discovery proceedings are continuing with the other defendants and a trial
will likely be scheduled in the first half of 2008.
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 or may not be covered by insurance.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------------------------------------------------
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings
made by RCM Technologies, Inc. ("RCM" or the "Company") are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, without limitation, statements
regarding the adoption by businesses of new technology solutions; the use
by businesses of outsourced solutions, such as those offered by the Company
in connection with such adoption; and the outcome of litigation (at both
the trial and appellate levels) 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 information technology and
engineering services and solutions and the placement of temporary staffing
personnel; (ii) the Company's ability to continue to attract, train and
retain personnel qualified to meet the requirements of its clients; (iii)
the Company's ability to identify appropriate acquisition candidates,
complete such acquisitions and successfully integrate acquired businesses;
(iv) uncertainties regarding pro forma financial information and the
underlying assumptions relating to acquisitions and acquired businesses;
(v) uncertainties regarding amounts of deferred consideration and earnout
payments to become payable to former shareholders of acquired businesses;
(vi) adverse effects on the market price of the Company's common stock due
to the potential resale into the market of significant amounts of common
stock; (vii) 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; (viii) the
Company's ability to obtain financing on satisfactory terms; (ix) the
reliance of the Company upon the continued service of its executive
officers; (x) the Company's ability to remain competitive in the markets
that it serves; (xi) the Company's ability to maintain its unemployment
insurance premiums and workers compensation premiums; (xii) the risk of
claims being made against the Company associated with providing temporary
staffing services; (xiii) the Company's ability to manage significant
amounts of information and periodically expand and upgrade its information
processing capabilities; (xiv) the Company's ability to remain in
compliance with federal and state wage and hour laws and regulations; (xv)
uncertainties in predictions as to the future need for the Company's
services; (xvi) uncertainties relating to the allocation of costs and
expenses to each of the Company's operating segments; (xvii) the costs of
conducting and the outcome of litigation involving the Company, and (xviii)
other economic, competitive 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. 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.
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-------------------------------------------------------------------------------
Overview
RCM participates in a market that is cyclical in nature and extremely
sensitive to economic changes. As a result, the impact of economic changes
on revenues and operations can be substantial, resulting in significant
volatility in the Company's financial performance.
RCM's operational performance gained momentum in 2006 with a moderate
increase in revenues and earnings. This was attributed to an improvement in
the general economy, strength in the Company's sector and increased capital
spending by clients in selected markets. All three major business segments
of the Company benefited from stronger economic conditions. So far in 2007,
RCM's financial performance continues to show modest improvement as
compared to the same period a year ago, despite a slowdown in the overall
economy and a tightening of the labor market. In addition, RCM's management
continues to monitor its operating cost structure with a strong focus on
working capital management and cash flows.
Over the years, RCM 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 an 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 IT 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 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 revenues 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. Revenues are
recognized when services are provided.
24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Overview (Continued)
Costs of services consist primarily of salaries and compensation-related
expenses for billable consultants, 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 reporting
responsibilities and acquisition program. The Company records these
expenses when incurred. Depreciation relates primarily to the fixed assets
of the Company. Amortization relates to the allocation of the purchase
price of an acquisition, which has been assigned to covenants not to
compete, and customer lists. Acquisitions have been accounted for under
SFAS No. 141, "Business Combinations," and have created goodwill.
Critical Accounting Policies
The Company's interim financial statements were prepared in accordance with
generally accepted accounting principles, which require management to make
subjective decisions, assessments and estimates about the effect of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the judgment increases, such judgments become even more
subjective. While management believes its assumptions are reasonable and
appropriate, actual results may be materially different than estimated. The
critical accounting estimates and assumptions identified in the Company's
2006 Annual Report on Form 10-K filed on March 22, 2007 with the Securities
and Exchange Commission have not materially changed.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform consulting and staffing services. The Company's
Engineering Services and Information Technology Services segments also
perform project services. All of the Company's segments derive revenue from
permanent placement fees.
