RCM TECHNOLOGIES, INC.
(Address of Principal Executive Offices) (Zip Code)
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
The accompanying consolidated interim financial statements of RCM Technologies, Inc. and subsidiaries ("RCM" or the "Company") are unaudited. The year-end consolidated balance sheet was derived from audited statements but does not include all disclosures required by accounting principles generally accepted in the United States. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company's consolidated financial statements and the notes thereto for the year ended December 31, 201630, 2017 included in the Company's Annual Report Form 10-K for such period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
The consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods.
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal year ended December 31, 201630, 2017 was a 52-week reporting year. The second fiscal quarters of 20172018 and 20162017 ended on the following dates, respectively:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Company uses estimates to calculate an allowance for doubtful accounts on its accounts receivables, adequacy of reserves, goodwill impairment, if any, equity compensation, the tax rate applied and the valuation of certain assets and liability accounts. These estimates can be significant to the operating results and financial position of the Company.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company's costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company's claims experience or the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company's services, adverse litigation and claims and the hiring, training and retention of key employees.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
3.2. | Use of Estimates and Uncertainties (Continued) |
Fair Value of Financial Instruments
The Company's carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, and transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature. The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.
As of December 31, 2017, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective approach. Revenues are recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers. The adoption of ASC 606 did not result in an adjustment to retained earnings in the Company's consolidated balance sheet as of December 31, 2017.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenues from several sources. The Company's Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the Company's segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company's revenues are invoiced on a time and materials basis.
The following table presents our revenues disaggregated by revenue source for the twenty-six weeks periods ended June 30, 2018 and July 1, 2017:
| | June 30, 2018 | | July 1, 2017 |
| Engineering: | | | |
| Time and Material | $38,460 | | $34,078 |
| Fixed Fee | 4,528 | | 5,732 |
| Total Engineering | $42,988 | | $39,810 |
| | | | |
| Specialty Health Care: | | | |
| Time and Material | $44,697 | | $33,726 |
| Permanent Placement Services | 795 | | 1,150 |
| Total Specialty Health Care | $45,492 | | $34,876 |
| | | | |
| Information Technology: | | | |
| Time and Material | $13,950 | | $16,921 |
| Permanent Placement Services | 92 | | 246 |
| Total Information Technology | $14,042 | | $17,167 |
| | $102,522 | | $91,853 |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 3. | Revenue Recognition (Continued) |
Time and Material
The Company's IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both time and material and fixed fee work. The Company's time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenues associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company's fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenues under these arrangements are recognized as the costs on these contracts are incurred. On an infrequent basis, amounts paid in excess of revenues earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed and recorded based upon contractual rates per hour. Additionally, some contracts contain "Performance Fees" (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenues and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable, the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the person placed with the Company's client.
There was no deferred revenue balance at June 30, 2018. The deferred revenue balance at December 30, 2017 was $596 and is included in accounts payable and accrued expense in the accompanying consolidated balance sheet at that date. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet. For the twenty-six week period ended June 30, 2018, the Company recognized revenue of $596 that was included in deferred revenue at the beginning of the reporting period.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 4. | Accounts Receivable, Transit Accounts Receivable and Transit Accounts Payable |
The Company's accounts receivable are comprised as follows:
| | July 1, 2017 | | December 31, 2016 | | June 30, 2018 | | December 30, 2017 | |
| Billed | $33,075 | | $34,463 | | $37,934 | | $31,448 | |
| Accrued and unbilled | 5,688 | | 6,894 | | 9,891 | | 10,573 | |
| Work-in-progress | 5,885 | | 5,215 | | 5,173 | | 5,026 | |
| Allowance for sales discounts and doubtful accounts | (1,496 | ) | (1,402 | ) | (1,257 | ) | (967 | ) |
| | | | | | | | | |
| Accounts receivable, net | $43,152 | | $45,170 | | $51,741 | | $46,080 | |
Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenues earned under contracts which the Company contractually invoices at future dates.
From time to time, the Company's Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company's end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a "transit account receivable" and "transit account payable" as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The Company's transit accounts payable generally exceeds the Company's transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $2.4$1.2 million and related transit accounts payable was $4.6$1.8 million, for a net liabilitypayable of $2.2$0.6 million, as of July 1, 2017.June 30, 2018. The transit accounts receivable was $4.3$3.0 million and related transit accounts payable was $6.8$4.7 million, for a net liabilitypayable of $2.5$1.7 million, as of December 31, 2016.30, 2017.
The Company has a dispute with a customer that is a major utility in the United States. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed to the Company for certain disputed projects. The Company recently compelled arbitration with this customer. As of June 30, 2018 the total amount of outstanding receivables from this customer is $6.4 million, subject to an upward adjustment following disclosures by the customer in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter claims of $9.3 million. The Company also believes these counter claims were retaliatory in nature. Prior to the arbitration, the customer had not asserted any claims. The Company believes these asserted claims have no merit and were merely asserted as a strategy to reduce the Company's claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude sometime late in fiscal year 2018 or early fiscal 2019. While the Company believes the customer's counter claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
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.
Property and equipment are comprised of the following:
| | July 1, 2017 | | December 31, 2016 |
| Equipment and furniture | $878 | | $1,045 |
| Computers and systems | 5,847 | | 5,521 |
| Leasehold improvements | 830 | | 804 |
| | 7,555 | | 7,370 |
| | | | |
| Less: accumulated depreciation and amortization | 3,726 | | 3,318 |
| | | | |
| Property and equipment, net | $3,829 | | $4,052 |
| | June 30, 2018 | | December 30, 2017 |
| Equipment and furniture | $691 | | $938 |
| Computers and systems | 6,503 | | 6,172 |
| Leasehold improvements | 702 | | 899 |
| | 7,896 | | 8,009 |
| | | | |
| Less: accumulated depreciation and amortization | 4,637 | | 4,563 |
| | | | |
| Property and equipment, net | $3,259 | | $3,446 |
The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $367$711 and $2,268$367 during the twenty-six week periods ended June 30, 2018 and July 1, 2017, and July 2, 2016, respectively. Depreciation expense for the twenty-six week periods ended June 30, 2018 and July 1, 2017 was $778 and July 2, 2016 was $774, and $744, respectively.
The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. The Company gives no assurance that it will make acquisitions in the future and if they do make acquisitions gives no assurance that such acquisitions will be successful.
Future Contingent Payments
As of July 1, 2017, the Company had five active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective July 1, 2012 the Company acquired certain assets of BGA, LLC ("BGA"); 2) effective August 1, 2014 the Company acquired all of the stock of Point Comm, Inc. ("PCI"); 3) effective July 5, 2015, the Company acquired certain assets of Substation Design Services, LLC ("SDS"); 4) effective December 31, 2016, the Company acquired certain assets of Allied Health Professionals, LLC ("AHP") and 5) effective April 16, 2017 the Company acquired certain assets of R.A.F. Services, Inc. ("RAF"). The Company estimates future contingent payments at July 1, 2017 as follows:
Fiscal Year | Total |
December 30, 2017 (after July 1, 2017) | $1,525 |
December 30,made the following acquisitions during fiscal 2018 | 240 |
Estimated future contingent consideration payments | $1,765 |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
6. | Acquisitions (Continued) |
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions are capped at a cumulative maximum of $3.2 million. The Company estimates future contingent consideration in payments based on forecasted performance and recorded at the net present value of those expected payments as of July 1, 2017. The measurement is based on significant inputs that are not observable in the market, which "Fair Value Measurements and Disclosures" (ASU Topic 820-10-35) refers to as Level 3 inputs.
The Company paid $0.3 and $0.7 million in contingent consideration during the twenty-six week periods ended July 1, 2017 and July 2, 2016, respectively.
