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 June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 95-1480559
------ ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777 (Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
Common Stock, $0.05 par value, 12,035,643 shares outstanding as
of August 7, 2007.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
----------------------------------------------------------------------------------------
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2007 (Unaudited)
and December 30, 2006 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Twenty-Six Weeks Ended June 30, 2007 and July 1, 2006 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Thirteen Weeks Ended June 30, 2007 and July 1, 2006 7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Twenty-Six Weeks Ended June 30, 2007 9
Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended
June 30, 2007 and July 1, 2006 10
Notes to Unaudited Consolidated Financial Statements 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 40
Item 4 - Controls and Procedures 40
PART II - OTHER INFORMATION
--------------------------------------------------------------------------
Item 1 - Legal Proceedings 41
Item 4 - Submission of Matters to a Vote of Security Holders 41
Item 5 - Other Information 41
Item 6 - Exhibits 42
Signatures 43
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2007 and December 30, 2006
ASSETS
June 30, December 30,
2006 2007
--------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets
Cash and cash equivalents $6,883,542 $2,449,428
Accounts receivable, net of allowance for doubtful accounts
of $1,855,000 (June 30, 2007) and $1,672,000
(December 30, 2006), respectively 52,954,012 48,140,787
Prepaid expenses and other current assets 3,103,956 1,715,858
Deferred tax assets 1,582,000 3,185,050
--------------------------------------------------------------------------------------------------------------------------
Total current assets 64,523,510 55,491,123
--------------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Equipment and leasehold improvements 8,976,419 10,086,457
Less: accumulated depreciation and amortization 4,770,731 5,694,513
--------------------------------------------------------------------------------------------------------------------------
4,205,688 4,391,944
--------------------------------------------------------------------------------------------------------------------------
Other assets
Deposits 151,828 158,722
Goodwill 39,587,936 39,328,997
Intangible assets, net of accumulated amortization
of $566,000 (June 30, 2007) and $406,000
(December 30, 2006), respectively 509,106 669,270
--------------------------------------------------------------------------------------------------------------------------
40,248,870 40,156,989
--------------------------------------------------------------------------------------------------------------------------
Total assets $108,978,068 $100,040,056
==========================================================================================================================
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
June 30, 2007 and December 30, 2006
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 30,
2007 2006
--------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilities
Accounts payable and accrued expenses $11,097,019 $7,317,135
Accrued compensation 8,924,298 8,122,058
Payroll and withheld taxes 1,114,450 1,146,136
Income taxes payable 141,415 61,465
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 21,277,182 16,646,794
---------------------------------------------------------------------------------------------------------------------------
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; 11,978,643 and
11,822,126 shares issued and outstanding
at June 30, 2007 and December 30, 2006, respectively 598,932 591,107
Additional paid-in capital 102,264,838 101,559,302
Accumulated other comprehensive income 1,171,651 1,001,488
Accumulated deficit (16,334,535) (19,758,635)
---------------------------------------------------------------------------------------------------------------------------
87,700,886 83,393,262
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $108,978,068 $100,040,056
===========================================================================================================================
The accompanying notes are an integral part of these
financial statements.
4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Twenty-Six Weeks Ended June 30, 2007 and July 1, 2006
(Unaudited)
------------------------------------------------------------------------------
June 30, July 1,
2007 2006
--------------------------------------------------------------------------------------------------------------------------
Revenues $111,338,757 $96,078,710
Cost of services (1) 85,003,524 71,868,210
--------------------------------------------------------------------------------------------------------------------------
Gross profit 26,335,233 24,210,500
--------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Selling, general and administrative (2) 20,722,038 20,270,785
Depreciation 559,792 577,667
Amortization 160,164 143,064
--------------------------------------------------------------------------------------------------------------------------
21,441,994 20,991,516
--------------------------------------------------------------------------------------------------------------------------
Operating income 4,893,239 3,218,984
--------------------------------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income, net of interest expense 711 (129,443)
Gain (loss) on foreign currency transactions 11,354 (10,698)
Legal settlement 800,000
--------------------------------------------------------------------------------------------------------------------------
812,065 (140,141)
--------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,705,304 3,078,843
Income taxes 2,281,204 408,595
--------------------------------------------------------------------------------------------------------------------------
Net income 3,424,100 2,670,248
Other comprehensive income
Foreign currency translation adjustment 170,163 71,812
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income $3,594,263 $2,742,060
==========================================================================================================================
(1) Includes stock-based compensation expense of $4,008 and $30,441 for the
twenty-six weeks ended June 30, 2007 and July 1, 2006, respectively.
(2) Includes stock-based compensation expense of $89,696 and $562,875 for the
twenty-six weeks ended June 30, 2007 and July 1, 2006, respectively.
The accompanying notes are an integral part of these
financial statements.
5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME - (Continued)
Twenty-Six Weeks Ended June 30,
2007 and July 1, 2006
(Unaudited)
-------------------------------------------------------------------------------
June 30, July 1,
2007 2006
-------------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Basic earnings per share $0.29 $0.23
=========================================================================================================================
Weighted average number of common shares outstanding 11,908,292 11,751,757
=========================================================================================================================
Diluted earnings per share
Diluted earnings per share $0.28 $0.22
=========================================================================================================================
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options of 512,910 and 288,046 in
the twenty-six weeks ended June 30, 2007 and July 1, 2006,
respectively) 12,421,202 12,039,803
=========================================================================================================================
The accompanying notes are an integral part of these
financial statements.
6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Thirteen Weeks Ended June 30, 2007 and July 1, 2006
(Unaudited)
-------------------------------------------------------------------------------
June 30, July 1,
2007 2006
-----------------------------------------------------------------------------------------------------------------------
Revenues 56,845,609 $49,024,924
Cost of services (1) 42,886,954 36,845,416
------------------------------------------------------------------------------------------------------------------------
Gross profit 13,958,655 12,179,508
-----------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Selling, general and administrative (2) 10,627,903 10,184,763
Depreciation 286,088 296,480
Amortization 80,082 71,532
-----------------------------------------------------------------------------------------------------------------------
10,994,073 10,552,775
-----------------------------------------------------------------------------------------------------------------------
Operating income 2,964,582 1,626,733
-----------------------------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income, net of interest expense 8,352 (64,092)
Gain on foreign currency transactions 13,317 2,408
-----------------------------------------------------------------------------------------------------------------------
21,669 (61,684)
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,986,251 1,565,049
Income tax expense (benefit) 1,133,067 (293,874)
-----------------------------------------------------------------------------------------------------------------------
Net income 1,853,184 1,858,923
Other comprehensive income
Foreign currency translation adjustment 181,926 86,759
-----------------------------------------------------------------------------------------------------------------------
Comprehensive income $2,035,110 $1,945,682
=======================================================================================================================
(1) Includes stock-based compensation credit of $9,331 and stock based
compensation expense $18,323 for the thirteen weeks ended June 30, 2007 and
July 1, 2006, respectively.