Project Services - The Company recognizes revenues in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition" ("SAB 104") which clarifies application of U.S.
generally accepted accounting principles to revenue transactions. Project
services are generally provided on a cost-plus-fixed-fee or
time-and-material basis. Typically, a customer will outsource a discrete
project or activity and the Company assumes responsibility for the
performance of such project or activity. The Company recognizes revenues
and associated costs on a gross basis as services are provided to the
customer and costs are incurred using its employees. The Company, from time
to time, enters into contracts requiring the completion of specific
deliverables. The Company recognizes revenue on these deliverables at the
time the client accepts and approves the deliverables. In instances where
project services are provided on a fixed-price basis and the contract will
extend beyond a 12-month period, revenue is recorded in accordance with the
terms of each contract. In some instances, revenue is billed and recorded
at the time certain milestones are reached, as defined in the contract. In
other instances, revenue is billed and recorded based upon contractual
rates per hour. In addition, some contracts contain "Performance Fees"
(bonuses) for completing a contract under budget. Performance Fees, if any,
are recorded when the contract is completed and the revenue is reasonably
certain of collection. Some contracts also limit revenues and billings to
maximum amounts. Provision for contract losses, if any, is made in the
period such losses are determined. For contracts where there are multiple
deliverables and the work has not been 100% complete on a specific
deliverable the costs have been deferred. The associated costs are expensed
when the related revenue is recognized.
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Revenue Recognition (Continued)
Consulting and Staffing Services - Revenues derived from consulting and
staffing services are recorded on a gross basis as services are performed
and associated costs have been incurred using employees of the Company. In
these circumstances, the Company assumes the risk of acceptability of its
employees to its customers. In certain cases, the Company may utilize other
companies and their employees to fulfill customer requirements. In these
cases, the Company receives an administrative fee for arranging for,
billing for, and collecting the billings related to these companies. The
customer is typically responsible for assessing the work of these companies
who have responsibility for acceptability of their personnel to the
customer. Under these circumstances, the Company's reported revenues are
net of associated costs (effectively the administrative fee).
Permanent Placement Services - The Company earns permanent placement fees
from providing permanent placement services. Fees for placements are
recognized at the time the candidate commences employment. 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. Revenues are recorded
on a gross basis as a component of revenue.
Accounts Receivable
The Company's accounts receivable are primarily due from trade customers.
Credit is extended based on evaluation of customers' financial condition
and, generally, collateral is not required. Accounts receivable payment
terms vary and are stated in the financial statements at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's
previous loss history, the customer's current ability to pay its obligation
to the Company, and the condition of the general economy and the industry
as a whole. The Company writes off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over the
fair market value of identifiable assets. In accordance with SFAS 142,
"Goodwill and Other Intangible Assets," the Company performs its annual
goodwill impairment testing, by reportable segment, in the fourth quarter,
or more frequently if events or changes in circumstances indicate that
goodwill may be impaired. Application of the goodwill impairment test
requires significant judgments including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate
of growth for the businesses, the useful life over which cash flows will
occur, and determination of the Company's weighted average cost of capital.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or conclusions on goodwill impairment for
each reporting unit. The Company conducted its annual goodwill impairment
test for 2006 as of November 30, 2006 and identified no impairments.
Goodwill was $39.6 million and $39.3 million at September 29, 2007 and
December 30, 2006, respectively.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Long-Lived Assets
The Company evaluates long-lived assets and intangible assets with definite
lives for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When it is
probable that undiscounted future cash flows will not be sufficient to
recover an asset's carrying amount, the asset is written down to its fair
value. Assets to be disposed of by sale, if any, are reported at the lower
of the carrying amount or fair value less cost to sell.
Accounting for Stock Options
The Company has used stock options to attract, retain, and reward employees
for long-term service.
Effective as of January 1, 2006, the Company adopted SFAS 123R. SFAS 123R
requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost is measured
based on the fair value of the equity or liability instruments issued. SFAS
123R covers a wide range of stock-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.
In addition to the accounting standard that sets forth the financial
reporting objectives and related accounting principles, SFAS 123R includes
an appendix of implementation guidance that provides expanded guidance on
measuring the fair value of share-based payment awards. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. The Company has applied the provisions
of SAB 107 in its adoption of SFAS 123R.
Since the Company adopted SFAS 123R, effective January 1, 2006 using the
modified-prospective-transition-method the Company is required to record
compensation expense for all awards granted after the date of adoption and
for the unvested portion of previously granted awards that remain
outstanding as of the beginning of the period of adoption. The Company
measures share-based compensation cost using the Black-Scholes option
pricing model.