AHP
Effective December 31, 2016, the Company acquired the business operations of Allied Health Professionals, LLC ("AHP"). AHP was a Chicago area healthcare staffing company providing physical therapists, occupational therapists and speech language pathologists to hospitals, rehabilitation centers, schools and outpatient programs. The Company expects the AHP acquisition to complement its Chicago area operations which formerly provided primarily nurses to the Chicago Public School system. AHP will add new clients and expand the Company's service offerings in the Chicago area. The purchase price for AHP was $695, all of which was allocated to goodwill, payable as follows: 1) cash of $275 paid in January 2017; 2) an unsecured note payable of $280 to be paid in quarterly installments through October 2018; and 3) maximum contingent consideration of $140 tied to certain gross profit targets and, if earned, payable in 2018.2017:
RAF
Effective April 16, 2017, the Company acquired the business operations of RAF Services, Inc. ("RAF").RAF. RAF has been in business since 1991 as a multi-disciplined engineering and consulting and design company, headquartered on Long Island. The firm has been providing Engineering, Design, Permitting, Inspection and Construction Management services to the utility, industrial, commercial, and property management industries. RAF specializes in turnkey above ground tank inspection, repair and cleaning services, as well as concrete, steel, masonry, and roofing routine maintenance inspection and design. The purchase price for RAF was $133, all of which was allocated to goodwill as follows: 1) assumed liabilities of $123; and 2) estimated contingent consideration of $10 expected to bewas paid in fiscal 2018.2017.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
7.6. | GoodwillAcquisitions (Continued) |
Goodwill representsPSR
Effective October 1, 2017 the premium paidCompany acquired all of the stock of PSR. PSR was established in Serbia in 2006 and specializes in the design and engineering associated with high voltage substations, design engineering for electrical equipment in power plants, 3D modeling, commissioning, site supervision and other engineering services for clients in Europe, North America, South America and the Middle East. At the time of acquisition, PSR had a highly trained staff of approximately 30 engineers. PSR has acted as a subcontractor to the Company for over three years. The total purchase price of $3,248 included cash at closing of $1,000, estimated contingent consideration of $1,763 and $485 due to seller upon realization of net working capital recorded at closing. As part of the working capital recorded at closing, the Company received cash of $237. The Company allocated $58 to fixed assets and the balance to goodwill.
Future Contingent Payments
As of June 30, 2018, the Company had three active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective July 1, 2012 the Company acquired certain assets of BGA, LLC ("BGA"); 2) effective July 5, 2015, the Company acquired certain assets of Substation Design Services, LLC ("SDS"); and 3) effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) ("PSR"). The Company estimates future contingent payments at June 30, 2018 as follows:
| Fiscal Years Ending | Total |
| December 29, 2018 (after June 30, 2018) | $482 |
| December 28, 2019 | 526 |
| January 2, 2021 | 725 |
| Estimated future contingent consideration payments | $1,733 |
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions are capped at cumulative maximum of $2.3 million. The Company estimates future contingent consideration in payments based on forecasted performance and recorded at the net present value of those expected payments as of June 30, 2018. The measurement is based on significant inputs that are not observable in the market, which "Fair Value Measurements and Disclosures" (ASU Topic 820-10-35) refers to as Level 3 inputs. There has been no change in the fair value of the net tangible and intangible assets acquired in business combinations. The Company is required to assess the carrying value of its reporting units that contain goodwill at least on an annual basis. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. The Company formally assesses these qualitative factors, and if necessary, conducts its annual goodwill impairment test as of the last day of the Company's fiscal November each year or if indicators of impairment exist. During all periods presented, the Company determined that the existing qualitative factors did not suggest that an impairment of goodwill exists. Since there have been no indicators of impairment, the Company has not performed a quantitative impairment test.
There were no changes in the carrying amount of goodwillcontingent consideration for the twenty-six week period ended June 30, 2018.
The Company paid contingent consideration of $0.3 million during both the twenty-six week periods ended June 30, 2018 and July 1, 2017.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| | Engineering | | Information Technology | | Specialty Health Care | | Total |
| | | | | | | | |
| Balance as of December 31, 2016 | $4,411 | | $5,516 | | $2,398 | | $12,325 |
| | | | | | | | |
| Goodwill recorded, RAF | 133 | | - | | - | | 133 |
| | | | | | | | |
| Balance as of July 1, 2017 | $4,544 | | $5,516 | | $2,398 | | $12,458 |
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company tests goodwill for impairment on an annual basis as of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of goodwill may be below the carrying amount. The Company has determined that no impairment of goodwill existed during the twenty-six week period ended June 30, 2018.
There were no changes in the carrying amount of goodwill for the twenty-six week period ended June 30, 2018.
| | Engineering | | Specialty Health Care | | Information Technology | | Total |
| | | | | | | | |
Balance as of June 30, 2018 and December 30, 2017 | $7,249 | | $2,398 | | $2,038 | | $11,685 |
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 the Company determines that 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. The Company's intangible assets consist of customer relationships and non-compete agreements. During all periods presented, the Company determined that no impairment of intangible assets exists.
The following table reflects the activity for net intangibleIntangible assets excluding goodwill which isare substantially attributable to the Company's Engineering segment and include the following:
| | Twenty-Six Week Periods Ended | |
| | June 30, 2018 | | July 1, 2017 | |
| Customer contracts and relations | $59 | | $115 | |
| Non-compete agreements | 12 | | 22 | |
| | | | | |
| Intangible assets | $71 | | $137 | |
Amortization expense of intangible assets for the twenty-six week periods presented:ended June 30, 2018 and July 1, 2017 was $34 and $33, respectively.
| | Twenty-Six Weeks Ended | |
| | July 1, 2017 | | July 2, 2016 | |
| Beginning balance | $171 | | $252 | |
| | | | | |
Amortization of intangibles during the twenty-six week period presented | 34 | | 46 | |
| | | | | |
| Ending balance | $137 | | $206 | |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
The Company and its subsidiaries are party to a loan agreement with Citizens Bank of Pennsylvania which, as of June 30, 2018, provides for a $35$40 million revolving credit facility and includes a sub-limit of $5 million for letters of credit (the "Revolving Credit Facility") and expires December 11, 2019. The Revolving Credit Facility has been amended several times, most recently pursuant to the SeventhEleventh Amendment entered into on MarchMay 21, 2018 when a tier from its interest rate pricing grid was eliminated. The Company also entered into to the Tenth Amendment on February 14, 2018 when the Company increased the Revolving Credit Facility to $40 million from its previous amount of $35 million and entered into the Ninth Amendment on December 8, 2017 when the Company was granted a waiverwaivers that expressly excludesallowed a cash dividend of up to $12.4 million and waived certain expenses from the Company's loan covenant calculations, including $1.3 million of certain expenses related legal settlementcosts, office closures and office closureother expenses in the calculation of the Company's loan covenants.fiscal 2017, up to $1.0 million consulting expenses for analyzing tax credits for research and development costs and 179D energy savings tax credits on a rolling four quarter basis and up to $4.6 million for goodwill impairment. 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, typically borrowed in fixed 30-day increments or (ii) the agent bank's prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the twenty-six week period ended July 1, 2017June 30, 2018 was 2.5%3.6%.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
9. | Line of Credit (Continued) |
The Company and its subsidiaries amended and restated the Revolving Credit Facility on August 9, 2018 as more fully detailed in Footnote 18 – Subsequent Events.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company's ability to borrow in order to pay dividends. As of July 1, 2017,June 30, 2018, the Company was in compliance with all covenants contained in itsthe Revolving Credit Facility.