(2) Includes stock-based compensation credit of $82,967 and stock based
compensation expense $270,026 for the thirteen weeks ended June 30, 2007
and July 1, 2006, respectively.
The accompanying notes are an integral part of these
financial statements.
7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME - (Continued)
Thirteen Weeks Ended June 30, 2007 and July 1, 2006
(Unaudited)
------------------------------------------------------------------------------
June 1, July 1,
2007 2006
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.16 $0.16
=====================================================================================================================
Weighted average number of common shares outstanding 11,931,649 11,761,688
=====================================================================================================================
Diluted earnings per share $0.15 $0.15
=====================================================================================================================
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options of 546,999 and 282,685 in
the thirteen weeks ended June 30, 2007 and July 1, 2006,
respectively) 12,478,648 12,044,373
======================================================================================================================
The accompanying notes are an integral part of these
financial statements.
8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Twenty-Six Weeks Ended June 30, 2007
(Unaudited)
------------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit Total
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 30, 2006 11,822,126 $591,107 $101,559,302 $1,001,488 ($19,758,635) $83,393,262
Issuance of stock under
employee stock purchase plan 13,017 651 65,736 66,387
Exercise of stock options 143,500 7,174 546,096 553,270
Translation adjustment 170,163 170,163
Stock based compensation expense 93,704 93,704
Net income 3,424,100 3,424,100
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2007 11,978,643 $598,932 $102,264,838 $1,171,651 ($16,334,535) $87,700,886
=================================================================================================================================
The accompanying notes are an integral part of these
financial statements.
9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Twenty-Six Weeks
Ended June 30, 2007 and July 1, 2006
(Unaudited)
-----------------------------------------------------------------------------
June 30, July 1,
2007 2006
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $3,424,100 $2,670,248
-------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of acquisition:
Depreciation and amortization 723,293 720,731
Stock-based compensation expense 93,704 593,316
Provision for losses on accounts receivable 183,000 (17,000)
Deferred tax assets 1,603,050 (186,290)
Changes in assets and liabilities:
Accounts receivable (4,822,353) (3,136,844)
Restricted cash 8,572,064
Prepaid expenses and other current assets (1,376,487) (71,556)
Accounts payable and accrued expenses 3,297,314 (6,098,258)
Accrued compensation 759,898 1,393,005
Payroll and withheld taxes (46,791) 93,150
Income taxes payable 94,367 (1,448,821)
--------------------------------------------------------------------------------------------------------------------------
Total adjustments 508,995 413,497
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $3,933,095 $3,083,745
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
financial statements.
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Twenty-Six Weeks Ended June 30, 2007 and July 1, 2006
(Unaudited)
------------------------------------------------------------------------------
June 30, July 1,
2007 2006
-------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property and equipment acquired ($373,641) ($1,192,405)
Decrease (increase) in deposits 6,894 (26,274)
Cash paid for acquisition, net of working capital acquired (621,516)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (366,747) (1,840,195)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 66,387 179,614
Exercise of stock options 553,270 65,408
Net borrowings on line of credit 1,600,000
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 619,657 1,845,022
------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 248,109 71,812
------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 4,434,114 3,160,384
Cash and cash equivalents at beginning of period 2,449,428 3,761,063
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $6,883,542 $6,921,447
========================================================================================================================
Supplemental cash flow information:
Cash paid for:
Interest expense $131,736 $1,058,714
Income taxes $620,080 $1,629,295
The accompanying notes are an integral part of these
financial statements.
11
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 30, 2006. 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 twenty-six weeks ended June 30, 2007 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 30, 2006 was a 52-week reporting year. The
second quarter of 2006, the 2006 fiscal year and the second quarter of 2007
ended on the following dates, respectively:
Period Ended Weeks in Quarter Weeks in Year to Date
------------------------------------------------------------------------
July 1, 2006 Thirteen Twenty-Six
December 30, 2006 Thirteen Fifty-Two
June 30, 2007 Thirteen Twenty-Six
3. Use of Estimates and Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates.
The Company has risk participation arrangements with respect to workers
compensation and health care insurance. The amounts included in the
Company's costs related to this risk participation are estimated and can
vary based on changes in assumptions, the Company's claims experience or
the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty
relating to the performance of the U.S. economy, competition, demand for
the Company's services, adverse litigation and claims, as well as the
hiring, training and retention of key employees.
4. Acquisitions
On April 17, 2006, the Company purchased the operating assets of Techpubs,
LLC ("Techpubs"), a Rhode Island limited liability company. Techpubs is a
specialty provider of engineering services. The acquisition has been
accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141 "Business Combinations." Accordingly, the results
of operations of the acquired company have been included in the
consolidated results of operations of the Company from the date of
acquisition and are included in the Engineering segment.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
4. Acquisitions (Continued)
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 three
twelve month periods following the purchase.
The allocation of the purchase price, including the earnout of $259,000
paid for the twelve months ended April 30, 2007 is as follows:
Amount Period of Amortization
(in thousands)
-----------------------------------------------
Non-compete agreements $31 5 years
Customer relationships 140 5 years
Goodwill 710
-----------------------------------------------------------------------
$881
=======================================================================
In connection with certain acquisitions, the Company is obligated to pay
contingent consideration to the selling shareholders upon the acquired
business achieving certain earnings targets over periods ranging from two
to three years following the acquisition. In general, the contingent
consideration amounts fall into two categories: (a) Deferred Consideration
- fixed amounts are due if the acquisition achieves a base level of
earnings which has been determined at the time of acquisition and (b)
Earnouts - amounts payable are not fixed and are based on the growth in
excess of the base level earnings. The Company's outstanding Deferred
Consideration obligations, which relate to various acquisitions, are
anticipated to result in approximately the following payments:
Amount
Year Ending (in thousands)
-------------------------------------------------------
December 29, 2007 $700
December 27, 2008 800
January 2, 2010 100
-------------------------------------------------------
$1,600
=======================================================
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 the
Techpubs acquisition had occurred as of the beginning of the periods
presented. These results are not necessarily indicative of results of
future operations nor of results that would have occurred had the
acquisition of Techpubs been consummated as of the beginning of the periods
presented.
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------------- ----------------------
Amounts (in thousands,
except earnings per share data July 1, July 1,
June 30, 2006 June 30, 2006
2007 (Proforma) 2007 (Proforma)
--------------------- --- ----------------------------------------------
Revenues $56,846 $49,065 $111,339 $96,379
Operating income 2,965 1,635 4,893 3,276
Net income $1,853 $1,860 $3,424 $2,690
Earnings per share (Diluted) $0.15 $0.15 $0.28 $0.22
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
5. Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of
assets at the end of their estimated useful lives. The annual rates are 20%
for computer hardware and software as well as furniture and office
equipment. Leasehold improvements are amortized over the shorter of the
estimated life of the asset or the lease term.
