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 30, 2006
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, 11,806,674 shares
outstanding as of November 8, 2006.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
-----------------------------------------------------------------------------------------------
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2006 (Unaudited)
and December 31, 2005 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Thirty-Nine Weeks Ended September 30, 2006 and October 1, 2005 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Thirteen Weeks Ended September 30, 2006 and October 1, 2005 7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Thirty-Nine Weeks Ended September 30, 2006 9
Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
September 30, 2006 and October 1, 2005 10
Notes to Unaudited Consolidated Financial Statements 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 41
Item 4 - Controls and Procedures 41
PART II - OTHER INFORMATION
---------------------------------------------------------------------------
Item 1 - Legal Proceedings 42
Item 6 - Exhibits 43
Signatures 44
2
The accompanying notes are an integral part of these
financial statements.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2006 and December 31, 2005
ASSETS
September 30, December 31,
-------------- 2005
2006
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets
Cash and cash equivalents $6,666,362 $3,761,063
Accounts receivable, net of allowance for doubtful accounts
of $1,683,000 (September 30, 2006) and $1,792,000
(December 31, 2005), respectively 48,836,192 44,930,276
Restricted cash 8,572,064
Prepaid expenses and other current assets 2,774,607 2,840,700
Deferred tax assets 4,157,070 4,012,340
----------------------------------------------------------------------------------------------------------------
Total current assets 62,434,231 64,116,443
----------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Equipment and leasehold improvements 9,945,999 10,038,094
Less: accumulated depreciation and amortization 5,469,699 6,017,593
----------------------------------------------------------------------------------------------------------------
4,476,300 4,020,501
----------------------------------------------------------------------------------------------------------------
Other assets
Deposits 183,014 166,814
Goodwill 38,110,616 37,660,320
Intangible assets, net of accumulated amortization
of $635,648 (September 30, 2006) and $405,376
(December 31, 2005), respectively 749,352 808,624
----------------------------------------------------------------------------------------------------------------
39,042,982 38,635,758
----------------------------------------------------------------------------------------------------------------
Total assets $105,953,513 $106,772,702
================================================================================================================
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 2006 and December 31, 2005
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
-------------- 2005
2006
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilities
Line of credit $3,900,000 $3,900,000
Accounts payable and accrued expenses 9,708,326 14,979,127
Accrued compensation 8,424,209 7,087,897
Payroll and withheld taxes 1,117,544 867,274
Income taxes payable 2,101,154 4,249,779
----------------------------------------------------------------------------------------------------------------
Total current liabilities 25,251,233 31,084,077
----------------------------------------------------------------------------------------------------------------
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; 11,788,674 and
11,728,261 shares issued and outstanding
at September 30, 2006 and December 31, 2005, respectively 589,434 586,413
Accumulated other comprehensive income 1,037,465 981,772
Additional paid-in capital 101,170,606 100,235,338
Accumulated deficit (22,095,225) (26,114,898)
----------------------------------------------------------------------------------------------------------------
80,702,280 75,688,625
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $105,953,513 $106,772,702
================================================================================================================
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Thirty-Nine Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------ --- -------------- -- --- -------------
Revenues $147,728,501 $133,796,641
Cost of services (1) 110,565,755 102,477,944
------------------------------------------------------------------------ --- -------------- -- --- -------------
Gross profit 37,162,746 31,318,697
------------------------------------------------------------------------ --- -------------- -- --- -------------
Operating costs and expenses
Selling, general and administrative (2) 30,521,288 26,045,339
Depreciation 884,261 800,561
Amortization 230,272
------------------------------------------------------------------------ --- -------------- -- --- -------------
31,635,821 26,845,900
------------------------------------------------------------------------ --- -------------- -- --- -------------
Operating income 5,526,925 4,472,797
------------------------------------------------------------------------ --- -------------- -- --- -------------
Other expenses
Interest expense, net of interest income 204,243 171,502
Loss on foreign currency transactions 15,784 6,701
------------------------------------------------------------------------ --- -------------- -- --- -------------
220,027 178,203
------------------------------------------------------------------------ --- -------------- -- --- -------------
Income before income taxes 5,306,898 4,294,594
Income taxes 1,287,225 1,577,052
------------------------------------------------------------------------ --- -------------- -- --- -------------
Net income 4,019,673 2,717,542
Other comprehensive income
Foreign currency translation adjustment 55,693 176,521
------------------------------------------------------------------------ --- -------------- -- --- -------------
Comprehensive income $4,075,366 $2,894,063
======================================================================== === ============== == === =============
(1) Includes stock based compensation expense of $29,750 for the thirty-nine
weeks ended September 30, 2006.
(2) Includes stock based compensation expense of $662,925 for the thirty-nine
weeks ended September 30, 2006.
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (Continued)
Thirty-Nine Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
------------------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------------------------------------------------
Basic earnings per share
Basic earnings per share $.34 $.24
=================================================================================================================
Weighted average number of common shares outstanding 11,764,056 11,407,806
=================================================================================================================
Diluted earnings per share
Diluted earnings per share $.33 $.23
=================================================================================================================
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 256,845 and 209,638 in 2006 and 2005, respectively) 12,020,901 11,617,444
=================================================================================================================
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Thirteen Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------ --- -------------- -- --- -------------
Revenues $51,649,791 $43,390,661
Cost of services (1) 38,697,545 33,237,445
------------------------------------------------------------------------ --- -------------- -- --- -------------
Gross profit 12,952,246 10,153,216
------------------------------------------------------------------------ --- -------------- -- --- -------------
Operating costs and expenses
Selling, general and administrative (2) 10,250,503 8,710,506
Depreciation 306,594 272,709
Amortization 87,208
------------------------------------------------------------------------ --- -------------- -- --- -------------
10,644,305 8,983,215
------------------------------------------------------------------------ --- -------------- -- --- -------------
Operating income 2,307,941 1,170,001
------------------------------------------------------------------------ --- -------------- -- --- -------------
Other expenses
Interest expense, net of interest income 74,800 63,463
Loss on foreign currency transactions 5,086 2,328
------------------------------------------------------------------------ --- -------------- -- --- -------------
79,886 65,791
------------------------------------------------------------------------ --- -------------- -- --- -------------
Income before income taxes 2,228,055 1,104,210
Income tax expense 878,630 387,366
------------------------------------------------------------------------ --- -------------- -- --- -------------
Net income 1,349,425 716,844
Other comprehensive (loss) income
Foreign currency translation adjustment (16,119 ) 246,203
------------------------------------------------------------------------ --- -------------- -- --- -------------
Comprehensive income $1,333,306 $963,047
======================================================================== === ============== == === =============
(1) Includes stock based compensation credit of $691 for the thirteen weeks
ended September 30, 2006.