Borrowings under the line of credit as of July 1, 2017June 30, 2018 and December 31, 201630, 2017 were $10.1$29.2 million and $14.3$27.3 million, respectively. At July 1, 2017June 30, 2018 and December 31, 201630, 2017 there were letters of credit outstanding for $0.8 million. At July 1, 2017,June 30, 2018, the Company had availability for additional borrowings under the Revolving Credit Facility of $24.1$10.0 million.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
The Company uses the treasury stock method to calculate the weighted-average shares used for diluted earnings per share. The number of common shares used to calculate basic and diluted earnings per share for the thirteen and twenty-six week periods ended June 30, 2018 and July 1, 2017 and July 2, 2016 was determined as follows:
| | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| | July 1, 2017 | | July 2, 2016 | | July 1, 2017 | | July 2, 2016 |
| | | | | | | | |
Basic weighted average shares outstanding | 11,961,967 | | 12,363,811 | | 11,954,310 | | 12,423,179 |
Dilutive effect of outstanding stock options and restricted stock awards | 107,321 | | 101,924 | | 104,052 | | 84,963 |
Weighted average dilutive shares outstanding | 12,069,288 | | 12,465,735 | | 12,058,362 | | 12,508,142 |
| | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| | June 30, 2018 | | July1, 2017 | | June 30, 2018 | | July1, 2017 |
| | | | | | | | |
Basic weighted average shares outstanding | 12,239,758 | | 11,961,967 | | 12,239,259 | | 11,954,310 |
Dilutive effect of outstanding restricted stock awards | 21,895 | | 107,321 | | 20,200 | | 104,052 |
Weighted average dilutive shares outstanding | 12,261,653 | | 12,069,288 | | 12,259,459 | | 12,058,362 |
ThereFor both the thirteen and the twenty-six week periods ended June 30, 2018, there were 40,000no anti-dilutive shares not included in the calculation of common stock equivalents as there were no stock options outstanding. For both the thirteen and 42,500the twenty-six week periods ended July 1, 2017 there were 40,000 absolute anti-dilutive shares not included in the calculation of common stock equivalents for the twenty-six week periods ended July 1, 2017 and July 2, 2016, respectively.equivalents. These were determined to be anti-dilutive because the exercise prices of these sharesthe associated stock options for the periods were higher than the average market price of the Company's common stock for the same periods.
Unissued shares of common stock were reserved for the following purposes:
| | July 1, 2017 | | December 31, 2016 | June 30, 2018 | | December 30, 2017 |
| | | | | | | |
| Exercise of options outstanding | 42,000 | | 42,000 | |
| Time-based restricted stock units outstanding | 187,734 | | 197,734 | 96,195 | | 87,034 |
| Performance-based restricted stock units outstanding | 400,000 | | 200,000 | 240,000 | | 400,000 |
| Future grants of options or shares | 404,266 | | 619,266 | 483,071 | | 332,232 |
| Shares reserved for employee stock purchase plan | 224,463 | | 268,211 | 131,872 | | 177,280 |
| | | | | | | |
| Total | 1,258,463 | | 1,327,211 | 951,138 | | 996,546 |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 11. | Share-Based Compensation |
At July 1, 2017,June 30, 2018, the Company had fourtwo share-based employee compensation plans. The Company measures the fair value of share-based awards, if and when granted, based on the Black-Scholes method and using the closing market price of the Company's common stock on the date of grant. Awards vest over periods ranging from one to three years and expire within 10 years of issuance. Share-based compensation expense related to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method. The Company vestsexpenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest. Performance-based share awards that are likely to vest are also expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest, or in the case of a reversal when they are later determined to be unlikely to vest.
Share-based compensation expense of $395$201 and $405$395 was recognized for the twenty-six week periods ended June 30, 2018 and July 1, 2017, and July 2, 2016, respectively. Share based compensation for the twenty-six week period ended July 1, 2017June 30, 2018 did not include any expense associated with performance-based restricted stock units since they were, as of July 1, 2017,June 30, 2018, determined to be unlikely to vest.
As of July 1, 2017,June 30, 2018, the Company had approximately $0.3 million$344 of total unrecognized compensation cost related to all time-based non-vested share-based awards granted under the Company's various share-based plans, which the Company expects to recognize over approximately a two-year period. These amounts do not include a) performance-based restricted stock units, b) the cost of any additional share-based awards that may be granted in future periods or c) the impact of any potential changes in the Company's forfeiture rate.
Incentive Share-Based Plans
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001, provided for the 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 consultants and advisors utilized by the Company. As of July 1, 2017, under the 2000 Plan, options to purchase 25,000 shares of common stock granted under the 2000 Plan were outstanding. The 2000 Plan has expired therefore no shares are available for grant thereunder.
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 consultants and advisors utilized by the Company. As of July 1, 2017, under the 2007 Plan, options to purchase 17,000 shares of common stock were outstanding. The 2007 Plan has expired therefore no shares are available for grant thereunder.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
11. | Share-Based Compensation (Continued) |
Incentive Share-Based Plans (Continued)
2014 Omnibus Equity Compensation Plan (the 2014 Plan)
The 2014 Plan, approved by the Company's stockholdersshareholders in December 2014, provides for the issuance of up to 625,000 shares of the Company's common stock to officers, non-employee directors, employees of the Company and its subsidiaries or consultants and advisors utilized by the Company. In fiscal 2016, the Company amended and restated the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an additional 500,000 shares so that the total number of shares of stock reserved for issuance under the Plan is 1,125,000 shares. The expiration date of the Plan is December 1, 2026. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant.
As of July 1, 2017,June 30, 2018, under the 2014 Plan, 587,73496,195 time-based and 240,000 performance-based restricted stockshare units were outstanding including 400,000 performance-based restricted stock units the Company currently deems unlikely to vest, and 404,266483,071 shares were available for awards thereunder.
Employee Stock Purchase Plan
The Company implemented the 2001 Employee Stock Purchase Plan (the "Purchase Plan") with shareholder approval, effective January 1, 2001. Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to 10% of qualified compensation.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 11. | Share-Based Compensation (Continued) |
Incentive Share-Based Plans (Continued)
Employee Stock Purchase Plan (Continued)
In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,100,000 shares and to extend the expiration date of the Plan to December 31, 2025.
The Company has two offering periods in the Purchase Plan coinciding with the Company's first two fiscal quarters and the last two fiscal quarters. Actual shares are issued on the first business day of the subsequent offering period for the prior offering period payroll deductions. The number of shares issued at the beginning of the current period (on January 2, 2017)2018) was 43,748.45,408. As of July 1, 2017,June 30, 2018, there were 224,463131,872 shares available for issuance under the Purchase Plan.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
11. | Share-Based Compensation (Continued) |
Stock Option Awards
There were no options granted during both twenty-six week periods ended July 1, 2017 and July 2, 2016. Activity regarding outstanding options for the twenty-six week period ended July 1, 2017 is as follows:
| | All Stock Options Outstanding | |
| Shares | | Weighted Average Exercise Price | |
| Options outstanding as of December 31, 2016 | 42,000 | | $8.27 | |
| Options granted | - | | | |
| Options exercised | - | | | |
| Options forfeited/cancelled | - | | | |
| | | | | |
| Options outstanding as of July 1, 2017 | 42,000 | | $8.27 | |
| | | | | |
| Options outstanding price range at July 1, 2017 | $5.27 - $9.81 | | | |
| | | | | |
| Options exercisable as of July 1, 2017 | 42,000 | | | |
| | | | | |
Intrinsic value per share of outstanding stock options as of July 1, 2017 | $0 | | | |
As of July 1, 2017, the Company had approximately $0 of total unrecognized compensation cost related to all non-vested stock option awards.