The Company writes off fully depreciated assets each year. During the six
months ended June 30, 2007, the write offs were $1,392,000.
6. New Accounting Standards
In February 2007, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115"
("SFAS 159"). SFAS 159 expands the use of fair value accounting but does
not affect existing standards, which require assets and liabilities to be
carried at fair value. Under SFAS 159, a company may elect to use fair
value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and other eligible financial instruments. SFAS 159
is effective for fiscal years beginning after November 15, 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies the principle that fair value should be
based on assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes
information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective for the Company's fiscal year
beginning with the current year.
We are currently evaluating the impact, if any, that the adoption of SFAS
157 and 159 will have on our consolidated financial statements.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
7. Line of Credit
The Company and its subsidiaries are party to a loan agreement with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25 million Revolving Credit Facility and
includes a sub-limit of $5.0 million for letters of credit (the "Revolving
Credit Facility"). Borrowings under the Revolving Credit Facility bear
interest at one of two alternative rates, as selected by the Company at
each incremental borrowing. These alternatives are: (i) LIBOR (London
Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's
prime rate.
All borrowings under the Revolving Credit Facility are collateralized by
all of the assets of the Company and its subsidiaries and a pledge of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends.
The Revolving Credit Facility expires in August 2011. The weighted average
interest rates, which include unused line fees, under the Revolving Credit
Facility for the twenty-six weeks ended June 30, 2007 and July 1, 2006 were
35.4% and 8.3%, respectively. The weighted average interest rate for the
2007 period is disproportionately high because of unused line fees in
relation to the interest expense incurred. During the twenty-six weeks
ended June 30, 2007 and July 1, 2006, the Company's outstanding borrowings
ranged from $-0- to $1.5 million and $200,000 to $1.0 million,
respectively. At June 30, 2007 and December 30, 2006, there were no
outstanding borrowings under this facility. At June 30, 2007, there was a
letter of credit outstanding for $116,000, which is used as collateral for
a lease obligation. At June 30, 2007, the Company had availability for
additional borrowings under the Revolving Credit Facility of $24.9 million.
8. Interest Expense, Net
Interest expense, net consisted of the following (in thousands):
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Thirteen Weeks Ended Thirteen Weeks Ended
June 30, 2007 July 1, 2006 June 30, 2007 July 1, 2006
----------------------------------------------------------------------------------------------------------------
Interest expense ($38) ($350) ($13) ($181)
Interest income 39 220 21 117
----------------------------------------------------------------------------------------------------------------
$1 ($130) $8 ($64)
================================================================================================================
9. Goodwill and Intangibles
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires
the Company to perform a goodwill impairment test on at least an annual
basis. Application of the goodwill impairment test requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for the
businesses, the useful life over which cash flows will occur and
determination of 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 influence the market multiples of comparable businesses
and consequently could influence the results of future annual impairment
tests. There were no events during the twenty-six weeks ended June 30, 2007
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
------------------------------------------------------------------------------
9. Goodwill and Intangibles (Continued)
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
June 30, 2007 December 30, 2006
-----------------------------------------------------------------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------------------------------------------------------------------------------
Definite-lived intangible assets
Non-compete agreements $145 $49 $145 $35
Customer relationships 930 517 930 371
----------------------------------------------------------------------------------------------------------------------------
Total $1,075 $566 $1,075 $406
============================================================================================================================
10. Stockholders' Equity
Common Stock Reserved
Shares of unissued common stock were reserved for the following purposes
(in thousands):
June 30, December 30,
2007 2006
-------------------------------------------------------------------------------------------------------------------
Exercise of options outstanding 1,525 1,768
Future grants of options 764 29
-------------------------------------------------------------------------------------------------------------------
Total 2,289 1,797
===================================================================================================================
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
11. Stock - Based Compensation
Effective as of January 1, 2006, the Company has adopted SFAS 123R, "Share
Based Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or
liability instruments issued.
SFAS 123R covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share appreciation rights and employee share purchase plans.
In addition to the accounting standard that sets forth the financial
reporting objectives and related accounting principles, SFAS 123R includes
an appendix of implementation guidance that provides expanded guidance on
measuring the fair value of share-based payment awards. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS
123R. The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123R.
At June 30, 2007, the Company had five stock-based employee compensation
plans. Stock-based compensation of $93,704, or $0.01 per share, and of
$593,316, or $0.05 per share, was recognized for the twenty-six weeks ended
June 30, 2007 and July 1, 2006, respectively. Share-based compensation
credit of $92,297, or $0.01 per share, and an expense of $288,349, or $0.02
per share, was recognized for the thirteen weeks ended June 30, 2007 and
July 1, 2006, respectively. The Company anticipates that share-based
compensation will not exceed $275,000 or approximately $0.02 per share, for
the year ending December 29, 2007.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model. There were options to purchase
5,000 shares of common stock granted during the twenty-six weeks ended June
30, 2007. There were no grants issued during the thirteen weeks ended June
30, 2007. The share-based compensation expense attributable to the 5,000
options was $2,468 for the twenty-six weeks and thirteen weeks ended June
30, 2007.
Expected volatility is based on the historical volatility of the price of
our common stock since June 30, 2002. 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 56.42%, 5.02% and 15.98% for the
twenty-six weeks ended June 30, 2007, respectively. The stock price
volatility, risk free interest rate and annualized forfeiture rate was
46.96%, 5.10% and 9.12% for the twenty-six weeks ended July 1, 2006,
respectively.
As of June 30, 2007, we have approximately $501,000 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 3 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 twenty-six weeks
of fiscal years 2007 and 2006 of $553,270 and $65,408, respectively. The
impact of these cash receipts is included in financing activities in the
accompanying consolidated statements of cash flows.
17
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 June 30, 2007, options to purchase 73,455 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 June 30, 2007, 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 June
30, 2007, options to purchase 935,545 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 June 30, 2007,
options to purchase 63,694 shares of common stock were available for future
grants, and options to purchase 445,500 shares of common stock were
outstanding.
2007 Omnibus Equity Compensation Plan (the 2007 Plan)
The 2007 Plan, approved by the Company's stockholders in June 2007,
provides for the issuance of up to 700,000 shares of the Company's common
stock to officers, non-employee directors, employees of the Company and its
subsidiaries or to consultants and advisors utilized by the Company. No
more than 350,000 shares of common stock in the aggregate may be issued
pursuant to grants of stock awards, stock units, performance shares and
other stock-based awards. No more than 300,000 shares of common stock with
respect to awards may be granted to any individual during any fiscal year.