(2) Includes stock based compensation expense of $100,050 for the thirteen weeks
ended September 30, 2006.
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (Continued)
Thirteen Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
-------------------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.11 $.06
=================================================================================================================
Weighted average number of common shares outstanding 11,788,581 11,451,202
=================================================================================================================
Diluted earnings per share $.11 $.06
=================================================================================================================
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 215,169 and 259,862 in 2006 and 2005, respectively) 12,003,750 11,711,064
=================================================================================================================
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Thirty-Nine Weeks Ended September 30, 2006
(Unaudited)
-------------------------------------------------------------------------------
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Accumulated
Income Capital Deficit Total
--------------------------
Shares Amount
----------------------------------- -------------- ----------- ----------------- ----------------- ---------------- ---------------
Balance, December 31, 2005 11,728,261 $586,413 $981,772 $100,235,338 ($26,114,898) $75,688,625
Issuance of stock under
employee stock purchase plan 15,318 766 64,642 65,408
Exercise of stock options 45,095 2,255 177,951 180,206
Translation adjustment 55,693 55,693
Stock based compensation 692,675 692,675
expense
Net income 4,019,673 4,019,673
----------------------------------- -------------- ----------- ----------------- ----------------- ---------------- ---------------
Balance, September 30, 2006 11,788,674 $589,434 $1,037,465 $101,170,606 ($22,095,225) $80,702,280
=================================== ============== =========== ================= ================= ================ ===============
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Nine Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
-------------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $4,019,673 $2,717,542
----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of acquisition:
Depreciation and amortization 1,114,533 800,561
Stock-based compensation expense 692,675
Provision for losses on accounts receivable (109,000) (110,000)
Deferred tax assets (144,730) 82,391
Changes in assets and liabilities:
Accounts receivable (3,796,916) (1,762,160)
Restricted cash 8,572,064 (204,871)
Prepaid expenses and other current assets 66,093 806,022
Accounts payable and accrued expenses (5,270,800) 693,406
Accrued compensation 1,336,312 (1,038,872)
Payroll and withheld taxes 250,268 (523,527)
Income taxes payable (2,148,625) 1,136,860
----------------------------------------------------------------------------------------------------------------
Total adjustments 561,874 (120,190)
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $4,581,547 $2,597,352
----------------------------------------------------------------------------------------------------------------
10
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Thirty-Nine Weeks Ended September 30, 2006 and October 1, 2005
(Unaudited)
------------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property and equipment acquired ($1,340,059) ($472,170)
Increase in deposits (16,200) (23,712)
Cash paid for acquisition, net of working capital acquired (621,296) 732,682
----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,977,555) 236,800
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 65,408 80,475
Exercise of stock options 180,206 192,295
Repayments on line of credit (1,000,000)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 245,614 (727,230)
----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 55,693 176,520
----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,905,299 2,283,442
Cash and cash equivalents at beginning of period 3,761,063 2,401,794
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $6,666,362 $4,685,236
================================================================================================================
Supplemental cash flow information:
Cash paid for:
Interest expense $1,176,185 $257,382
Income taxes $3,166,169 $524,895
11
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005. Certain information and footnote
disclosures, which are normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to SEC rules and regulations. The information
reflects all normal and recurring adjustments that in the opinion of
management are necessary for a fair presentation of the consolidated
financial position of the Company and its consolidated results of
operations for the interim periods set forth herein. The results for the
thirteen and thirty-nine weeks ended September 30, 2006 are not necessarily
indicative of the results to 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 31, 2005 was a 52-week reporting year. The third
quarter of 2005, the 2005 fiscal year and the third quarter of 2006 ended
on the following dates, respectively:
Period Ending Weeks in Quarter Weeks in Year to Date
-------------------------- ------------------- -------------------------
October 1, 2005 Thirteen Thirty-Nine
December 31, 2005 Thirteen Fifty-Two
September 30, 2006 Thirteen Thirty-Nine
3. Use of Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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 as a purchase transaction 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.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
4. Acquisitions (Cont'd)
The purchase consideration at closing consisted of $600,000 in cash, legal
cost of $22,000 and $300,000 of deferred consideration contingent upon
achieving certain base levels of operating income for each of the twelve
month periods following the purchase.
The allocation of the purchase price is as follows:
Period of
(in thousands) Amortization
------------------- -- -----------------
Non-compete agreements $31 5 years
Customer relationships 140 5 years
Goodwill 451
---------------------------------- ------------------- -- -----------------
$622
================================== =================== == =================
The purchase price allocation was finalized in the third quarter, which
resulted in the allocation of $31,000 and $140,000 to non-compete
agreements and customer relationships, respectively, from goodwill.
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
- amounts are due, provided that 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:
Amount
Year Ending (in thousands)
-------------------------------------- -- ----------------
December 30, 2006 (Three Months) $700
December 29, 2007 800
December 27, 2008 800
January 2, 2010 100
-------------------------------------- -- ----------------
$2,400
====================================== == ================
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.