Time-Based Restricted Stock Units
From time-to-time the Company issues time-based restricted stock units. These time-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee's restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. Dividends for time-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has only issued time-based restricted stock units only under the 2007 and 2014 Plans. The 2007 Plan has expired and there are no time-based restricted stock units outstanding thereunder. The following summarizes the activity in the time-based restricted stock units under the 2007 and 2014 PlansPlan during the twenty-six week period ended July 1, 2017:June 30, 2018:
| | Number of Time-Based Restricted Stock Units | | Weighted Average Grant Date Fair Value per Share | Number of Time-Based Restricted Stock Units | | Weighted Average Grant Date Fair Value per Share |
| Outstanding non-vested at December 31, 2016 | 197,734 | | $7.33 | |
| Outstanding non-vested at December 30, 2017 | | 87,034 | | $5.88 |
| Granted | 15,000 | | $4.97 | 15,000 | | $5.33 |
| Vested | 25,000 | | $5.41 | - | | - |
| Forfeited or expired | - | | - | 5,839 | | $6.85 |
| Outstanding non-vested at July 1, 2017 | 187,734 | | $7.39 | |
| Outstanding non-vested at June 30, 2018 | | 96,195 | | $5.74 |
Based on the closing price of the Company's common stock of $4.94 per share on June 29, 2018 (the last trading day prior to June 30, 2018), the intrinsic value of the time-based non-vested restricted stock units at June 30, 2018 was approximately $475. As of June 30, 2018, there was approximately $344 of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the vesting period of the restricted stock units.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 11. | Share-Based Compensation (Continued) |
Time-Based Restricted Stock Units (Continued)
Based on the closing price of the Company's common stock of $5.05 per share on June 30, 2017 (the last trading day prior to July 1, 2017), the intrinsic value of the time-based non-vested restricted stock units at July 1, 2017 was approximately $0.9 million. As of July 1, 2017, there was approximately $0.3 million of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the vesting period of the restricted stock units.
Performance Based Restricted Stock Units
From time-to-time the Company issues performance-based restricted stock units to its executives. Performance-based restricted stock units are typically vested based on certain multi-year performance metrics as determined by the Board of Directors Compensation Committee. These performance-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period on any stock units that actually vest, if any. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. Dividends for performance-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has only issued performance-based restricted stock units only under the 2014 Plan. The following summarizes the activity in the performance-based restricted stock units during 2017:2018:
| | Number of Performance-Based Restricted Stock Units | | Weighted Average Grant Date Fair Value per Share | Number of Performance-Based Restricted Stock Units | | Weighted Average Grant Date Fair Value per Share |
| Outstanding non-vested at December 31, 2016 | 200,000 | | $5.36 | |
| Outstanding non-vested at December 30, 2017 | | 400,000 | | $5.11 |
| Granted | 200,000 | | $4.85 | 200,000 | | $5.66 |
| Vested | - | | - | - | | - |
| Forfeited or expired | - | | - | 360,000 | | $5.29 |
| Outstanding non-vested at July 1, 2017 | 400,000 | | $5.11 | |
| Outstanding non-vested at June 30, 2018 | | 240,000 | | $5.29 |
As of July 1, 2017,June 30, 2018, the Company considers 400,000the metrics related to 240,000 of the performance-based restricted stock unit metricsunits unlikely to be achieved, thus no performance condition is probable of achievement and no compensation cost has been recognized on the performance-based restricted stock units. The Company will reassess at each reporting date whether achievement of any performance condition is probable and would begin recognizing compensation cost if and when achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the remaining requisite service period.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 12. | Treasury Stock Transactions |
On October 28, 2013, the Board of Directors authorized a repurchase program to purchase up to $5.0 million of outstanding shares of common stock at the prevailing market prices, from time to time over the subsequent 12-month period. On September 30, 2014, the Board extended this repurchase program through October 31, 2015. On September 11, 2015, the Board extended this repurchase program through December 31, 2016. On August 9, 2016, the Board authorized an additional $5.0 million to the repurchase program and extended this repurchase program through December 31, 2017. DuringFor the twenty-six week periodsperiod ended June 30, 2018, the Company did not purchase any treasury shares. For the twenty-six week period ended July 1, 2017, and July 2, 2016, the Company purchased 59,312 shares at an average price of $6.16 per share and 214,578 shares at an average price of $5.27, respectively. As of July 1, 2017, the Company has $2.5 million available for future treasury stock purchases.
13. | New Accounting Standards |
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations," which further clarifies the implementation guidance on principal versus agent considerations," and in April 2016, the FASB issued ASU 2016-10, "Revenue from contracts with customers (Topic 606): Identifying performance obligations and licensing," an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU 2016-12, "Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients," which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which continues the FASB's ongoing project to issue technical corrections and improvements to clarify the codification or correct unintended application of guidance. From the results of the preliminary review, the Company believes the impact of adopting the updated standard will not have a material impact on the Company. Over 90% of the Company's revenues are generated through time and material invoicing. The clients are invoiced after the hours have been worked and/or the material has been delivered and accepted. The remaining revenue relates to long term projects. The Company recognizes revenue on these projects using the percentage of completion method. The Company reviewed the five-step process for revenue recognition and believes its current method of recognizing revenue on these long term projects would not materially change upon adoption due to the value provided to the customer during the project.
The guidance is effective for fiscal years beginning on or after December 15, 2017 including interim periods within those fiscal years and early adoption is permitted. We are continuing to evaluate the effect the adoption will have on our consolidated financial statements. The Company expects to adopt this update in its fiscal 2018 first quarter using the modified retrospective approach.
In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842), which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.
$6.16.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 13. | New Accounting Standards (Continued) |
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirement in Topic "Revenue Recognition" (Topic 605), and requires entities to recognize revenue when control of the promised good or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for goods or services. The Company adopted this standard in its fiscal 2018 first quarter using the modified retrospective approach. See Note 3 for further details.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company expects the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company's balance sheet for real estate operating leases.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Additionally, Inin May of 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. Early adoption is permitted. The Company adopted ASU 2016-09 in its fiscal 2017 first quarter. It did not have a material impact. ASU 2017-09 is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact that adoption ofadopted ASU 2017-10 on2017-09 in its consolidated financial statements.fiscal 2018 first quarter. It did not have a material impact.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the potential impact of adoption of this standard onadopted ASU 2016-15 in its consolidated financial statements.fiscal 2018 first quarter. It did not have a material impact.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations" (Topic 805) to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective forCompany adopted ASU 2017-01 in its fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted under certain circumstances. The Company is evaluating the impact that adoption of this guidance will2018 first quarter. It did not have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles – Goodwill and Other" (Topic 350). The objective of Phase 1 of the project, which resulted in this Update, is to simplify the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact that adoption of this guidance will have on its consolidated financial statements.
a material impact.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
The Company follows "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for companies to report information about operating segments, geographic areas and major customers. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies (see(see Note 1 to the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2016)30, 2017).