Accounting for Income Taxes
In establishing the provision for income taxes and deferred income tax
assets and liabilities, and valuation allowances against deferred tax
assets, the Company makes judgments and interpretations based on enacted
tax laws, published tax guidance, and estimates of future earnings. As of
September 29, 2007, the Company had total net deferred tax assets of $1.0
million, primarily representing the tax effect of a tax net operating loss
carryfoward. Realization of deferred tax assets is dependent upon the
likelihood that future taxable income will be sufficient to realize these
benefits over time, and the effectiveness of tax planning strategies in the
relevant tax jurisdictions. In the event that actual results differ from
these estimates and assessments, additional valuation allowances may be
required.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), on January 1,
2007. Because of the implementation of FIN 48, the Company recognized no
material adjustments in the liability for unrecognized income tax benefits.
The Company conducts its operations in multiple tax jurisdictions in the
United States and Canada. With limited exceptions, the Company is no longer
subject to audits by tax authorities for tax years prior to 2001. At
September 29, 2007, the Company did not have any uncertain tax positions.
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Accounting for income taxes (continued)
The Company's future effective tax rates could be adversely affected by
changes in the valuation of its deferred tax assets or liabilities or
changes in tax laws or interpretations thereof. In addition, the Company is
subject to the examination of its income tax returns by the Internal
Revenue Service and other tax authorities. The Company regularly assesses
the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of its provision for income taxes.
Accrued Bonuses
The Company pays bonuses to certain executive management, field management
and corporate employees based on, or after giving consideration to, a
variety of financial performance measures. Executive management, field
management, and certain corporate employees' bonuses are accrued throughout
the year for payment during the first quarter of the following year, based
in part upon anticipated annual results compared to annual budgets.
Variances in actual results versus budgeted amounts can have a significant
impact on the calculations and therefore the estimates of the required
accruals. Accordingly, the actual earned bonuses may be materially
different from the estimates used to determine the quarterly accruals.
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 consulting and
engineering services as well as temporary and permanent employees. Should
the U.S. economy decline, the Company's operating performance could be
adversely impacted. 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, declines
in the economy 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 RCM's
future earnings. There can be no assurance that RCM 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 employment services market is highly competitive with limited barriers
to entry. RCM competes in global, national, regional, and local markets
with numerous consulting, engineering and employment companies. Price
competition in the industries the Company serves is significant, and
pricing pressures from competitors and customers are increasing. RCM
expects that the level of competition will remain high in the future, which
could limit RCM's ability to maintain or increase its market share or
profitability.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks
Ended September 30, 2006
A summary of operating results for the fiscal periods ended September 29,
2007 and September 30, 2006 is as follows (in thousands, except for
earnings per share data):
September 29, 2007 September 30, 2006
--------------------------------------------------------------------------------------------------------------
% of % of
Amount Revenue Amount Revenue
--------------------------------------------------------------------------------------------------------------
Revenues $165,418 100.0 $147,729 100.0
Cost of services 125,650 76.0 110,566 74.8
--------------------------------------------------------------------------------------------------------------
Gross profit 39,768 24.0 37,163 25.2
--------------------------------------------------------------------------------------------------------------
Selling, general and administrative 31,010 18.7 30,522 20.7
Depreciation and amortization 1,089 .7 1,114 .8
--------------------------------------------------------------------------------------------------------------
32,099 19.4 31,636 21.5
--------------------------------------------------------------------------------------------------------------
Operating income 7,669 4.6 5,527 3.7
Other income (expense) 885 .5 (220) (0.1)
--------------------------------------------------------------------------------------------------------------
Income before income taxes 8,554 5.1 5,307 3.6
Income taxes 3,406 2.0 1,287 0.9
--------------------------------------------------------------------------------------------------------------
Net income $5,148 3.1 $4,020 2.7
==============================================================================================================
Earnings per share
Basic: $.43 $.34
Diluted: $.41 $.33
==============================================================================================================
The above summary is not a presentation of results of operations under
accounting principles generally accepted in the United States of America
and should not be considered in isolation or as an alternative to results
of operations as an indication of the Company's performance.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The
year to date reporting periods ended September 29, 2007 and September 30,
2006 consisted of thirty-nine weeks each.