The following results of operations have been prepared assuming all
acquisitions since January 2, 2005 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
acquisitions been consummated as of the beginning of the periods presented.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------ ----------------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
(Proforma) (Proforma) (Proforma) (Proforma)
---------------- - ----------------- -- -------------- -- ----------------
Revenues $51,649,791 $45,889,256 $148,028,500 $139,854,195
Operating income 2,307,941 1,496,701 5,583,923 5,408,672
Net income $1,349,425 $888,644 $4,039,335 $3,206,167
Earnings per share $0.11 $0.08 $0.34 $0.27
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
5. New Accounting Standards
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." ("SAB 108") is effective for fiscal years ending on
or after November 15, 2006 and addresses how financial statement errors
should be considered from a materiality perspective and corrected. The
literature provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. Historically, there have been two
common approaches used to quantify such errors: (i) the "rollover"
approach, which quantifies the error as the amount by which the current
year income statement is misstated, and (ii) the "iron curtain" approach,
which quantifies the error as the cumulative amount by which the current
year balance sheet is misstated. The SEC Staff believes that companies
should quantify errors using both approaches and evaluate whether either of
these approaches results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material.
Historically, the Company has evaluated uncorrected differences utilizing
the "rollover" approach, and the Company is currently evaluating the
impact, if any, of adopting the provisions of SAB 108 on our financial
position, results of operations and liquidity.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FAS
48"). The interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Specifically, FAS 48 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. The FAS 48 also provides guidance on the related derecognition,
classification, interest and penalties, accounting for interim periods,
disclosure and transition of uncertain tax positions. The interpretation is
effective for fiscal years beginning after December 15, 2006. The Company
is evaluating the impact of this new pronouncement on its consolidated
financial statements.
SFAS No. 123R "Share-Based Payment" ("SFAS 123R"), which the Company has
adopted effective as of January 1, 2006, requires all share-based payments
to employees, including grants of employee stock options, to be recognized
as an expense in the Consolidated Statements of Operations based on their
fair values as they are earned by the employees under the vesting terms.
Pro forma disclosure of stock-based compensation expense, as was the
Company's practice under SFAS 123, is not permitted after 2005, since SFAS
123R must be adopted no later than the first interim or annual period
beginning after December 15, 2005. The Company followed the "modified
prospective" method of adoption of SFAS 123R beginning in fiscal 2006,
whereby earnings for prior periods are not to be restated as though stock
based compensation had been expensed.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 requires retrospective application to prior periods'
financial statements for changes in accounting principles, unless it is
impractical to determine either the period-specific effects or the
cumulative effects of a change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct
effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of
the accounting change. SFAS 154 also requires that a change in
depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
affected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company has adopted the provision of SFAS 154,
as applicable, beginning in fiscal 2006.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
6. 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 (the
"Revolving Credit Facility"). Availability of credit under the Revolving
Credit Facility is based on 80% of the aggregate amount of accounts
receivable for which not more than 90 days have elapsed since the date of
the original invoice. 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 under the Revolving Credit Facility for the thirty-nine
weeks ended September 30, 2006 and October 1, 2005 were 8.8% and 6.0%,
respectively. The amounts outstanding under the Revolving Credit Facility
at September 30, 2006 and December 31, 2005 were $3.9 million at each date.
At September 30, 2006, the Company had availability for additional
borrowing under the Revolving Credit Facility of $21.0 million. The fifth
amended Revolving Credit Facility extended the previous amended agreement
from August 2006 until August 2011and the other terms and conditions remain
principally the same as the previous amendment.
7. Interest Expense, Net
Interest expense, net consisted of the following:
Thirty-Nine Thirty-Nine Thirteen Weeks Thirteen Weeks
Weeks Ended Weeks Ended Ended Ended
September 30, October 1, 2005 September 30, October 1, 2005
2006 2006
----------------------------------------------------------------------------------------------
Interest expense $464,161 $427,722 $114,543 $144,203
Interest income (259,918) (256,220) (39,743) (80,740)
----------------------------------------------------------------------------------------------
$204,243 $171,502 $74,800 $63,463
==============================================================================================
8. 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 our 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. Future changes in
the industry could impact the market multiples of comparable businesses and
consequently could impact the results of future annual impairment tests.
There were no events during the thirty-nine weeks ended September 30, 2006
that have indicated a need to perform the impairment test prior to the
Company's annual test date.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
8. Goodwill and Intangibles (Continued)
The changes in the carrying amount of goodwill for the thirty-nine weeks
ended September 30, 2006 are as follows (in thousands):
Information
Technology Engineering Commercial Total
---- --------------------------------- -- -------------- -- ------------- -- ------------- --- ------------
Balance as of December 31, 2005 $30,132 $7,528 $37,660
Goodwill acquired during the
period 451 451
---- --------------------------------- -- -------------- -- ------------- -- ------------- --- ------------
Balance as of September 30, 2006 $30,132 $7,979 $38,111
====================================== == ============== == ============= == ============= === ============
9. Accounts Payable
Accounts payable and accrued expenses consisted of the following at
September 30, 2006 and December 31, 2005:
September 30, December 31,
2006 2005
-------------------------------------------------------------------------------------
Accounts payable - trade $9,437,434 $5,649,920
Due to sellers 270,892 794,894
Reserve for litigation 8,534,313
-------------------------------------------------------------------------------------
Total $9,708,326 $14,979,127
=====================================================================================
10. Stockholders' Equity
Common Stock Reserved
Shares of unissued common stock were reserved for the following purposes:
September 30, December 31,
2006 2005
--------------------------------------------------------------------------------------
Exercise of options outstanding 1,819,500 1,935,483
Future grants of options 28,694 36,486
--------------------------------------------------------------------------------------
Total 1,848,194 1,971,969
======================================================================================
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
11. Stock - Based Compensation
Effective with the fiscal year ending December 30, 2006, the Company has
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 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.