The Compensation Committee of the Board of Directors determines the vesting
period at the time of grant. As of June 30, 2007, options to purchase
700,000 shares of common stock were available for future grants, and there
were no options to purchase shares of common stock outstanding.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
11. Stock - Based Compensation (Continued)
Incentive Stock Option Plans (Continued)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with stockholder approval, effective January 1, 2002. Under the
Purchase Plan, employees meeting certain specific employment qualifications
are eligible to participate and can purchase shares of common stock
semi-annually through payroll deductions at the lower of 85% of the fair
market value of the stock at the commencement or end of the offering
period. The purchase plan permits eligible employees to purchase common
stock through payroll deductions for up to 10% of qualified compensation.
During the twenty-six weeks ended June 30, 2007, there were 13,017 shares
issued under the Purchase Plan for net proceeds of $66,387. As of June 30,
2007, there were 212,171 shares available for issuance under the Purchase
Plan. The share-based compensation expense attributable to the 212,171
shares issued was $24,467 and $12,508 for the twenty-six weeks ended June
30, 2007 and July 1, 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 previously claimed tax deductions claimed from
goodwill impairments. On June 8, 2006, the goodwill impairment deductions
of approximately $13.5 million were disallowed by the Internal Revenue
Service as a deduction in the December 31, 2002 income tax return. Based
upon the methodology applied by the Internal Revenue Service, these
deductions are best substantiated by facts and circumstances arising during
2005 and therefore the deductions were included in the December 31, 2005
federal income tax return. This reclassification of the deduction from the
year ended December 31, 2002 to the year ended December 31, 2005 resulted
in the reversal of the income tax reserve of approximately $1.6 million, of
which approximately $1.0 million was recorded in the three months ended
July 1, 2006.
19
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 to the consolidated financial statements).
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Twenty-Six Weeks Ended Information
June 30, 2007 Technology Engineering Commercial Corporate Total
--------------------------------------------------------------------------------------------------------------------------
Revenue $52,306 $37,231 $21,802 $111,339
Operating expenses (1) (2) 48,980 35,704 21,042 105,726
--------------------------------------------------------------------------------------------------------------------------
EBITDA ((4)) 3,326 1,527 760 5,613
Depreciation 253 232 75 560
Amortization of intangibles 143 17 160
--------------------------------------------------------------------------------------------------------------------------
Operating income 2,930 1,278 685 4,893
Interest income, net of interest
expense (1) (1)
Gain on foreign currency transactions (11) (11)
Legal settlement (800) (800)
Income taxes 1,172 515 274 320 2,281
---------------------------------------------------------------------------------------------------------------------------
Net income $1,759 $774 $411 $480 $3,424
===========================================================================================================================
Total assets $54,525 $27,242 $13,043 $14,168 $108,978
Capital expenditures $240 $52 $7 $75 $374
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
13. Segment Information (Continued)
Twenty-Six Weeks Ended Information
July 1, 2006 Technology Engineering Commercial Corporate Total
-----------------------------------------------------------------------------------------------------------------------------
Revenue $48,887 $25,085 $22,107 $96,079
Operating expenses (1) 46,112 24,957 21,070 92,139
-----------------------------------------------------------------------------------------------------------------------------
EBITDA (4) 2,775 128 1,037 3,940
Depreciation 258 233 87 578
Amortization of intangibles 143 143
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 2,374 (105) 950 3,219
Interest expense, net of (interest
income) 66 34 29 129
Loss on foreign currency transactions 11 11
Income taxes (benefit) 307 (20) 122 409
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $2,001 ($130) $799 $2,670
============================================================================================================================
Total assets $54,351 $21,631 $12,816 $17,094 $105,892
Capital expenditures $146 $890 $156 $1,192
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
13. Segment Information (Continued)
Thirteen Weeks Ended Information
June 30, 2007 Technology Engineering Commercial Corporate Total
----------------------------------------------------------------------------------------------------------------------------
Revenue $27,249 $18,256 $11,341 $56,846
Operating expenses (1) (3) 25,417 17,399 10,699 53,515
-----------------------------------------------------------------------------------------------------------------------------
EBITDA (4) 1,832 857 642 3,331
Depreciation 134 114 38 286
Amortization of intangibles 72 8 80
-----------------------------------------------------------------------------------------------------------------------------
Operating income 1,626 735 604 2,965
Interest income, net of interest
expense (4) (3) (1 ) (8)
Gain on foreign currency transactions (13) (13)
Income taxes 618 285 230 1,133
-----------------------------------------------------------------------------------------------------------------------------
Net income $1,012 $466 $375 $1,853
=============================================================================================================================
Total assets $54,525 $27,242 $13,043 $14,168 $108,978
Capital expenditures $79 $50 $7 $28 $164
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
13. Segment Information (Continued)
Thirteen Weeks Ended Information
July 1, 2006 Technology Engineering Commercial Corporate Total
------------------------------------------------------------------------------------------------------------------------------
Revenue $24,185 $13,700 $11,140 $49,025
Operating expenses (1) 22,812 13,549 10,669 47,030
----------------------------------------------------------------------------------- --- --------------------------------------
EBITDA (4) 1,373 151 471 1,995
Depreciation 128 125 44 297
Amortization intangibles 71 71
------------------------------------------------------------------------------------------------------------------------------
Operating income 1,174 26 427 1,627
Interest expense, net of interest
income 32 18 14 64
Gain on foreign currency
transactions (2) (2)
Income taxes benefit (214) (2) (78) (294)
-------------------------------------------------------------------------------------------------------------------------------
Net income $1,356 $12 $491 $1,859
===============================================================================================================================
Total assets $54,351 $21,631 $12,816 $17,094 $105,892
Capital expenditures $51 $380 $431
(1) Operating expenses exclude depreciation and amortization.
(2) Operating expenses include $93,704 and $593,316 of stock-based
compensation expense for the twenty-six weeks ended June 30, 2007 and
July 1, 2006, respectively.
(3) Operating expenses include $92,297 of stock -based compensation credit
and $288,349 of stock- based compensation expense for the thirteen
weeks ended June 30, 2007 and July 1, 2006, respectively.
(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.