Segment operating income includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. The following tables reflect the results of the reportable segments consistent with the Company's management system:
Thirteen Week Period Ended July 1, 2017 | Engineering | | Information Technology | | Specialty Health Care | | Corporate | | Total | | |
| | | | | | | | | | | | |
Thirteen Week Period Ended June 30, 2018 | | Engineering | | Specialty Health Care | | Information Technology | | Corporate | | Total |
| Revenue | $20,586 | | $8,557 | | $16,369 | | $ - | | $45,512 | | $21,571 | | $22,858 | | $7,281 | | $ - | | $51,710 |
| | | | | | | | | | | | |
| Cost of services | 14,889 | | 6,200 | | 12,310 | | - | | 33,999 | | 15,934 | | 17,771 | | 5,270 | | - | | 38,975 |
| | | | | | | | | | | | |
| Gross profit | 5,697 | | 2,357 | | 4,059 | | - | | 12,113 | | 5,637 | | 5,087 | | 2,011 | | - | | 12,735 |
| | | | | | | | | | | | |
| Selling, general and administrative | 4,184 | | 2,144 | | 3,747 | | - | | 10,075 | | 4,104 | | 4,137 | | 1,835 | | - | | 10,076 |
| | | | | | | | | | | | |
| Change in contingent consideration | - | | - | | - | | 781 | | 781 | | |
| | | | | | | | | | | | |
| Depreciation and amortization | 282 | | 40 | | 88 | | - | | 410 | | 265 | | 106 | | 27 | | - | | 398 |
| | | | | | | | | | | | |
Severance, professional fees and other charges | | - | | - | | - | | 1,371 | | 1,371 |
| Operating income (loss) | $1,231 | | $173 | | $224 | | ($781 | ) | $847 | | $1,268 | | $844 | | $149 | | ($1,371 | ) | $890 |
| | | | | | | | | | | | | | | | | | | | |
| Total assets as of July 1, 2017 | $34,050 | | $11,260 | | $16,742 | | $3,574 | | $65,626 | | |
| Total assets as of June 30, 2018 | | $35,602 | | $26,069 | | $6,497 | | $5,645 | | $73,813 |
| Capital expenditures | $40 | | - | | $415 | | $5 | | $460 | | $282 | | $16 | | $9 | | $2 | | $309 |
Thirteen Week Period Ended July 2, 2016 | Engineering | | Information Technology | | Specialty Health Care | | Corporate | | Total | |
| | | | | | | | | | | |
| Revenue | $18,742 | | $10,957 | | $15,680 | | $ - | | $45,379 | |
| | | | | | | | | | | |
| Cost of services | 13,715 | | 8,172 | | 11,388 | | - | | 33,275 | |
| | | | | | | | | | | |
| Gross profit | 5,027 | | 2,785 | | 4,292 | | - | | 12,104 | |
| | | | | | | | | | | |
| Selling, general and administrative | 3,944 | | 2,698 | | 3,535 | | - | | 10,177 | |
| | | | | | | | | | | |
| Depreciation and amortization | 284 | | 48 | | 67 | | - | | 399 | |
| | | | | | | | | | | |
| Operating income | $799 | | $39 | | $690 | | $ - | | $1,528 | |
| | | | | | | | | | | |
| Total assets as of July 2, 2016 | $35,768 | | $13,250 | | $17,525 | | $4,198 | | $70,741 | |
| Capital expenditures | $174 | | $24 | | $53 | | $12 | | $263 | |
Thirteen Week Period Ended July 1, 2017 | Engineering | | Specialty Health Care | | Information Technology | | Corporate | | Total |
| Revenue | $20,586 | | $16,369 | | $8,557 | | $ - | | $45,512 |
| Cost of services | 14,889 | | 12,310 | | 6,200 | | - | | 33,399 |
| Gross profit | 5,697 | | 4,059 | | 2,357 | | - | | 12,113 |
| Selling, general and administrative | 4,184 | | 3,747 | | 2,144 | | - | | 10,075 |
| Change in contingent consideration | - | | - | | - | | 781 | | 781 |
| Depreciation and amortization | 282 | | 88 | | 40 | | - | | 410 |
| Operating income (loss) | $1,231 | | $224 | | $173 | | ($781 | ) | $847 |
| | | | | | | | | | |
| Total assets as of July 1, 2017 | $34,050 | | $16,742 | | $11,260 | | $3,574 | | $65,626 |
| Capital expenditures | $40 | | $415 | | - | | $5 | | $460 |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 14. | Segment Information (Continued) |
Twenty-Six Week Period Ended July 1, 2017 | Engineering | | Information Technology | | Specialty Health Care | | Corporate | | Total | | |
| | | | | | | | | | | | |
Twenty-Six Week Period Ended June 30, 2018 | | Engineering | | Specialty Health Care | | Information Technology | | Corporate | | Total |
| Revenue | $39,810 | | $17,167 | | $34,876 | | $ - | | $91,853 | | $42,988 | | $45,492 | | $14,042 | | $ - | | $102,522 |
| | | | | | | | | | | | |
| Cost of services | 29,076 | | 12,657 | | 26,255 | | - | | 67,988 | | 31,658 | | 35,156 | | 10,418 | | - | | 77,232 |
| | | | | | | | | | | | |
| Gross profit | 10,734 | | 4,510 | | 8,621 | | - | | 23,865 | | 11,330 | | 10,336 | | 3,624 | | - | | 25,290 |
| | | | | | | | | | | | |
| Selling, general and administrative | 8,219 | | 4,497 | | 7,676 | | - | | 20,392 | | 8,225 | | 8,608 | | 3,664 | | - | | 20,497 |
| | | | | | | | | | | | |
| Change in contingent consideration | - | | - | | - | | 781 | | 781 | | |
| | | | | | | | | | | | |
| Depreciation and amortization | 566 | | 81 | | 160 | | - | | 807 | | 548 | | 211 | | 53 | | - | | 812 |
| | | | | | | | | | | | |
Severance, professional fees and other charges | | - | | - | | - | | $1,371 | | 1,371 |
| Operating income (loss) | $1,949 | | ($68 | ) | $785 | | ($781 | ) | $1,885 | | $2,557 | | $1,517 | | ($93 | ) | ($1,371 | ) | $2,610 |
| | | | | | | | | | | | | | | | | | | | |
| Total assets as of July 1, 2017 | $34,050 | | $11,260 | | $16,742 | | $3,574 | | $65,626 | | |
| Total assets as of June 30, 2018 | | $35,602 | | $26,069 | | $6,497 | | $5,645 | | $73,813 |
| Capital expenditures | $109 | | - | | $415 | | $28 | | $552 | | $391 | | $56 | | $18 | | $133 | | $598 |
Twenty-Six Week Period Ended July 2, 2016 | Engineering | | Information Technology | | Specialty Health Care | | Corporate | | Total | | |
Twenty-Six Week Period Ended July 1, 2017 | | Engineering | | Specialty Health Care | | Information Technology | | Corporate | | Total |
| Revenue | | $39,810 | | $34,876 | | $17,167 | | $ - | | $91,853 |
| Cost of services | | 29,076 | | 26,255 | | 12,657 | | - | | 67,988 |
| Gross profit | | 10,734 | | 8,621 | | 4,510 | | - | | 23,865 |
| Selling, general and administrative | | 8,219 | | 7,676 | | 4,497 | | - | | 20,392 |
| Change in contingent consideration | | - | | - | | - | | 781 | | 781 |
| Depreciation and amortization | | 566 | | 160 | | 81 | | - | | 807 |
| Operating income (loss) | | $1,949 | | $785 | | ($68 | ) | ($781 | ) | $1,885 |
| | | | | | | | | | | | | | | | | | | | |
| Revenue | $37,427 | | $23,697 | | $31,431 | | $ - | | $92,555 | | |
| | | | | | | | | | | | |
| Cost of services | 27,568 | | 17,120 | | 23,087 | | - | | 67,775 | | |
| | | | | | | | | | | | |
| Gross profit | 9,859 | | 6,577 | | 8,344 | | - | | 24,780 | | |
| | | | | | | | | | | | |
| Selling, general and administrative | 7,760 | | 5,841 | | 7,041 | | - | | 20,642 | | |
| | | | | | | | | | | | |
| Depreciation and amortization | 560 | | 100 | | 129 | | - | | 789 | | |
| | | | | | | | | | | | |
| Operating income | $1,539 | | $636 | | $1,174 | | $ - | | $3,349 | | |
| | | | | | | | | | | | |
| Total assets as of July 2, 2016 | $35,768 | | $13,250 | | $17,525 | | $4,198 | | $70,741 | | |
| Total assets as of July 1, 2017 | | $34,050 | | $16,742 | | $11,260 | | $3,574 | | $65,626 |
| Capital expenditures | $455 | | $48 | | $128 | | $26 | | $657 | | $109 | | $415 | | - | | $28 | | $552 |
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
| 14. | Segment Information (Continued) |
The Company derives a majority of its revenue from offices in the United States. Revenues reported for each operating segment are all from external customers. The Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Puerto Rico.Serbia. Revenues by geographic area for the thirteen and twenty-six week periods ended June 30, 2018 and July 1, 2017 and July 2, 2016 are as follows:
| | | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended | |
| | | June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | |
| Revenues | | | | | | | | |
| | U. S. | $42,044 | | $37,158 | | $83,635 | | $75,876 | |
| | Canada | 8,005 | | 7,222 | | 15,634 | | 13,717 | |
| | Puerto Rico | 1,046 | | 1,132 | | 2,029 | | 2,260 | |
| | Serbia | 615 | | - | | 1,224 | | - | |
| | | $51,710 | | $45,512 | | $102,522 | | $91,853 | |
Total assets by geographic area as of the reported periods are as follows:
| | June 30, 2018 | | December 30, 2017 | |
| Total assets | | | | |
| | U. S. | $53,934 | | $52,595 | |
| | Canada | 14,146 | | 15,419 | |
| | Puerto Rico | 1,854 | | 1,891 | |
| | Serbia | 3,879 | | 3,374 | |
| | | $73,813 | | $73,279 | |
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), directing taxpayers to consider the impact of the Tax Act as "provisional" when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The changes in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the Company's estimates due to, among other things, changes in interpretations of the Tax Act, further legislation related to the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates to estimates the Company has utilized to calculate the impacts of the Tax Act. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the related tax impacts. The Company currently anticipates finalizing any resulting adjustments before the end of its fiscal year ending December 29, 2018. The Company, based on current knowledge, estimated the impact of SAB 118 on its income tax provision for the fifty-two week period ended December 30, 2017. The total impact was an increase to its fiscal 2017 tax expense of $1.2 million, including $1.0 million for a reduction in deferred tax benefit and $0.2 million related to transition repatriation taxes. Any subsequent changes to the Company's fiscal 2017 tax expense estimates, if any, could materially impact the Company's fiscal 2018 tax provision. As of June 30, 2018, the Company is unaware of any factors or potential revisions that would materially change the Company's estimated fiscal 2017 tax provision.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
14. | Segment Information (Continued) |
| | | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended | |
| | | July 1, 2017 | | July 2, 2016 | | July 1, 2017 | | July 2, 2016 | |
| Revenues | | | | | | | | |
| | U. S. | $37,158 | | $37,524 | | $75,876 | | $77,307 | |
| | Canada | 7,222 | | 6,395 | | 13,717 | | 12,604 | |
| | Puerto Rico | 1,132 | | 1,460 | | 2,260 | | 2,644 | |