SFAS 123R replaces SFAS 123, Accounting for Stock-Based Compensation ("SFAS
123"), and supersedes Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"). SFAS 123, as
originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, SFAS 123 permitted entities the option of continuing to apply the
guidance in APB No. 25 as long as the footnotes to financial statements
disclosed what net income would have been had the preferable
fair-value-based method been used. The impact of SFAS 123R, if it had been
in effect, on the net earnings and related per share amounts of our fiscal
years ended in December 31, 2005, January 1, 2005 and December 27, 2003
were disclosed in Note 1 Summary of Significant Accounting Policies -
Stock-Based Compensation of the Company's Financial Statements included in
our Form 10-K for the fiscal year ended December 31, 2005.
Since the Company adopted SFAS 123R using the
modified-prospective-transition-method, prior periods have not been
restated. Under this 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 measured share-based
compensation cost using the Black-Scholes option pricing model.
At September 30, 2006, the Company has four share-based employee
compensation plans. Share-based compensation of $692,675, or $0.06 per
share, was recognized for the thirty-nine weeks ended September 30, 2006.
Share-based compensation of $99,359, or $0.01 per share, was recognized for
the thirteen weeks ended September 30, 2006. The Company anticipates that
share-based compensation will not exceed $832,000 or approximately $0.07
per share for the year ending December 30, 2006. Reported net income,
adjusting for share-based compensation that would have been recognized for
the thirteen weeks and thirty-nine weeks ended October 1, 2005 if SFAS 123R
had been followed, is (in thousands, except per share amounts):
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
11. Stock - Based Compensation (Continued)
October 1, 2005
-------------------------------------
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
---------------------------------------- ------------------ ----------------
Net income, as reported $717 $2,718
Less: stock-based compensation costs
determined under fair value based
method for all awards 286 414
---------------------------------------- ------------------ ----------------
Adjusted net income $431 $2,304
================== ================
Earnings per share of common stock-basic:
As reported $.06 $.24
Share-based compensation costs (.02 ) (.04 )
Adjusted net income $.04 $.20
Earnings per share of common stock-diluted:
As reported $.06 $.23
Share-based compensation costs (.02 ) (.03 )
Adjusted net income $.04 $.20
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
12,000 shares of common stock granted during the thirty-nine weeks ended
September 30, 2006, of which 2,000 were granted in the thirteen weeks ended
September 30, 2006. The share-based compensation expense attributable to
the 12,000 options was $1,117 and $2,818 for the thirteen weeks and
thirty-nine weeks ended September 30, 2006, respectively.
Expected volatility is based on the historical volatility of the price of
our common stock since January 2, 2001. We use 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 stock price volatility, risk free interest rate
and annualized forfeiture rate was 58.0%, 4.6% and 5.7% for the
thirty-nine weeks ended September 30, 2006.
As of September 30, 2006, we have approximately $1.0 million of total
unrecognized compensation cost related to non-vested awards granted under
our various share-based plans, which we expect to recognize over a
weighted-average period of 1.9 years. These amounts do not include the cost
of any additional options that may be granted in future periods nor any
changes in the Company's forfeiture rate.
We received cash from options exercised during the first thirty-nine weeks
of fiscal years 2006 and 2005 of $180,206 and $192,295, respectively. The
impact of these cash receipts is included in financing activities in the
accompanying consolidated statements of cash flows.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
11. 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 30, 2006, options to purchase 83,455 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 30, 2006, options
to purchase 70,000 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. 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 30, 2006, options to purchase 1,064,545 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 30,
2006, options to purchase 28,694 shares of common stock were available for
future grants, and options to purchase 601,500 shares of common stock were
outstanding.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
11. Stock - Based Compensation (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 30, 2006, there were 15,318
shares issued under the Purchase Plan for net proceeds of $65,408. As of
September 30, 2006, there were 243,640 shares available for issuance under
the Purchase Plan. The share based compensation expense attributable to the
15,318 shares issued was $11,489 and $-0- for the thirty-nine weeks and
thirteen weeks ended September 30, 2006, respectively.
12. 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 tax deductions taken as a result of 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 are
best substantiated by facts and circumstances arising during 2005 and thus
such deductions are 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 results in the reversal of the
income tax accrual of approximately $1.0 million, (equivalent to $.08
earnings per share diluted) the impact of which is included in the
statement of income for the thirty-nine weeks ended September 30, 2006. The
remaining income tax accrual of $1.5 million has been reserved for
estimated unbilled interest and estimated disallowed tax net operating loss
deductions.
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
13. 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. SFAS 131 has no effect on the
Company's consolidated financial position, consolidated results of
operations or liquidity. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies
(see Note 1).