Revenues. Revenues increased 12.0%, or $17.7 million, for the thirty-nine
weeks ended September 29, 2007 as compared to the same period in the prior
year (the "comparable prior year period"). Revenues increased $2.1 million
in the Information Technology ("IT") segment, increased $15.8 million in
the Engineering segment, and decreased $122,000 in the Commercial segment.
Management attributes the increase in the Engineering revenues to strong
business activity with certain existing customers. The increase in the IT
revenues was attributable to successful marketing and sales efforts.
Management expects revenues for the remainder of fiscal 2007 to remain
generally consistent on a prorated basis with the revenues for the
thirty-nine weeks ended September 29, 2007.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-------------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks
Ended September 30, 2006 - (Continued)
Cost of Services. Cost of services increased 13.6%, or $15.1 million, for
the thirty-nine weeks ended September 29, 2007 as compared to the
comparable prior year period. This increase was primarily due to the
increase in revenues. Cost of services as a percentage of revenues
increased to 76.0% for the thirty-nine weeks ended September 29, 2007 from
74.8% for the comparable prior year period. This increase was primarily
attributable to increased revenues in the Engineering segment, which had
lower gross margins. Management anticipates the ratio of cost of sales to
revenues for the remainder of fiscal 2007 to remain comparable to the
thirty-nine weeks ended September 29, 2007.
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses increased 1.6%, or $489,000, for the thirty-nine weeks
ended September 29, 2007 as compared to the comparable prior year period.
As a percentage of revenues, SGA expenses were 18.7% for the thirty-nine
weeks ended September 29, 2007 as compared to 20.7% for the comparable
prior year period. This percentage decrease was primarily attributable to
the spreading of certain fixed administrative costs over a larger revenue
base as well as lower stock-based compensation expense. Management
reasonably expects SGA expenses for the remainder of fiscal 2007 to remain
consistent with the SGA expenses for the thirty-nine weeks ended September
29, 2007.
Depreciation and Amortization. Depreciation and amortization were
essentially unchanged for the thirty-nine weeks ended September 29, 2007 as
compared to the comparable prior year period.
Other Income (Expense). Other income (expense) consists of interest income,
net of interest expense and gains and losses on foreign currency
transactions and, in 2007, the proceeds from a legal settlement. For the
thirty-nine weeks ended September 29, 2007, actual interest expense of
$53,000 was offset by $85,000 of interest income, which was earned from
short-term money market deposits. Interest income, net increased $237,000
for the thirty-nine weeks ended September 29, 2007 as compared to the
comparable prior year period. This increase was primarily due to decreased
borrowing requirements, which was offset by an increase in weighted average
interest rates on borrowed funds. Gains on foreign currency transactions
increased $68,000 in the thirty-nine weeks ended September 29, 2007 as
compared to the comparable prior year period. This increase was
attributable to the favorable exchange rates realized during the 2007
period. The proceeds from the legal settlement in 2007 were realized when
the Company reached a settlement with one of the law firm defendants
resulting in the recovery of $800,000. (See footnote 14 to the consolidated
financial statements).
Income Tax. Income tax expense increased 164.6%, or $2.1 million, for the
thirty-nine weeks ended September 29, 2007 as compared to the comparable
prior year period. This increase was principally attributable to an
increase in income before taxes. Additionally, for the thirty-nine weeks
ended September 30, 2006, there was a reversal of $1.0 million ($.08
diluted earnings per share) of previously accrued income taxes. (See
footnote 13 to the consolidated financial statements). The effective tax
rate was 39.8% for the thirty-nine weeks ended September 29, 2007 as
compared to 43.0% before the tax reversal in the comparable prior year
period. The decrease in effective tax rate was attributable to the
decreased amount of non-tax-deductible items in relation to increased
income before income tax purposes.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks
Ended September 30, 2006 - (Continued)
Segment Discussion (See Footnote 14)
Information Technology
IT revenues of $76.8 million in 2007 increased $2.1 million, or 2.7%,
compared to 2006. The increase in revenue was attributable to the
strengthening of demand for the Company's IT services. The IT segment
EBITDA was $4.9 million, or 55.6% of the overall EBITDA for 2007, as
compared to $4.6 million, or 69.3% of the overall EBITDA for 2006.