| | | $45,512 | | $45,379 | | $91,853 | | $92,555 | |
Total assets by geographic area as of the reported periods are as follows:
| | July 1, 2017 | | December 31, 2016 | |
| Total assets | | | | |
| | U. S. | $48,353 | | $53,842 | |
| | Canada | 15,204 | | 13,953 | |
| | Puerto Rico | 2,069 | | 2,036 | |
| | | $65,626 | | $69,831 | |
| 15. | Income Taxes (Continued) |
The projected fiscal 20172018 effective income tax rates as of July 1, 2017 and applied to income before any discrete permanent differenceJune 30, 2018 for the twenty-six week period ended July 1, 2017June 30, 2018 are approximately 41.6%28.3%, 26.5% and 26.5%17.3% in the United States, Canada and Canada,Serbia, respectively, and yielded a consolidated effective income tax rate before any discrete permanent difference of approximately 37.9%25.2% for the twenty-six week period ended July 1, 2017. For theJune 30, 2018. The comparable prior year period estimated income tax rates were 41.6% and 26.5% in the United States and Canada, respectively, and yielded a consolidated effective income tax rate of approximately 39.2%37.9% for the twenty-six week period ended July 2, 2016.1, 2017. The Company did not have Serbian operations for the comparable prior year period. The significant decrease in the tax rate in the United States for the twenty-six week period ended June 30, 2018 as compared to the comparable prior year period was due to the reduction in the Company's federal income tax rate to 21.0% from 34.0% as provided for in the Tax Cuts and Jobs Act. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company. The Company experienced a discrete permanent difference of $0.8 million because of increases to contingent consideration. The Company's effective income tax rate after including this discrete permanent difference was 55.7% for the twenty-six week period ended July 1, 2017.
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. Once established, a provision may change in the future due to new developments or changes in circumstances, and could increase or decrease the Company's earnings in the period that the changes are made. Asserted claims in these matters sought approximately $1.5$9.4 million in damages (including $9.3 million in counter claims described below) as of both July 1, 2017 and December 31, 2016June 30, 2018. As of both July 1, 2017 and December 31, 2016,June 30, 2018, the Company accrued $0.5had a negligible accrual for any such liabilities.
The Company has a dispute with a customer that is a major utility in the United States. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed to the Company for certain disputed projects. The Company recently compelled arbitration with this customer. As of June 30, 2018 the total amount of outstanding receivables from this customer is $6.4 million, forsubject to an upward adjustment following disclosures by the customer in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter claims of $9.3 million. The Company also believes these counter claims were retaliatory in nature. Prior to the arbitration, the customer had not asserted any claims. The Company believes these asserted claims have no merit and were merely asserted as a strategy to reduce the Company's claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude sometime late in fiscal year 2018 or early fiscal 2019. While the Company believes the customer's counter claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such liabilities.claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated) |
17. Severance, Professional Fees and Other Charges
The Company experienced $1.4 million in severance, professional fees and other charges for the thirteen week period ended June 30, 2018. These charges include severance accrued for the Company's former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.5 million incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. The Company did not incur any such charges in the comparable prior year period.
18. Subsequent Events
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on August 9, 2018. As amended and restated, the Revolving Credit Facility, now provides for a $45.0 million revolving credit facility (increased from $40.0 million), no longer has a sub-limit for letters of credit (from a sub-limit of $5.0 million) and expires on August 8, 2023. The amended and restated Revolving Credit Facility provides the Company waivers from certain financial covenant calculations of up to $1.4 million in the borrowers' fiscal year ending on December 31, 2018 for certain expenses including severance accrued for the Company's former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, charges incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. Except as noted, all material terms remain unchanged.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. ("RCM" or the "Company") are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption; the Company's strategic and business initiatives and growth strategies; and the outcome of litigation (at both the trial and appellate levels) 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) the Company's relationships with and reliance upon significant customers; (v) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vi) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (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, arbitrations, and other business disputes involving the Company, and the applicability of insurance coverage with respect to any such litigation;disputes; (xviii) the results of, and costs relating to, any interactions with shareholders of the Company who may pursue specific initiatives with respect to the Company's governance and strategic direction, including without limitation a contested proxy solicitation initiated by such shareholders, or any similar such interactions; and (ixx) 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. Except as required by law, the Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Overview
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenues and operations can be substantial, resulting in significant volatility in the Company's financial performance.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today's business climate. However, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by current and prospective clients for many emerging new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced information technology and engineering solutions to upgrade their systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems, applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are generally higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes 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. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. Typically these contracts are for less than one year. The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables.
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when incurred.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Critical Accounting Policies and Use of Estimates
The Company'sThis Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited interim condensed consolidated financial statements, werewhich have been prepared in accordance with U.S.accounting principles generally accepted accounting principles, which require managementin the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires us to make subjective decisions, assessmentsestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In our unaudited interim condensed consolidated financial statements, estimates are used for, but not limited to, accounts receivable and allowance for doubtful accounts, goodwill, long-lived intangible assets, accounting for stock options and restricted stock units, insurance liabilities, accounting for income taxes and accrued bonuses.
A summary of our significant accounting policies is included in our Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 30, 2017. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effecteffects of matters that are inherently uncertain. AsSuch policies are summarized in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different from estimated. Management has identified certain critical accounting policies, described below, that require significant judgment to be exercised by management.year ended December 30, 2017.
Revenue RecognitionRecently Issued Accounting Pronouncements
The Company derives its revenues from several sources. The Company's Engineering Services and Information Technology Services segments perform consulting and project solutions services. AllA discussion of the Company's segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company's revenues are invoiced on a time and materials basis.
Project Services
The Company recognizes revenuesrecently issued accounting pronouncements is set forth in accordance with current revenue recognition standards underNote 13, New Accounting Standards, Codification ("ASC") 605, Revenue Recognition, 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 may recognize revenues 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 at the time certain milestones are reached, as defined in the contract. Revenues under these arrangements are recognized as the costs on these contracts are incurred. Amounts invoiced in excess of revenues recognized are recorded as deferred revenue,unaudited interim condensed consolidated financial statements included in accounts payablePart I, Item I of this Quarterly Report on Form 10-Q and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed and recorded based upon contractual rates per hour (i.e., percentage of completion). In addition, some contracts contain "Performance Fees" (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenues and billings to specified maximum amounts. Provision for contract losses, if any, are made in the period such losses are determined. For contracts where there is a deliverable, the work is not complete on a specific deliverable and the revenue is not recognized, the costs are deferred. The associated costs are expensed when the related revenue is recognized.