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 (in thousands):
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) (2) 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
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
13. Segment Information (Continued)
Thirty-Nine Weeks Ended Information
October 1, 2005 Technology Engineering Commercial Corporate Total
-------------------------------------------------------------------------------------------------------------------
Revenue $73,113 $35,329 $25,355 $133,797
Operating expenses (1) 68,635 35,308 24,580 128,523
-------------------------------------------------------------------------------------------------------------------
EBITDA (4) 4,478 21 775 5,274
Depreciation 407 277 117 801
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) 4,071 (256 ) 658 4,473
Interest expense, net of
(interest income) 94 45 33 172
Loss on foreign currency
transactions 6 6
Income taxes (benefit) 1,460 (112 ) 229 1,577
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $2,517 ($195 ) $396 $2,718
===================================================================================================================
Total assets $52,173 $21,200 $9,890 $20,568 $103,831
Capital expenditures $158 $25 $289 $472
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
13. 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) (3) 24,045 14,985 9,919 48,949
---------------------------------------------------------------------------------------------------------------------
EBITDA (4) 1,827 519 355 2,701
Depreciation 136 130 40 306
Amortization of intangibles 72 15 87
---------------------------------------------------------------------------------------------------------------------
Operating income 1,619 374 315 2,308
Interest expense, net of
interest income 37 22 16 75
Loss 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
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
13. Segment Information (Continued)
Thirteen Weeks Ended Information
October 1, 2005 Technology Engineering Commercial Corporate Total
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Revenue $23,564 $11,188 $8,639 $43,391
Operating expenses (1) 22,114 11,281 8,553 41,948
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
EBITDA (4) 1,450 (93 ) 86 1,443
Depreciation 137 94 42 273
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Operating income (loss) 1,313 (187 ) 44 1,170
Interest expense, net of
interest income 35 15 12 63
Loss on foreign currency
transactions 2 2
Income taxes (benefit) 447 (71 ) 11 387
------------------------------ - --------------- - -------------- -- -------------- - ------------ -- -------------
Net income (loss) $831 ($135 ) $21 $717
============================== = =============== = ============== == ============== = ============ == =============
Total assets $52,173 $21,200 $9,890 $20,568 $103,831
Capital expenditures $56 $25 $81
(1) Operating expenses exclude depreciation and amortization.
(2) Operating expenses include $692,675 of stock based compensation expense
for the thirty-nine weeks ended September 30, 2006.
(3) Operating expenses include $99,359 of stock based compensation expense
for the thirteen weeks ended September 30, 2006.
(4) EBITDA means earnings before interest, taxes, depreciation and
amortization. We believe that EBITDA, as presented, represents a useful
measure of assessing the performance of our operating activities, as it
reflects our earnings trends without the impact of certain non-cash and
unusual charges or income. EBITDA is also used by our creditors in
assessing debt covenant compliance. We understand 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 our operating performance, nor as an
alternative to any other measure of performance in conformity with
generally accepted accounting principles.
24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
13. 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 30, 2006 and October 1,
2005 are as follows (in thousands):
Thirty-Nine Weeks Ended
-----------------------------------------------------------------------------------
September 30, October 1,
2006 2005
-----------------------------------------------------------------------------------
Revenues
U. S. $139,524 $122,553
Canada 8,205 11,243
-----------------------------------------------------------------------------------
$147,729 $133,796
===================================================================================
Fixed Assets
U. S. $4,397 $4,073
Canada 79 186
-----------------------------------------------------------------------------------
$4,476 $4,259
===================================================================================
Revenues by geographic area for the thirteen weeks ended September 30, 2006
and October 1, 2005 are as follows (in thousands):
Thirteen Weeks Ended
-----------------------------------------------------------------------------------
September 30, October 1,
2006 2005
-----------------------------------------------------------------------------------
Revenues
U. S. $48,564 $39,971
Canada 3,086 3,419
-----------------------------------------------------------------------------------
$51,650 $43,390
===================================================================================
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
14. Contingencies
In late 1998, two shareholders who were formerly officers and directors of
the Company filed suit against the Company alleging 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 the acquisition transaction
pursuant to which the plaintiffs became shareholders of the Company. The
plaintiffs claimed damages in an amount equal to the difference between the
amounts for which they could have sold their RCM shares during the 12-month
period ended March 11, 1999, but for the alleged wrongful limitation on
their sales, and the amount for which the plaintiffs sold their shares
during that period and thereafter.
A trial resulted in an August 2003 judgment in favor of the plaintiffs for
$7.6 million that the Company unsuccessfully appealed in the New Jersey
appellate courts. In June 2006, the plaintiffs were paid $8,622,458 to
satisfy and cancel the judgment. The payment did not affect the financial
position of the Company as of September 30, 2006.
In November 2002, the Company brought suit on professional liability claims
against the attorneys and law firms who served as its counsel in the
above-described acquisition transaction and in its subsequent dealings with
the plaintiffs concerning their various relationships with the Company
resulting from that transaction. In its lawsuit against the 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 paid to satisfy the judgment; and (3) its
costs and counsel fees incurred in the prosecution of the legal malpractice
action itself. In September 2005, the Company and the various attorney and
law firm defendants agreed to the dismissal of the original suit and the
filing of a new action against the same defendants in another section of
the Superior Court of New Jersey. The complaint in the new action, in which
the Company has asserted certain additional claims against the defendants,
was filed in October 2005. Discovery proceedings are continuing, and a
trial will likely be scheduled for early 2007.
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.
26
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.
27
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 volatile.
RCM's operational performance in 2005 gained momentum with a moderate
increase in revenues and earnings over the comparable period in 2004. This
was attributed to an improvement in the general economy, strength in our
sector and increased capital spending by clients in selected markets. Certain
business units of the Company benefited from stronger economic conditions,
specifically in our (Engineering) and (Commercial) segments. So far in 2006,
RCM's financial performance has shown further modest improvement across all
of the Company's business units due to the continued strengthening of the
economy and the Company's receipt of several key contracts. 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 an agreed-upon fixed fee 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.
28
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 consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, 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 judgments increases, such judgments become even
more subjective. While management believes that its assumptions are
reasonable and appropriate, actual results may differ materially from
estimates. The Company has identified certain critical accounting policies,
described below, that require significant judgment to be exercised by
management.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform consulting/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") 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.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-----------------------------------------------------------------------------
Revenue Recognition (Continued)
Consulting/Staffing Services - Revenues derived from consulting/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 our 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 2005 as of November
30, 2005 and identified no impairments. Goodwill at September 30, 2006 and
December 31, 2005 was $38,111,000 and $37,660,000, respectively.
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.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
---------------------------------------------------------------------------
Accounting for Stock Options
The Company has used stock options to attract, retain, and reward employees
for long-term service. Generally accepted accounting principles in the United
States had allowed alternative methods of accounting for these awards. The
Company had chosen to account for its stock plans (including stock option
plans) under APB 25, "Accounting for Stock Issued to Employees". Since option
exercise prices reflect the market value per share of the Company's stock
upon grant, no compensation expense related to stock options is reflected in
the Company's Consolidated Statement of Income for periods ended prior to
January 1, 2006.