23
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 twenty-six weeks ended June 30, 2007 and July 1, 2006 are
as follows (in thousands):
Twenty-Six Weeks Ended
---------------------------------------------------------------------------------------------------------
June 30, July 1,
2007 2006
---------------------------------------------------------------------------------------------------------
Revenues
U. S. $104,495 $90,960
Canada 6,844 5,119
---------------------------------------------------------------------------------------------------------
$111,339 $96,079
=========================================================================================================
Fixed Assets
U. S. $4,193 $4,524
Canada 14 111
---------------------------------------------------------------------------------------------------------
$4,207 $4,635
=========================================================================================================
Revenues by geographic area for the thirteen weeks ended June 30, 2007 and
July 1, 2006 are as follows (in thousands):
Thirteen Weeks Ended
---------------------------------------------------------------------------------------------------------
June 30, July 1,
2007 2006
---------------------------------------------------------------------------------------------------------
Revenues
U. S. $53,243 $46,058
Canada 3,603 2,967
---------------------------------------------------------------------------------------------------------
$56,846 $49,025
=========================================================================================================
24
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. The former officers and
directors alleged that the Company wrongfully limited the number of shares
of the Company's common stock that could have been sold by the plaintiffs
under a registration rights agreement entered into in connection with an
acquisition transaction pursuant to which the plaintiffs became
shareholders of the Company.
A trial in 2002 resulted in a judgment in favor of the plaintiffs for $7.6
million that was affirmed on appeal. In June 2006, the Company paid $8.6
million, which included interest and other items of $1.0 million to the
date of payment to the plaintiffs to satisfy the judgment.
In November 2002, the Company filed suit on professional liability claims
against the attorneys and law firms who had served as its counsel in the
acquisition transaction and in connection with its subsequent dealings with
the plaintiffs concerning their various relationships with the Company
resulting from that transaction. In its lawsuit against its former counsel,
the Company is seeking complete indemnification with respect to (1) its
costs and counsel fees incurred in defending itself against the claims of
the plaintiffs; (2) the amount paid to satisfy the judgment; and (3) its
costs and counsel fees incurred in the prosecution of the legal malpractice
action itself. In February 2007, the Company reached a settlement with one
of the law firm defendants resulting in the recovery of $800,000. Discovery
proceedings are continuing with the other defendants and a trial will
likely be scheduled for the latter part of 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.
25
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.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Overview
RCM participates in a market that is cyclical in nature and extremely
sensitive to economic changes. As a result, the impact of economic changes on
revenues and operations can be substantial, resulting in significant
volatility in the Company's financial performance.
RCM's operational performance gained momentum in 2006 with a moderate
increase in revenues and earnings. This was attributed to an improvement in
the general economy, strength in our sector and increased capital spending by
clients in selected markets. All three major business segments of the Company
benefited from stronger economic conditions. So far, in 2007, RCM's financial
performance has shown further modest improvement as compared to the same
period a year ago, due to the continued strength of the economy and the
marketing efforts of the Company. 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.
27
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 and staffing services. The Company's Engineering
Services and Information Technology Services segments also perform project
services. All of the Company's segments derive revenue from permanent
placement fees.
Project Services - The Company recognizes revenues in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition" ("SAB 104") which clarifies application of U.S.
generally accepted accounting principles to revenue transactions. Project
services are generally provided on a cost-plus-fixed-fee or time-and-material
basis. Typically, a customer will outsource a discrete project or activity
and the Company assumes responsibility for the performance of such project or
activity. The Company recognizes revenues and associated costs on a gross
basis as services are provided to the customer and costs are incurred using
its employees. The Company, from time to time, enters into contracts
requiring the completion of specific deliverables. The Company recognizes
revenue on these deliverables at the time the client accepts and approves the
deliverables. In instances where project services are provided on a
fixed-price basis and the contract will extend beyond a 12-month period,
revenue is recorded in accordance with the terms of each contract. In some
instances, revenue is billed and recorded at the time certain milestones are
reached, as defined in the contract. In other instances, revenue is billed
and recorded based upon contractual rates per hour. In addition, some
contracts contain "Performance Fees" (bonuses) for completing a contract
under budget. Performance Fees, if any, are recorded when the contract is
completed and the revenue is reasonably certain of collection. Some contracts
also limit revenues and billings to maximum amounts. Provision for contract
losses, if any, is made in the period such losses are determined. For
contracts where there are multiple deliverables and the work has not been
100% complete on a specific deliverable the costs have been deferred. The
associated costs are expensed when the related revenue is recognized.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Revenue Recognition (Continued)
Consulting and Staffing Services - Revenues derived from consulting and
staffing services are recorded on a gross basis as services are performed and
associated costs have been incurred using employees of the Company. In these
circumstances, the Company assumes the risk of acceptability of its employees
to its customers. In certain cases, the Company may utilize other companies
and their employees to fulfill customer requirements. In these cases, the
Company receives an administrative fee for arranging for, billing for, and
collecting the billings related to these companies. The customer is typically
responsible for assessing the work of these companies who have responsibility
for acceptability of their personnel to the customer. Under these
circumstances, the Company's reported revenues are net of associated costs
(effectively the administrative fee).
Permanent Placement Services - The Company earns permanent placement fees
from providing permanent placement services. Fees for placements are
recognized at the time the candidate commences employment. The Company
guarantees its permanent placements on a prorated basis for 90 days. In the
event a candidate is not retained for the 90-day period, the Company will
provide a suitable replacement candidate. In the event a replacement
candidate cannot be located, the Company will provide a prorated refund to
the client. An allowance for refunds, based upon the Company's historical
experience, is recorded in the financial statements. Revenues are recorded on
a gross basis as a component of revenue.
Accounts Receivable
The Company's accounts receivable are primarily due from trade customers.
Credit is extended based on evaluation of customers' financial condition and,
generally, collateral is not required. Accounts receivable payment terms vary
and are stated in the financial statements at amounts due from customers net
of an allowance for doubtful accounts. Accounts outstanding longer than the
payment terms are considered past due. The Company determines its allowance
by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company's previous loss history, the
customer's current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over the
fair market value of identifiable assets. In accordance with SFAS 142,
"Goodwill and Other Intangible Assets," the Company performs its annual
goodwill impairment testing, by reportable segment, in the fourth quarter, or
more frequently if events or changes in circumstances indicate that goodwill
may be impaired. Application of the goodwill impairment test requires
significant judgments including estimation of future cash flows, which is
dependent on internal forecasts, estimation of the long-term rate of growth
for the businesses, the useful life over which cash flows will occur, and
determination of 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 2006 as of November
30, 2006 and identified no impairments. Goodwill was $39.6 million and $39.3
million at June 30, 2007 and December 30, 2006, 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.
29
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.
Effective as of January 1, 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 stock-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.
In addition to the accounting standard that sets forth the financial
reporting objectives and related accounting principles, SFAS 123R includes an
appendix of implementation guidance that provides expanded guidance on
measuring the fair value of share-based payment awards. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123R.
Since the Company adopted SFAS 123R, effective January 1, 2006 using the
modified-prospective-transition-method the Company is required to record
compensation expense for all awards granted after the date of adoption and
for the unvested portion of previously granted awards that remain outstanding
as of the beginning of the period of adoption. The Company measures
share-based compensation cost using the Black-Scholes option pricing model.