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. These services are typically billed on a time and material basis.
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 recognizing the net administrative fee only).
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Revenue Recognition (Continued)
Transit Accounts Receivable and Transit Accounts Payable
From time to time, the Company's Engineering segment enters into agreements to provide, among other things, construction management and engineering services. In certain circumstances, the Company may acquire equipment as a purchasing agent for the client for a fee. Pursuant to these agreements, the Company: a) may engage subcontractors to provide construction or other services or contracts with manufacturers on behalf of the Company's clients to procure equipment or fixtures; b) typically earns a fixed percentage of the total project value or a negotiated mark-up on subcontractor or procurement charges as a fee; and c) assumes no ownership or risks of inventory. In such situations, the Company acts as an agent under the provisions of "Overall Considerations of Reporting Revenue Gross as a Principal versus Net as an Agent" and therefore recognizing revenue on a "net-basis." The Company records revenue on a "net" basis on relevant engineering and construction management projects, which require subcontractor/procurement costs or transit costs. In those situations, the Company charges the client a negotiated fee, which is reported as net revenue when earned. During the twenty-six week period ended July 1, 2017, total gross billings, including both transit cost billings and the Company's earned fees, was $20.1 million, for which the Company recognized $13.2 million of its net fee as revenue. During the twenty-six week period ended July 2, 2016, total gross billings, including both transit cost billings and the Company's earned fees, was $23.5 million, for which the Company recognized $14.6 million of its net fee as revenue.
Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company's end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a "transit account receivable" and "transit account payable" as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The Company's transit accounts payable generally exceeds the Company's transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $2.4 million and related transit accounts payable was $4.6 million, for a net liability of $2.2 million, as of July 1, 2017.
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.
Accounts Receivable and Allowance for Doubtful Accounts
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 allowanceincorporated herein 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 previously written off are credited to bad debt expense.reference.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Goodwill
Goodwill represents the premium paid over the fair value of the net assets acquired in business combinations. The Company is required to assess the carrying value of its reporting units that contain goodwill at least on an annual basis in order to determine if any impairment in value has occurred. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. An assessment of those qualitative factors or the application of the goodwill impairment test requires significant judgment including but not limited to the assessment of the business, its management and general market conditions, 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 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 formally assesses these qualitative factors and, if necessary, conducts its annual goodwill impairment test as of the last day of the Company's fiscal November each year, or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in share price and market capitalization, a decline in expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, a material change in management or other key personnel and/or slower expected growth rates, among others. Due to the thin trading of the Company stock in the public marketplace and the impact of the control premium held by relatively few shareholders, the Company may not consider the market capitalization of the Company the most appropriate measure of fair value of goodwill for our reporting units. The Company looks to earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as better measures of the fair value of our reporting units. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. There can be no assurance that future tests of goodwill impairment will not result in impairment charges. During all periods presented, the Company determined that the existing qualitative factors did not suggest that an impairment of goodwill exists. Since there have been no indicators of impairment, the Company has not performed a quantitative impairment test.
Long-Lived and Intangible Assets
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell.
Accounting for Stock Options and Restricted Stock Units
The Company uses stock options and restricted stock units to attract, retain and reward employees for long-term service. The Company follows "Share-Based Payment," which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. This compensation cost is measured based on the fair value of the equity or liability instruments issued. The Company measures stock-based compensation cost using the Black-Scholes option pricing model for stock options and the fair value of the underlying common stock at the date of grant for restricted stock units.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Insurance Liabilities
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The Company establishes loss provisions based on historical experience and in the case of expected losses from workers compensation, considers input from third parties. 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.
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 July 1, 2017, the Company had a net domestic long term deferred tax net liability of $0.3 million and a foreign long-term deferred tax net liability of $0.2 million. The domestic long term deferred tax net liability primarily represents the tax effect of accrued expenses which will be deductible for tax purposes within a twelve month period and the effect of temporary differences for the GAAP versus tax amortization of intangibles arising from acquisitions made in prior periods. 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, valuation allowances may be required.
The Company conducts its operations in multiple tax jurisdictions in the United States, Canada and Puerto Rico. The Company and its subsidiaries file a consolidated U.S. Federal income tax return and file in various states. The Company's federal income tax returns have been examined through 2010. The Internal Revenue Service is currently examining fiscal tax years 2011, 2012, 2013 and 2015. The State of New Jersey is currently examining fiscal tax years 2009 through 2012. Except for New Jersey and other limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2010. The Company is no longer subject to audit in Canada for the tax years prior to tax year 2012. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2006.
The Company's future effective tax rates could be adversely affected by changes in the valuation of its deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
There were no changes to unrecognized tax benefits during both twenty-six week periods presented.
Accrued Bonuses
The Company pays bonuses to certain executive management, field management and corporate employees based on, or after giving consideration to, a variety of financial performance measures. Executive management, field management and certain corporate employees' bonuses are accrued throughout the year for payment during the first quarter of the following year, based in part upon anticipated annual results compared to annual budgets. In addition, the Company pays discretionary bonuses to certain employees, which are not related to budget performance. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore on the estimates of the required accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for engineering and information technology services. When the U.S., Canadian or global economies 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 the Company's future earnings. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing.
The consulting and employment services market is highly competitive with limited barriers to entry. The Company competes in global, national, regional and local markets with numerous competitors in all of the Company's service lines. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. The Company expects that the level of competition will remain high in the future, which could limit the Company's ability to maintain or increase its market share or profitability.
Thirteen Week Period Ended July 1, 2017 Compared to Thirteen Week Period Ended July 2, 2016
A summary of operating results for the thirteen week periods ended July 1, 2017 and July 2, 2016 is as follows (in thousands):
| | July 1, 2017 | | July 2, 2016 | |
| | Amount | | % of Revenue | | Amount | | % of Revenue | |
| Revenues | $45,512 | | 100.0 | | $45,379 | | 100.0 | |
| Cost of services | 33,399 | | 73.4 | | 33,275 | | 73.3 | |
| Gross profit | 12,113 | | 26.6 | | 12,104 | | 26.7 | |
| | | | | | | | | |
| Selling, general and administrative | 10,075 | | 22.1 | | 10,177 | | 22.4 | |
| Change in contingent consideration | 781 | | 1.7 | | - | | - | |
| Depreciation and amortization | 410 | | 0.9 | | 399 | | 0.9 | |
| | 11,266 | | 24.7 | | 10,576 | | 23.3 | |
| | | | | | | | | |
| Operating income | 847 | | 1.9 | | 1,528 | | 3.4 | |
| Interest expense, net and foreign currency transactions | (81 | ) | (0.2 | ) | (85 | ) | (0.2 | ) |
| | | | | | | | | |
| Income before income taxes | 766 | | 1.7 | | 1,443 | | 3.2 | |
| Income tax expense | 577 | | 1.3 | | 580 | | 1.3 | |
| | | | | | | | | |
| Net income | $189 | | 0.4 | | $863 | | 1.9 | |
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended July 1, 2017 and July 2, 2016 consisted of thirteen weeks each.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Week Period Ended July 1, 2017June 30, 2018 Compared to Thirteen Week Period Ended July 2, 2016 (Continued)1, 2017
A summary of operating results for the thirteen week periods ended June 30, 2018 and July 1, 2017 is as follows (in thousands):
| | June 30, 2018 | | July 1, 2017 | |
| | Amount | | % of Revenue | | Amount | | % of Revenue | |
| Revenues | $51,710 | | 100.0 | | $45,512 | | 100.0 | |
| Cost of services | 38,975 | | 75.4 | | 33,399 | | 73.4 | |
| Gross profit | 12,735 | | 24.6 | | 12,113 | | 26.6 | |
| | | | | | | | | |
| Selling, general and administrative | 10,076 | | 19.5 | | 10,075 | | 22.1 | |
| Depreciation and amortization | 398 | | 0.8 | | 410 | | 0.9 | |
| Severance, professional fees and other charges | 1,371 | | 2.6 | | - | | - | |
| Change in contingent consideration | - | | - | | 781 | | 1.7 | |
| | 11,845 | | 22.9 | | 11,266 | | 24.7 | |
| | | | | | | | | |
| Operating income | 890 | | 1.7 | | 847 | | 1.9 | |
| Interest expense, net and foreign currency transactions | (388 | ) | 0.8 | | (81 | ) | (0.2 | ) |
| | | | | | | | | |
| Income before income taxes | 502 | | 0.9 | | 766 | | 1.7 | |
| Income tax expense | 121 | | 0.2 | | 577 | | 1.3 | |
| | | | | | | | | |
| Net income | $381 | | 0.7 | | $189 | | 0.4 | |
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended June 30, 2018 and July 1, 2017 consisted of thirteen weeks each.