Engineering
Engineering revenues of $56.3 million in 2007 increased $15.8 million, or
38.8%, compared to 2006. The increase in revenue was attributable to strong
business activity with certain existing customers. Management expects the
Engineering revenue levels to remain consistent over the next twelve
months. The Engineering segment EBITDA was $2.8 million, or 32.4% of the
overall EBITDA for 2007, as compared to $647,000, or 9.7% of the overall
EBITDA for 2006.
Commercial
Commercial revenues of $32.3 million in 2007 decreased $122,000, or 0.4%
compared to 2006. Revenues in the Commercial segment were essentially
unchanged. The Commercial segment EBITDA was $1.0 million, or 12.0% of the
overall EBITDA for 2007, as compared to $1.4 million, or 21.0% of the
overall EBITDA for 2006.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended
September 30, 2006
A summary of operating results for the fiscal periods ended September 29,
2007 and September 30, 2006 is as follows (in thousands, except for
earnings per share data):
September 29, 2007 September 30, 2006
--------------------------------------------------------------------------------------------------------------
% of % of
Amount Revenue Amount Revenue
--------------------------------------------------------------------------------------------------------------
Revenues $54,079 100.0 $51,650 100.0
Cost of services 40,646 75.2 38,698 74.9
--------------------------------------------------------------------------------------------------------------
Gross profit 13,433 24.8 12,952 25.1
--------------------------------------------------------------------------------------------------------------
Selling, general and administrative 10,288 19.0 10,251 19.8
Depreciation and amortization 369 .7 393 .8
--------------------------------------------------------------------------------------------------------------
10,657 19.7 10,644 20.6
--------------------------------------------------------------------------------------------------------------
Operating income 2,776 5.1 2,308 4.5
Other income 73 .2 (80 ) (.2)
--------------------------------------------------------------------------------------------------------------
Income before income tax 2,849 5.3 2,228 4.3
Income tax expense 1,125 2.1 879 1.8
--------------------------------------------------------------------------------------------------------------
Net income $1,724 3.2 $1,349 2.5
==============================================================================================================
Earnings per share
Basic: $.14 $.11
Diluted: $.14 $.11
==============================================================================================================
The above summary is not a presentation of results of operations under
accounting principles generally accepted in the United States of America
and should not be considered in isolation or as an alternative to results
of operations as an indication of the Company's performance.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The
third quarter reporting periods ended September 29, 2007 and September 30,
2006 consisted of thirteen weeks each.
Revenues. Revenues increased 4.7%, or $2.4 million, for the thirteen weeks
ended September 29, 2007 as compared to the same period in the prior year
(the "comparable prior year period"). The revenue decreased $1.4 million in
the IT segment, increased $3.6 million in the Engineering segment and
increased $183,000 in the Commercial segment. Management attributes the
increase in the Engineering revenues to strong business activity with
certain existing customers. The increase in the IT revenues was
attributable to successful marketing and sales efforts. Management expects
revenues for the remainder of fiscal 2007 to remain generally consistent
with the thirteen weeks ended September 29, 2007.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended
September 30, 2006 - (Continued)
Cost of Services. Cost of services increased 5.0%, or $1.9 million, for the
thirteen weeks ended September 29, 2007 as compared to the comparable prior
year period. This increase was primarily due to the increase in revenues.
Cost of services as a percentage of revenues increased to 75.2% for the
thirteen weeks ended September 29, 2007 from 74.9% for the comparable prior
year period. This modest increase was attributable to increased revenues in
the engineering segment, which historically has a lower gross margin
percentage (See footnote 14 to the consolidated financial statements).
Management anticipates the ratio of cost of sales to revenues for the
remainder of fiscal 2007 to be consistent with the thirteen weeks ended
September 29, 2007.
Selling, General and Administrative. SGA expenses increased 0.4%, or
$37,000, for the thirteen weeks ended September 29, 2007 as compared to the
comparable prior year period. As a percentage of revenues, SGA expenses
were 19.0% for the thirteen weeks ended September 29, 2007 as compared to
19.8% for the comparable prior year period. This decrease was primarily
attributable to the spreading of certain fixed administrative costs over a
larger revenue base as well as lower stock-based compensation expense.