Accounting for Income Taxes
In establishing the provision for income taxes and deferred income tax assets
and liabilities, and valuation allowances against deferred tax assets, the
Company makes judgments and interpretations based on enacted tax laws,
published tax guidance, and estimates of future earnings. As of June 30,
2007, the Company had total net deferred tax assets of $1.6 million,
primarily representing the tax effect of a tax net operating loss
carryfoward. Realization of deferred tax assets is dependent upon the
likelihood that future taxable income will be sufficient to realize these
benefits over time, and the effectiveness of tax planning strategies in the
relevant tax jurisdictions. In the event that actual results differ from
these estimates and assessments, additional valuation allowances may be
required.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"), on January 1, 2007. Because of
the implementation of FIN 48, we recognized no material adjustments in the
liability for unrecognized income tax benefits. The Company conducts its
operations in multiple tax jurisdictions in United States and Canada. With
few exceptions, the Company is no longer subject to audits by tax authorities
for tax years prior to 2001. At June 30, 2007, the Company did not have any
unrecognized tax benefits.
30
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.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Twenty-Six Weeks Ended June 30, 2007 Compared to Twenty-Six Weeks Ended July 1,
2006
A summary of operating results for the fiscal periods ended June 30, 2007 and
July 1, 2006 is as follows (in thousands, except for earnings per share data):
June 30, 2007 July 1, 2006
---------------------------------------------------------------------------------------------------------------------------
% of % of
Amount Revenue Amount Revenue
---------------------------------------------------------------------------------------------------------------------------
Revenues $111,339 100.0 $96,079 100.0
Cost of services 85,004 76.3 71,868 74.8
--------------------------------------------------------------------------------------------------------------------------
Gross profit 26,335 23.7 24,211 25.2
--------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 20,722 18.6 20,271 21.1
Depreciation and amortization 720 .7 721 .8
--------------------------------------------------------------------------------------------------------------------------
21,442 19.3 20,992 21.9
--------------------------------------------------------------------------------------------------------------------------
Operating income 4,893 4.4 3,219 3.3
Other (expense) income 812 .7 (140) (.1)
--------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,705 5.1 3,079 3.2
Income taxes 2,281 2.0 409 .4
--------------------------------------------------------------------------------------------------------------------------
Net income $3,424 3.1 $2,670 2.8
==========================================================================================================================
Earnings per share
Basic: $0.29 $.23
Diluted: $0.28 $.22
==========================================================================================================================
The above summary is not a presentation of results of operations under
accounting principles generally accepted in the United States of America and
should not be considered in isolation or as an alternative to results of
operations as an indication of the Company's performance.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The year to
date reporting periods ended June 30, 2007 and July 1, 2006 consisted of
twenty-six weeks each.
Revenues. Revenues increased 15.9%, or $15.3 million, for the twenty-six weeks
ended June 30, 2007 as compared to the same period in the prior year (the
"comparable prior year period"). Revenues increased $3.4 million in the
Information Technology ("IT") segment, increased $12.1 million in the
Engineering segment, and decreased $305,000 in the Commercial segment.
Management primarily 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 2007 to remain generally consistent on a
prorated basis with the revenues for the twenty-six weeks ended June 30, 2007.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-----------------------------------------------------------------------------
Twenty-Six Weeks Ended June 30, 2007 Compared to Twenty-Six Weeks Ended
July 1, 2006 (Continued)
Cost of Services. Cost of services increased 18.0%, or $13.1 million, for the
twenty-six weeks ended June 30, 2007 as compared to the comparable prior year
period. This increase was primarily due to the increase in revenues. Cost of
services as a percentage of revenues increased to 76.3% for the twenty-six weeks
ended June 30, 2007 from 74.8% for the comparable prior year period. This
increase was primarily attributable to increased revenues in the Engineering
segment, which had lower gross margins. Management anticipates the ratio of cost
of sales to revenues for the remainder of fiscal 2007 to remain comparable to
the twenty-six weeks ended June 30, 2007.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 2.2%, or $451,000, for the twenty-six weeks ended June 30,
2007 as compared to the comparable prior year period. As a percentage of
revenues, SGA expenses were 18.6% for the twenty-six weeks ended June 30, 2007
as compared to 21.1% for the comparable prior year period. This decrease was
primarily attributable the spreading of certain fixed administrative costs over
a larger revenue base. Management reasonably expects SGA expenses for the
remainder of fiscal 2007 to remain consistent with the SGA expenses for the
twenty-six weeks ended June 30, 2007.
Depreciation and Amortization. Depreciation and amortization were essentially
unchanged for the twenty-six weeks ended June 30, 2007 as compared to the
comparable prior year period.
Other Expense (Income). Other expense (income) consists of interest expense, net
of interest income and gains and losses on foreign currency transactions and, in
2007, the proceeds from a legal settlement. For the twenty-six weeks ended June
30, 2007, actual interest expense of $37,900 was offset by $38,600 of interest
income, which was earned from short-term money market deposits. Interest
expense, net decreased $130,200 for the twenty-six weeks ended June 30, 2007 as
compared to the comparable prior year period. This decrease was primarily due to
decreased borrowing requirements, which was offset by an increase in weighted
average interest rates on borrowed funds. Losses on foreign currency
transactions decreased $22,100 in the twenty-six weeks ended June 30, 2007 as
compared to the comparable prior year period. This modest decrease was
attributable to the favorable exchange rates realized during the 2007 period.
The proceeds from the legal settlement in 2007 were realized when the Company
reached a settlement with one of the law firm defendants resulting in the
recovery of $800,000. (See footnote 13 to the consolidated financial
statements).
Income Tax. Income tax expense increased 457.7%, or $1.9 million, for the
twenty-six weeks ended June 30, 2007 as compared to the comparable prior year
period. This increase was principally attributable to an increase in income
before taxes. For the twenty-six weeks ended July 1, 2006, there was 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 was 40.0% for the twenty-six weeks ended June 30, 2007 as compared to
45.8% before the tax reversal in the comparable prior year period. The decrease
in effective tax rate was attributable to the decreased amount of
non-tax-deductible items in relation to increased income before income tax
purposes.
33
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Twenty-Six Weeks Ended June 30, 2007 Compared to Twenty-Six Weeks Ended July 1,
2006 - (Continued)
Segment Discussion (See Footnote 13)
Information Technology
IT revenues of $52.3 million in 2007 increased $3.4 million, or 7.0%, compared
to 2006. The increase in revenue was attributable to the strengthening of demand
for the Company's IT services. The IT segment EBITDA was $3.3 million, or 59.3%
of the overall EBITDA for 2007, as compared to $2.8 million, or 70.4% of the
overall EBITDA, for 2006.
Engineering
Engineering revenues of $37.2 million in 2007 increased $12.1 million, or 48.4%,
compared to 2006. The increase in revenue was attributable to the strengthening
of demand for the Company's engineering services. The Engineering segment EBITDA
was $1.5 million, or 27.2% of the overall EBITDA for 2007, as compared to
$128,000, or 3.2% of the overall EBITDA for 2006.