SFAS 123R replaces SFAS 123 and supersedes APB No. 25. SFAS 123, as
originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, SFAS 123 permitted entities the option of continuing to apply the
guidance in APB 25 as long as the footnotes to financial statements disclosed
what net income would have been had the preferable fair-value-based method
been used. The impact of SFAS 123R, if it had been in effect, on the net
earnings and related per share amounts of our fiscal years ended in December
31, 2005, January 1, 2005 and December 27, 2003 were disclosed in Note 1
Summary of Significant Accounting Policies - Stock-Based Compensation of our
Financial Statements included in our Form 10-K for the fiscal year ended
December 31, 2005.
Since the Company adopted SFAS 123R, effective January 1, 2006 using the
modified-prospective-transition-method, prior periods have not been restated.
Under this 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 measured 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 30,
2006, the Company had total net deferred tax assets of $4.2 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.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
---------------------------------------------------------------------------
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The
pace of customer capital spending programs, new product launches and similar
activities have a direct impact on the need for 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.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 30, 2006 Compared to Thirty-Nine Weeks
Ended October 1, 2005
A summary of operating results for the fiscal periods ended September 30, 2006
and October 1, 2005 is as follows (in thousands, except for earnings per share
data):
September 30, 2006 October 1, 2005
--------------------------------------------------------------------------------------------------------------
% of % of
Amount Revenue Amount Revenue
--------------------------------------------------------------------------------------------------------------
Revenues $147,729 100.0 $133,797 100.0
Cost of services 110,566 74.8 102,478 76.6
--------------------------------------------------------------------------------------------------------------
Gross profit 37,163 25.2 31,319 23.4
--------------------------------------------------------------------------------------------------------------
Selling, general and administrative 30,521 20.7 26,045 19.5
Depreciation and amortization 1,115 .8 801 .6
--------------------------------------------------------------------------------------------------------------
31,636 21.5 26,846 20.1
--------------------------------------------------------------------------------------------------------------
Operating income 5,527 3.7 4,473 3.3
Other (expense) income 220 0.1 178 0.1
--------------------------------------------------------------------------------------------------------------
Income before income taxes 5,307 3.6 4,295 3.2
Income taxes 1,287 0.9 1,577 1.2
--------------------------------------------------------------------------------------------------------------
Net income $4,020 2.7 $2,718 2.0
==============================================================================================================
Earnings per share
Basic: $.34 $.24
Diluted: $.33 $.23
==============================================================================================================
The above summary is not a presentation of results of operations under generally
accepted accounting principles 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 30, 2006 and October 1, 2005 consisted of
thirty-nine weeks each.
Revenues. Revenues increased 10.4%, or $13.9 million, for the thirty-nine weeks
ended September 30, 2006 as compared to the same period in the prior year (the
"comparable prior year period"). Revenues increased $1.6 million in the
Information Technology ("IT") segment, increased $5.3 million in the Engineering
segment, and increased $7.0 million in the Commercial segment. Management
attributes the overall increase to an improvement of the general economy and
successful marketing and sales efforts. Management expects revenues for the
remainder of fiscal 2006 to remain generally consistent on a prorated basis with
the revenues for the thirty-nine weeks ended September 30, 2006. Revenues that
were attributable to acquisitions since October 1, 2005 which were not included
in the comparable prior year period were approximately $8.3 million.
33
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 30, 2006 Compared to Thirty-Nine Weeks
Ended October 1, 2005 (Continued)
Cost of Services. Cost of services increased 7.9%, or $8.1 million, for the
thirty-nine weeks ended September 30, 2006 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 decreased to 74.8% for the thirty-nine
weeks ended September 30, 2006 from 76.6% for the comparable prior year period.
This decrease was primarily attributable to increased revenues in the
engineering segment which had higher gross margins as well as improved gross
margins in the Commercial segment. Management anticipates the ratio of cost of
sales to revenues for the remainder of fiscal 2006 to remain comparable to the
thirty-nine weeks ended September 30, 2006.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 17.2%, or $4.5 million, for the thirty-nine weeks ended
September 30, 2006 as compared to the comparable prior year period. As a
percentage of revenues, SGA expenses were 20.7% for the thirty-nine weeks ended
September 30, 2006 as compared to 19.5% for the comparable prior year period.
This increase was primarily attributable to increased sales costs on higher
revenues as well as additional administrative costs incurred from two
acquisitions since September 30, 2005. Management reasonably expects SGA
expenses for the remainder of fiscal 2006 to remain consistent with the SGA
expenses for the thirty-nine weeks ended September 30, 2006.
Depreciation and Amortization. Depreciation and amortization ("DA") increased
39.2%, or $314,000 for the thirty-nine weeks ended September 30, 2006 as
compared to the comparable prior year period. This increase was attributable to
the amortization of intangibles in the amount of $230,000 incurred subsequent to
September 30, 2005.
Other Expense. Other expense consists of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the
thirty-nine weeks ended September 30, 2006, actual interest expense of $464,000
was offset by $260,000 of interest income, which was principally earned from
restricted cash and short-term money market deposits. Interest expense, net
increased $129,000 for the thirty-nine weeks ended September 30, 2006 as
compared to the comparable prior year period. This increase was primarily due to
increased borrowing requirements as well as an increase in weighted average
interest rates on borrowed funds. Losses on foreign currency transactions
increased $9,000 in the thirty-nine weeks ended September 30, 2006 as compared
to the comparable prior year period. This modest increase was attributable to
the increase in the number of foreign currency transactions.
Income Tax. Income tax expense decreased 18.4%, or $290,000, for the thirty-nine
weeks ended September 30, 2006 as compared to the comparable prior year period.