Management reasonably expects SGA expenses for the remainder of fiscal 2007
to remain consistent with the SGA expenses for the thirteen weeks ended
September 29, 2007.
Depreciation and Amortization. Depreciation and amortization were
essentially unchanged for the thirteen weeks ended September 29, 2007 as
compared to the comparable prior year period.
Other Income (Expense). Other income (expense) consists of interest income,
net of interest expense and gains and losses on foreign currency
transactions. For the thirteen weeks ended September 29, 2007, actual
interest expense of $15,000 was offset by $47,000 of interest income, which
was earned from short-term money market deposits. Interest income, net
increased $106,000 for the thirteen weeks ended September 29, 2007 as
compared to the comparable prior year period. This increase was primarily
due to decreased borrowing requirements, which was offset by an increase in
weighted average interest rates resulting from unused line fees. Gains on
foreign currency transactions increased $46,000 in the thirteen weeks ended
September 29, 2007 as compared to the comparable prior year period. This
increase was principally attributable to the favorable exchange rates
realized during the 2007 period.
Income Tax. Income tax expense increased $246,000 for the thirteen weeks
ended September 29, 2007 as compared to the comparable prior year period.
This increase was principally attributable to an increase in income before
taxes. The effective tax rate was 39.5% for the thirteen weeks ended
September 29, 2007 and September 30, 2006.
33
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended
September 30, 2006 - (Continued)
Segment Discussion (See Footnote 14)
Information Technology
IT revenues of $24.5 million in the third quarter of 2007 decreased $1.4
million, or 5.3%, compared to the third quarter of 2006. The increase in
revenue was attributable to the strengthening of demand for the Company's
IT services. The IT segment EBITDA was $1.5 million, or 49.2% of the
overall EBITDA for the third quarter of 2007, as compared to $1.8 million,
or 67.6% of the overall EBITDA for the third quarter of 2006.
Engineering
Engineering revenues of $19.1 million in the third quarter of 2007
increased $3.6 million, or 23.3%, compared to the third quarter of 2006.
The increase in revenue was attributable to the strengthening of demand for
the Company's engineering services. The Engineering segment EBITDA was $1.3
million, or 41.7% of the overall EBITDA for the third quarter of 2007, as
compared to $519,000, or 19.2% of the overall EBITDA for the third quarter
of 2006.
Commercial
Commercial revenues of $10.5 million in the third quarter of 2007 increased
$183,000, or 1.8%, compared to the third quarter of 2006. Revenues in the
Commercial segment were essentially unchanged. The Commercial segment
EBITDA was $288,000 or 9.2% of the overall EBITDA for the third quarter of
2007, as compared to $355,000, or 13.2% of the overall EBITDA for the third
quarter of 2006.
34
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's
Consolidated Statements of Cash Flows:
Thirty-Nine Weeks Ended
-----------------------------------------
September 29, September 30,
2007 2006
------------------ -- -------------------
(In thousands)
------------------ -- -------------------
Cash provided by (used in):
Operating Activities $5,026 $4,582
Investing Activities ($756) ($1,978)
Financing Activities $881 $246
Operating Activities
Operating activities provided $5.0 million of cash for the thirty-nine
weeks ended September 29, 2007 as compared to $4.6 million for the
comparable 2006 period. The increase in cash provided by operating
activities was primarily attributable to increased earnings of $1.1 million
and a decrease in deferred tax assets of $2.2 million, which was offset by
an increase in accounts receivable of $4.2 million. Based on current
operating activities and the drivers of those activities, management
reasonably expects that cash will be provided from operating activities for
the remainder of fiscal 2007. The Company continues to institute enhanced
controls and standardization over its receivables collection and
disbursement processes.
Investing Activities
Investing activities used $756,000 for the thirty-nine weeks ended
September 29, 2007 as compared to $2.0 million for the comparable 2006
period. The decrease in the use of cash for investing activities for 2007
as compared to the comparable 2006 period was primarily attributable to a
decrease in expenditures for property and equipment and cash used for
acquisitions.
Financing Activities
Financing activities principally consisted of receipt of proceeds from the
exercise of stock options of $804,000 in 2007 as compared to $180,000 for
the comparable 2006 period.
The Company and its subsidiaries are party to a loan agreement with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25 million revolving credit facility and
includes a sub-limit of $5.0 million for letters of credit (the "Revolving
Credit Facility"). 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) LIBOR (London
Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's
prime rate.