Commercial
Commercial revenues of $21.8 million in 2007 decreased $305,000, or 1.4%
compared to 2006. The decrease in revenues for the Commercial segment was
essentially unchanged. The Commercial segment EBITDA was $760,000, or 13.5% of
the overall EBITDA, as compared to $1.0 million, or 26.4% of the overall EBITDA
for 2006.
34
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended June 30, 2007 Compared to Thirteen Weeks Ended July 1, 2006
A summary of operating results for the fiscal periods ended June 30, 2007 and
July 1, 2006 is as follows (in thousands, except for earnings per share data):
June 30, 2007 July 1, 2006
------------------------------------------------------------------------------------------------------------------------------
Amount % of Revenue Amount % of Revenue
------------------------------------------------------------------------------------------------------------------------------
Revenues $56,846 100.0 $49,025 100.0
Cost of services 42,887 75.4 36,845 75.2
------------------------------------------------------------------------------------------------------------------------------
Gross profit 13,959 24.6 12,180 24.8
------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 10,628 18.7 10,185 20.8
Depreciation and amortization 366 .6 368 .7
------------------------------------------------------------------------------------------------------------------------------
10,994 19.3 10,553 21.5
------------------------------------------------------------------------------------------------------------------------------
Operating income 2,965 5.2 1,627 3.3
Other income (expense) 22 (62) (.1)
------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 2,987 5.2 1,565 3.2
Income tax expense (benefit) 1,133 1.9 (294) (.6)
-------------------------------------------------------------------------------------------------------------------------------
Net income $1,854 3.3 $1,859 3.8
===============================================================================================================================
Earnings per share
Basic: $0.16 $0.16
Diluted: $0.15 $0.15
===============================================================================================================================
The above summary is not a presentation of results of operations under
accounting principles generally accepted in the United States of America and
should not be considered in isolation or as an alternative to results of
operations as an indication of the Company's performance.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The second
quarter reporting periods ended June 30, 2007 and July 1, 2006 consisted of
thirteen weeks each.
Revenues. Revenues increased 16.0%, or $7.8 million, for the thirteen weeks
ended June 30, 2007 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue increased $3.1 million in the IT
segment, increased $4.6 million in the Engineering segment and increased
$201,000 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 each of the remaining two fiscal
quarters to remain generally consistent with the thirteen weeks ended June 30,
2007.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
------------------------------------------------------------------------------
Thirteen Weeks Ended June 30, 2007 Compared to Thirteen Weeks Ended
July 1, 2006 - (Continued)
Cost of Services. Cost of services increased 16.4%, or $6.0 million, for the
thirteen weeks ended June 30, 2007 as compared to the comparable prior year
period. This increase was primarily due to the increase in revenues. Cost of
services as a percentage of revenues increased to 75.4% for the thirteen weeks
ended June 30, 2007 from 75.2% for the comparable prior year period. This modest
increase 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 2007 to decrease as compared to
the thirteen weeks ended June 30, 2007, which is consistent with historical
performance.
Selling, General and Administrative. SGA expenses increased 4.3%, or $443,000,
for the thirteen weeks ended June 30, 2007 as compared to the comparable prior
year period. As a percentage of revenues, SGA expenses were 18.7% for the
thirteen weeks ended June 30, 2007 as compared to 20.8% for the comparable prior
year period. This decrease was primarily attributable to the spreading of
certain fixed administrative costs over a larger revenue base. Management
reasonably expects SGA expenses for the remainder of fiscal 2007 to remain
consistent with the SGA expenses for the thirteen weeks ended June 30, 2007.
Depreciation and Amortization. Depreciation and amortization were essentially
unchanged for the thirteen weeks ended June 30, 2007 as compared to the
comparable prior year period.
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 June 30, 2007, actual interest expense of $13,100 was offset by
$21,500 of interest income, which was earned from short-term money market
deposits. Interest expense, net decreased $72,400 for the thirteen weeks ended
June 30, 2007 as compared to the comparable prior year period. This decrease was
primarily due to decreased borrowing requirements, which was offset by an
increase in weighted average interest rates on borrowed funds. Gains on foreign
currency transactions increased $10,900 in the thirteen weeks ended June 30,
2007 as compared to the comparable prior year period. This modest increase was
attributable to the favorable exchange rates realized during the 2007 period.
Income Tax. Income tax expense increased $1.4 million for the thirteen weeks
ended June 30, 2007 as compared to the comparable prior year period. This
increase was principally attributable to an increase in income before taxes. For
the comparable period, there was 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 was 37.9% for the
thirteen weeks ended June 30, 2007 as compared to 45.1% before the tax reversal
in the comparable prior year period. The decrease in effective tax rate was
attributable to the decreased amount of non-tax-deductible items in relation to
increased income before income tax purposes.
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
-----------------------------------------------------------------------------
Thirteen Weeks Ended June 30, 2007 Compared to Thirteen Weeks Ended
July 1, 2006 - (Continued)
Segment Discussion (See Footnote 13)
Information Technology
IT revenues of $27.2 million in the second quarter of 2007 increased $3.1
million, or 12.7%, compared to second quarter of 2006. The increase in revenue
was attributable to the strengthening of demand for the Company's IT services.
The IT segment EBITDA was $1.8 million, or 55.0% of the overall EBITDA, for
second quarter of 2007 as compared to $1.4 million, or 68.8% of the overall
EBITDA, for second quarter of 2006.
Engineering
Engineering revenues of $18.3 million in second quarter of 2007 increased $4.6
million, or 33.3%, compared to second quarter of 2006. The increase in revenue
was attributable to the strengthening of demand for the Company's engineering
services. The Engineering segment EBITDA was $857,000, or 25.7% of the overall
EBITDA for second quarter of 2007 as compared to $151,000, or 7.6% of the
overall EBITDA, for second quarter of 2006.
Commercial
Commercial revenues of $11.3 million in second quarter of 2007 increased
$201,000, or 1.8%, compared to second quarter of 2006. The increase in revenue
for the Commercial segment was essentially unchanged. The Commercial segment
EBITDA was $642,000, or 19.3% of the overall EBITDA, for the second quarter of
2007 as compared to $471,000, or 23.6% of the overall EBITDA, for second quarter
2006.
37
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:
Twenty-Six Weeks Ended
-------------------------------------
June 30, 2007 July 1, 2006
-------------------------------------
(In thousands)
-------------------------------------
Cash provided by (used in)
Operating Activities $3,933 $3,084
Investing Activities ($367) ($1,840)
Financing Activities $620 $1,845
Operating Activities
Operating activities provided $3.9 million of cash for the twenty-six weeks
ended June 30, 2007 as compared to $3.1 million for the comparable 2006 period.