This decrease was attributable to a reversal of $1.0 million ($.08 diluted
earnings per share) of previously accrued income taxes. (See footnote 12 to the
consolidated financial statements). The effective tax rate before the reversal
was 43.0% for the thirty-nine weeks ended September 30, 2006 as compared to
36.7% for the comparable prior year period. The increase in effective tax rate
was attributable to the increased amount of non-tax-deductible amortization in
relation to increased income before income tax purposes.
34
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
----------------------------------------------------------------------------
Thirty-Nine Weeks Ended September 30, 2006 Compared to Thirty-Nine Weeks
Ended October 1, 2005 - (Continued)
Segment Discussion (See Footnote 13)
Information Technology
IT revenues of $74.7 million in 2006 increased $1.6 million, or 2.3%, compared
to 2005. The increase in revenue was attributable to the strengthening of demand
for the Company's IT services. The IT segment EBITDA was $4.6 million, or 69.3%
of the overall EBITDA for 2006, as compared to $4.5 million, or 84.9% of the
overall EBITDA, for 2005.
Engineering
Engineering revenues of $40.6 million in 2006 increased $5.3 million, or 14.9%,
compared to 2005. The increase in revenue was attributable to the strengthening
of demand for the Company's engineering services. The Engineering segment EBITDA
was $647,000, or 9.7% of the overall EBITDA for 2006, as compared to $20,000, or
0.4% of the overall EBITDA for 2005.
Commercial
Commercial revenues of $32.4 million in 2006 increased $7.0 million, or 27.8%
compared to 2005. The increase in revenues was attributable to improvement in
economic activity within this segment. The Commercial segment EBITDA was $1.4
million, or 21.0% of the overall EBITDA, as compared to $775,000, or 14.7% of
the overall EBITDA for 2005.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
----------------------------------------------------------------------------
Thirteen Weeks Ended September 30, 2006 Compared to Thirteen Weeks Ended
October 1, 2005
A summary of operating results for the fiscal periods ended September 30, 2006
and October 1, 2005 is as follows (in thousands, except for earnings per share
data):
September 30, 2006 October 1, 2005
--------------------------------------------------------------------------------------------------------------
% of % of
Amount Revenue Amount Revenue
--------------------------------------------------------------------------------------------------------------
Revenues $51,650 100.0 $43,390 100.0
Cost of services 38,698 74.9 33,237 76.6
--------------------------------------------------------------------------------------------------------------
Gross profit 12,952 25.1 10,153 23.4
--------------------------------------------------------------------------------------------------------------
Selling, general and administrative 10,251 19.8 8,710 20.1
Depreciation and amortization 393 .8 273 .6
--------------------------------------------------------------------------------------------------------------
-
10,644 20.6 8,983 20.7
--------------------------------------------------------------------------------------------------------------
Operating income 2,308 4.5 1,170 2.7
Other expense 80 .2 66 .2
--------------------------------------------------------------------------------------------------------------
Income before income taxes 2,228 4.3 1,104 2.5
Income taxes 879 1.8 387 .9
--------------------------------------------------------------------------------------------------------------
Net income $1,349 2.5 $717 1.6
==============================================================================================================
Earnings per share
Basic: $.11 $.06
Diluted: $.11 $.06
==============================================================================================================
The above summary is not a presentation of results of operations under generally
accepted accounting principles 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 second
quarter reporting periods ended September 30, 2006 and October 1, 2005 consisted
of thirteen weeks each.
Revenues. Revenues increased 19.0%, or $8.3 million, for the thirteen weeks
ended September 30, 2006 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue increased $2.3 million in the IT
segment, increased $4.3 million in the Engineering segment and increased $1.6
million in the Commercial segment. Management attributes the overall increase to
an improvement of the general economy and successful marketing and sales
efforts. Management expects revenues for the remaining fiscal quarter to remain
generally consistent with the thirteen weeks ended September 30, 2006. Revenues
that were attributable to acquisitions since October 1, 2005 which were not
included in the comparable prior year period were approximately $3.1 million.
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-----------------------------------------------------------------------------
Thirteen Weeks Ended September 30, 2006 Compared to Thirteen Weeks
Ended October 1, 2005 - (Continued)
Cost of Services. Cost of services increased 16.4%, or $5.5 million, for the
thirteen weeks ended September 30, 2006 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 decreased to 74.9% for the thirteen weeks
ended September 30, 2006 from 76.6% for the comparable prior year period. This
decrease was attributable to the change in revenue amounts in each segment year
over year and the related gross margin percentages from each segment (See
segment discussion on page 37). Management anticipates the ratio of cost of
sales to revenues for the remainder of fiscal 2006 to decrease as compared to
the thirteen weeks ended October 1, 2005, which is consistent with historical
performance.
Selling, General and Administrative. SGA expenses increased 17.7%, or $1.5
million, for the thirteen weeks ended September 30, 2006 as compared to the
comparable prior year period. As a percentage of revenues, SGA expenses were
19.8% for the thirteen weeks ended September 30, 2006 as compared to 20.1% for
the comparable prior year period. This percentage decrease was primarily
attributable to higher revenues in which to absorb fixed costs, which was
partially offset by additional administrative costs incurred from two
acquisitions since September 30, 2005. Management reasonably expects SGA
expenses for the remainder of fiscal 2006 to remain consistent with the SGA
expenses for the thirteen weeks ended September 30, 2006.
Depreciation and Amortization. DA increased 44.0%, or $120,000, for the thirteen
weeks ended September 30, 2006 as compared to the comparable prior year period.
This increase was attributable to the amortization of intangibles in the amount
of $87,000 incurred subsequent to September 30, 2005.