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 restrictions on the
Company's ability to pay dividends.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-----------------------------------------------------------------------------
Liquidity and Capital Resources - (Continued)
The Revolving Credit Facility expires in August 2011. The weighted average
interest rates, which include unused line fees, under the Revolving Credit
Facility for the thirty-nine weeks ended September 29, 2007 and September
30, 2006 were 27.7% and 8.8%, respectively. The weighted average interest
rate for the 2007 period was disproportionately high in relation to the
interest expense incurred because of the inclusion of unused line fees.
During the thirty-nine weeks ended September 29, 2007 and September 30,
2006, the Company's outstanding borrowings ranged from $-0- to $1.5 million
and $.2 million to $1.0 million, respectively. At September 29, 2007 and
December 30, 2006, there were no outstanding borrowings under this
facility. At September 29, 2007, there were letters of credit outstanding
for $.4 million. At September 29, 2007, the Company had availability for
additional borrowings under the Revolving Credit Facility of $24.6 million.
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, 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 outcome to occur, there exists the
possibility of a material adverse impact on the Company's financial
position, liquidity, and the results of operations for the period in which
the effect becomes reasonably estimable.
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. 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 does not currently have material commitments for capital
expenditures and does not currently anticipate entering into any such
commitments during the next twelve months. 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 the next twelve months.
At September 29, 2007, the Company had a deferred tax asset totaling $1.3
million, primarily representing the tax effect of a tax net operating loss
carryforward. The Company expects to utilize the deferred tax asset during
the twelve months ending June 28, 2008 by offsetting the related tax
benefits of such assets against tax liabilities incurred from forecasted
taxable income.
Summarized below are the Company's obligations and commitments to make
future payments under lease agreements and debt obligations as of September
29, 2007:
Payments Due by Period
---------------------------------------------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
---------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (1) - - - - -
Operating Lease Obligations $7,418 $1,365 $4,000 $2,053 -
---------------------------------------------------------------------------------------------------------------
Total $7,418 $1,365 $4,000 $2,053 -
===============================================================================================================
(1) The Revolving Credit Facility is for $25.0 million and includes a
sub-limit of $5.0 million for letters of credit. The agreement expires in
August 2011. At September 29, 2007, there were outstanding letters of
credit for $.4 million.
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-------------------------------------------------------------------------------
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 its 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 29, 2007, 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. Presently the impact of a 10% (approximately 90 basis points)
increase in interest rates on its variable debt (using an incremental
borrowing rate) would have a relatively nominal impact on the Company's
results of operations. 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 Chief Executive Officer and Chief 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. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that those disclosure controls and procedures as of the end of
the period covered by this report were functioning effectively to provide
reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and is accumulated and communicated
to the Company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure.
A controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter and
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
37
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See discussion of Legal Proceedings in Note 15 to the consolidated
financial statements included in Item 1 of this report.
ITEM 1 A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the
"Risk Factors" section (Item 1A) of the Company's Annual Report on Form
10-K for the year ended December 30, 2006.
38
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief 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 Chief 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.)
39
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 8, 2007 By: /s/ Stanton Remer
-----------------------------
Stanton Remer
Executive Vice President,
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the
Registrant)
40
Exhibit 31.1
------------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 8, 2007 /s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
41
Exhibit 31.2
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 8, 2007 /s/ Stanton Remer
Stanton Remer
Chief Financial Officer
42
Exhibit 32.1
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Leon Kopyt, President and Chief Executive Officer of RCM Technologies,
Inc., a Nevada corporation (the "Company"), hereby certify that, to my
knowledge:
(1) The Company's periodic report on Form 10-Q for the quarter ended September
29, 2007 (the "Form 10-Q") fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
* * *
/s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
Date: November 8, 2007
43
Exhibit 32.2
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Stanton Remer, Chief Financial Officer of RCM Technologies, Inc.,
a Nevada corporation (the "Company"), hereby certify that, to my knowledge:
(1) The Company's periodic report on Form 10-Q for the quarter ended September
29, 2007 (the "Form 10-Q") fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
* * *
/s/ Stanton Remer
Stanton Remer
Chief Financial Officer
Date: November 8, 2007
44