The increase in cash provided by operating activities was primarily attributable
to increased earnings, an increase in accounts payable and accrued expenses, an
increase in income taxes payable, and an increase in accrued compensation, which
was offset by an increase in accounts receivable, and an increase in prepaid
expenses and other current assets. Based on current operating activities and the
drivers of those activities, management reasonably expects that cash will be
provided from operating activities for the remainder of fiscal 2007. The Company
continues to institute enhanced controls and standardization over its
receivables collection and disbursement processes.
Investing Activities
Investing activities used $367,000 for the twenty-six weeks ended June 30, 2007
as compared to $1.8 million for the comparable 2006 period. The decrease in the
use of cash for investing activities for 2007 as compared to the comparable 2006
period was primarily attributable to a decrease in expenditures for property and
equipment and cash used for acquisitions.
Financing Activities
Financing activities principally consisted of receipt of proceeds from the
exercise of stock options of $553,000 in 2007 as compared to financing
activities borrowing $1.6 million of debt for the comparable 2006 period.
The Company and its subsidiaries are party to a loan agreement with Citizens
Bank of Pennsylvania, administrative agent for a syndicate of banks, which
provides for a $25 million Revolving Credit Facility and includes a sub-limit of
$5.0 million for letters of credit (the "Revolving Credit Facility"). Borrowings
under the Revolving Credit Facility bear interest at one of two alternative
rates, as selected by the Company at each incremental borrowing. These
alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable
margin, or (ii) the agent bank's prime rate.
All borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of the stock of its
subsidiaries. The Revolving Credit Facility also contains various financial and
non-financial covenants, such as restrictions on the Company's ability to pay
dividends.
38
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
----------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
The Revolving Credit Facility expires in August 2011. The weighted average
interest rates, which include unused line fees, under the Revolving Credit
Facility for the twenty-six weeks ended June 30, 2007 and July 1, 2006 were
35.4% and 8.3%, respectively. The weighted average interest rate for the 2007
period is disproportionately high because of unused line fees in relation to the
interest expense incurred. During the twenty-six weeks ended June 30, 2007 and
July 1, 2006, the Company's outstanding borrowings ranged from $-0- to $1.5
million and $200,000 to $1.0 million, respectively. At June 30, 2007 and
December 30, 2006, there were no outstanding borrowings under this facility. At
June 30, 2007, there was a letter of credit outstanding for $116,000, which is
used as collateral for a lease obligation. At June 30, 2007, the Company had
availability for additional borrowing under the Revolving Credit Facility of
$24.9 million.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any long-term and short-term
capital requirements as well as future acquisitions will be derived from one or
more of the Revolving Credit Facility, funds generated through operations or
future financing transactions. The Company is subject to legal proceedings and
claims that arise from time to time in the ordinary course of its business,
which may or may not be covered by insurance. Were an unfavorable outcome to
occur, there exists the possibility of a material adverse impact on 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 June 30, 2007, the Company had a deferred tax asset totaling $1.3 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 June 28, 2008 by offsetting the related tax benefits of such assets
against tax liabilities incurred from forecasted taxable income.
Summarized below are the Company's obligations and commitments to make future
payments under lease agreements and debt obligations as of June 30, 2007 (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)
Operating Lease Obligations $8,165 $1,365 $4,000 $2,800
---------------------------------------------------------------------------------------------------------------------------------
Total $8,165 $1,365 $4,000 $2,800
=================================================================================================================================
(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 June 30, 2007, there was an outstanding letter of
credit for $116,000.
39
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 June 30, 2007, the Company's investments consisted of cash and money market
funds. The Company does not use interest rate derivative instruments to manage
its exposure to interest rate changes. Presently the impact of a 10%
(approximately 90 basis points) increase in interest rates on its variable debt
(using average debt balances during the twenty-six weeks ended June 30, 2007 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.
40
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 14, 2007.
The following actions were taken:
1) The following directors were elected to serve as Class B directors on
the Board of Directors, and shall serve a term expiring at the
Company's Annual Meeting in 2010 and until their respective successor
shall be elected and qualified. Tabulated voting results were as
follows:
Robert B. Kerr (Class B) (For 9,352,256; Withheld 2,123,398)
Lawrence Needleman(Class B) (For 9,364,634; Withheld 2,111,020)
The Class A director of the Company, Norman S. Berson, will continue to
serve on the Board of Directors for a term expiring at the Company's
Annual Meeting in 2009 and until his successor has been elected and
qualified.
The Class C directors of the Company, Leon Kopyt and Stanton Remer,
will continue to serve on the Board of Directors for a term expiring at
the Company's Annual Meeting in 2008 and until their successors have
been elected and qualified.
2) Approval of the Company's 2007 Omnibus Equity Compensation Plan.
Votes For - 7,930,409 Votes Against - 740,593 Abstentions - 2,804,652
3) Approval of Grant Thornton LLP as the independent auditing firm for the
Company for the fiscal year ending December 29, 2007.
Votes For - 11,328,119 Votes Against - 142,337 Abstentions - 5,197
ITEM 5. OTHER INFORMATION
At the Annual Meeting of Shareholders held on June 14, 2007, the Company's
shareholders approved the adoption of the Company's 2007 Omnibus Equity
Compensation Plan, a description of which is contained on pages 16-22 of the
Company's Definitive Proxy Statement, filed with the Securities and Exchange
Commission on April 19, 2007, and which description is incorporated herein by
reference.
41
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
-----------------------------------------------------------------------------
10(a) The RCM Technologies, Inc.2007 Omnibus Equity
Compensation Plan (attached as appendix to the
Registrant's Definitive Proxy Statement for the 2007
Annual Meeting of Stockholders, filed with the
Securities and Exchange Commission on April 19, 2007 and
incorporated by reference herein).
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.)
42
RCM TECHNOLOGIES, INC.
SIGNATURES
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RCM Technologies, Inc.
Date: August 9, 2007 By: /s/ Stanton Remer
-----------------------------
Stanton Remer
Executive Vice President,
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
43
Exhibit 31.1
--------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 9, 2007 /s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
44
Exhibit 31.2
----------------------------------------------------------------------------
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: August 9, 2007 /s/ Stanton Remer
Stanton Remer
Chief Financial Officer
45
Exhibit 32.1
------------------------------------------------------------------------------
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
June 30, 2007 (the "Form 10-Q") fully complies with the requirements
of Section 13(a) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
* * *
/s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
Date: August 9, 2007
46
Exhibit 32.2
-----------------------------------------------------------------------------
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
June 30, 2007 (the "Form 10-Q") fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934,
as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
* * *
/s/ Stanton Remer
Stanton Remer
Chief Financial Officer
Date: August 9, 2007
47