Other Expense. Other expense consists of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the thirteen
weeks ended September 30, 2006, actual interest expense of $115,000 was offset
by $40,000 of interest income, which was principally earned from restricted cash
and short-term money market deposits. Interest expense, net increased $11,000
for the thirteen weeks ended September 30, 2006 as compared to the comparable
prior year period. This increase was primarily due to increased borrowing
requirements as well as an increase in weighted average interest rates on
borrowed funds. Gains on foreign currency transactions increased $3,000 in the
thirteen weeks ended September 30, 2006 as compared to the comparable prior year
period.
Income Tax. Income tax expense increased 127.1%, or $492,000, for the thirteen
weeks ended September 30, 2006 as compared to the comparable prior year period.
The effective tax rate before the reversal of $1.0 million of previously accrued
income taxes (See footnote 12 to the consolidated financial statements) was
39.5% for the thirteen weeks ended September 30, 2006 as compared to 35.1% for
the comparable prior year period. The increase in effective tax rate was
attributable to the increased amount of non-tax-deductible amortization in
relation to increased income before income tax purposes.
37
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended September 30, 2006 Compared to Thirteen Weeks
Ended October 1, 2005 - (Continued)
Segment Discussion (See Footnote 13)
Information Technology
IT revenues of $25.9 million in 2006 increased $2.3 million, or 9.8%, compared
to 2005. The increase in revenue was attributable to the strengthening of demand
for the Company's IT services. The IT segment EBITDA was $1.8 million, or 67.6%
of the overall EBITDA, for 2006 as compared to $1.5 million, or 101% of the
overall EBITDA, for 2005.
Engineering
Engineering revenues of $15.5 million in 2006 increased $4.3 million, or 38.6%,
compared to 2005. The increase in revenue was attributable to the strengthening
of demand for the Company's engineering services. The Engineering segment EBITDA
was $519,000, or 19.2% of the overall EBITDA for 2006 as compared to an EBITDA
loss of $94,000 for 2005.
Commercial
Commercial revenues of $10.3 million in 2006 increased $1.6 million, or 18.9%
compared to 2005. The increase in revenue was attributable to improvement in
economic activity within this segment. The Commercial segment EBITDA was
$355,000, or 13.2% of the overall EBITDA, as compared to $86,000, or 6.0% of the
overall EBITDA for 2005.
38
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 30, October 1,
2006 2005
------------------ -- -------------------
(In thousands)
-----------------------------------------
Operating Activities $4,582 $2,597
Investing Activities ($1,978) $237
Financing Activities $246 ($727)
Operating Activities
Operating activities provided $4.6 million of cash for the thirty-nine weeks
ended September 30, 2006 as compared to $2.6 million for the comparable 2005
period. The increase in cash provided by operating activities was primarily
attributable to increased earnings, a decrease in prepaid expenses and other
current assets, an increase in accrued compensation, an increase in payroll and
withheld taxes and a decrease in restricted cash, which was offset by an
increase in accounts receivable, an increase in deferred tax assets, a decrease
in accounts payable and accrued expenses, and a decrease in income taxes
payable. 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 2006. The Company continues to
institute enhanced controls and standardization over its receivables collection
and disbursement processes.
Investing Activities
Investing activities used $2.0 million for the thirty-nine weeks ended September
30, 2006 as compared to $237,000 for the comparable 2005 period. The increase in
the use of cash for investing activities for 2006 as compared to the comparable
2005 period was primarily attributable to an increase in expenditures for
property and equipment and cash used for acquisitions.
Financing Activities
Financing activities principally consisted of the sale of stock for the employee
stock purchase plan and the exercise of stock options of $246,000 in 2006 as
compared to debt reduction of $1.0 million of debt for the comparable 2005
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 (the "Revolving Credit
Facility"). Availability of credit under the Revolving Credit Facility is based
on 80% of the aggregate amount of accounts receivable for which not more than 90
days have elapsed since the date of the original invoice. 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.
39
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 under the Revolving Credit Facility for the thirty-nine weeks
ended September 30, 2006 and October 1, 2005 were 8.8% and 6.0%, respectively.
The amounts outstanding under the Revolving Credit Facility at September 30,
2006 and December 31, 2005 were $3.9 million at each date. At September 30,
2006, the Company had availability for additional borrowing under the Revolving
Credit Facility of $21.0 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 final outcome
to occur, there exists the possibility of a material adverse impact on our
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 30, 2006, the Company had a deferred tax asset totaling $4.2
million, primarily representing the tax effect of a tax net operating loss
carryfoward. The Company expects to utilize the deferred tax asset during the
twelve months ending September 29, 2007 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 30, 2006 (in thousands):
Payments Due by Period
---------------------------------------------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
---------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (1) $3,900 $3,900
Operating Lease Obligations 8,365 2,497 $3,297 $2,571
---------------------------------------------------------------------------------------------------------------
Total $12,265 $6,397 $3,297 $2,571
===============================================================================================================
(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 30, 2006, there was an outstanding letter of credit
for $116,000.
40
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 line of credit. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The Company
is adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default risk, market risk and reinvestment risk. As
of September 30, 2006, 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 average debt balances during the thirty-nine weeks ended September 30,
2006 and average interest rates) 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.
41
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
---------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See discussion of Legal Proceedings in Note 14 to the consolidated financial
statements included in Item 1 of this report.
42
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
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10 (a) Fifth Amendment and Modification to Amended and Restated
Loan and Security Agreement dated August 7, 2006, between
RCM Technologies, Inc. and all of its Subsidiaries and
Citizens Bank of Pennsylvania as Administrative Agent and
Arranger.
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.)
43
RCM TECHNOLOGIES, INC.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: November 9, 2006 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)
44
Exhibit 31.1
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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 9, 2006 /s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
45
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 9, 2006 /s/ Stanton Remer
Stanton Remer
Chief Financial Officer
46
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 30, 2006 (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 9, 2006
47
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 30, 2006 (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 9, 2006
48