Revenues. Revenues increased 0.2%13.6%, or $0.1$6.2 million, for the thirteen week period ended July 1, 2017June 30, 2018 as compared to the thirteen week period ended July 2, 20161, 2017 (the "comparable prior year period"). Revenues increased $1.8$1.0 million in the Engineering segment, decreased $2.4 million in the Information Technology segment and increased $0.7$6.5 million in the Specialty Health Care segment and decreased $1.3 million in the Information Technology segment. On the last day of fiscal 2017, the Company disposed of its Microsoft Solutions Business Unit ("Microsoft Business"), which generated $0.5 million in revenues for the thirteen week period ended July 1, 2017. See Segment Discussion for further information on revenue changes.
The Company has material operations in Canada, primarily from the Company's Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the "Exchange Rate"). For the thirteen week period ended July 1, 2017,June 30, 2018, the Company generated total revenues from its Canadian clients of $8.0 million in U.S. dollars at an Exchange Rate of 77.6% as compared to $7.2 million in U.S. dollars at an Exchange Rate of 74.4% as compared to $6.4 million in U.S. dollars at an Exchange Rate of 77.6% for the prior year comparable period.
Cost of Services and Gross Profit. Cost of services increased 0.3%16.7%, or $0.1$5.6 million, for the thirteen week period ended July 1, 2017June 30, 2018 as compared to the comparable prior year period. Cost of services increased due to the increase in revenues. Cost of services as a percentage of revenues for the thirteen week periods ended June 30, 2018 and July 1, 2017 was 75.4% and July 2, 2016 was 73.4% and 73.3%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Week Period Ended June 30, 2018 Compared to Thirteen Week Period Ended July 1, 2017 (Continued)
Selling, General and Administrative. Selling, general and administrative ("SGA") expenses decreased 1.0%, or $0.1were $10.1 million for both of the thirteen week periodperiods ended June 30, 2018 and July 1, 2017 as compared to the comparable prior year period.2017. As a percentage of revenues, SGA expenses were 22.1%19.5% for the thirteen week period ended July 1, 2017June 30, 2018 and 22.4%22.1% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Severance, Professional Fees and Other Charges. The Company experienced $1.4 million in severance, professional fees and other charges for the thirteen week period ended June 30, 2018. These charges include severance accrued for the Company's former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.5 million incurred related to transactional financial advisory fees, legal fees associated with defending a frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. The Company did not incur any such charges in the comparable prior year period.
Change in Contingent Consideration. There was no change to contingent consideration for the thirteen week period ended June 30, 2018. The Company incurred charges of $0.8 million for increases to contingent consideration for the thirteen week period ended July 1, 2017. The increase can be principally attributed to the PCI acquisition. Since the PCI acquisition was for stock in Canada the increase in purchase price is not tax deductible and is treated as a permanent difference. There was no change to contingent consideration for the thirteen week period ended July 2, 2016.
Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company's loan agreement,line of credit, net of interest income and gains and losses on foreign currency transactions. There were no material changesOther expense, net increased to other$0.4 million as compared to $0.1 million for the comparable prior year period. The primary component of the increase was interest expense netwhich increased due to increased borrowings under the Company's line of credit. The primary reason for the increased borrowing was to fund the Company's $12.2 million cash dividend paid in December 2017.
Income Tax Expense. The Company recognized $0.1 million of income tax expense for the thirteen week period ended July 1, 2017June 30, 2018, as compared to the prior comparable period.
Income Tax Expense. The Company recognized $0.6 million of income tax expense for both the thirteen week period ended July 1, 2017 and for the comparable prior year period. The consolidated effective income tax rate for the current period was 75.3%24.1% as compared to 40.2%75.3% for the comparable prior year period. The thirteen week period ended July 1, 2017 is impacted by a discrete permanent difference due to the increase in contingent consideration of $0.8 million. The projected fiscal 20172018 income tax rates as of July 1, 2017June 30, 2018 were approximately 41.6%28.3%, 26.5% and 26.5%17.3% in the United States, Canada and Canada,Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The consolidated effective income tax rate for the thirteen week period ended June 30, 2018 was lower than the comparable prior year period primarily due to the reduction of the Company's federal income tax rate to 21.0% from 34.0% as provided for in the Tax Cuts and Jobs Act and the impact of its Serbian operations acquired in October 2017. The Company did not have Serbian operations for the comparable prior year period. Additionally, the consolidated effective income tax rate for the comparable prior year period is impacted by a discrete permanent difference due to the increase in contingent consideration of $0.8 million. The consolidated effective income tax rate after eliminating this discrete permanent difference decreased for the thirteen week period ended July 1, 2017 towas 37.3% as compared to 40.2% for the comparable prior year period because the Company's projected fiscal 2017 Canadian income before taxes is higher as a percentage of the total projected 2017 income before taxes as compared to the projected 2016 Canadian income before taxes as a percentage of the total projected 2016 income before taxes at the same time in the comparable prior year period..
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Week Period Ended July 1, 2017June 30, 2018 Compared to Thirteen Week Period Ended July 2, 20161, 2017 (Continued)
Segment Discussion
Engineering
Engineering revenues of $20.6$21.6 million for the thirteen week period ended July 1, 2017June 30, 2018 increased 9.8%4.8%, or $1.8$1.0 million, as compared to the comparable prior year period. The increase was primarily due to increases in revenues of $1.6 million from the Company's Energy Services Group and $0.4$0.1 million from the Company's Canadian Power Systems Engineering Group partially offset by a decrease in revenues of $0.1$0.7 million from the Company's Aerospace Engineering Group. Gross profit increased 13.3%decreased 1.1%, or $0.7$0.1 million, as compared to the comparable prior year period. Gross profit increased due to the increase in revenues and an increase in gross margin to 27.7% for the current period was 26.1% as compared to 26.8%27.7% for the comparable prior year period. The gross profit and gross margin increase wasdecreases were primarily due to moreless favorable utilization of billable consultants on fixed price contracts as the Company naturally experiences variability in utilization from quarter to quarter. The Engineering segment operating income was $1.2$1.3 million for the thirteen week period ended July 1, 2017June 30, 2018 as compared to $0.8$1.2 million for the comparable prior year period. The improvement in operating income was primarily driven by the increase in gross profit and was offset by an increasea decrease in SGA expense of $0.2$0.1 million. The increasedecrease in SGA expense was primarily due to increased investment in selling costs and a higherlower allocation of corporate-generated SGA expense.
Information TechnologySpecialty Health Care
Information Technology
Specialty Health Care revenues of $8.6$22.9 million for the thirteen week period ended July 1, 2017 decreased 21.9%June 30, 2018 increased 39.6%, or $2.4$6.5 million, as compared to $11.0 million for the comparable prior year period. The decrease was primarilyprimary drivers of the increase in the revenues for the Specialty Health Care segment were increases of $4.5 million from reductionsthe New York City Office, $1.3 million from the Honolulu office and $0.4 million from the HIM practice. The primary reason for revenue increases in project revenues from several large clients thatNew York City and Hawaii were not replaced. Grossincremental additions of paraprofessionals billed on school contracts. The Specialty Health Care segment's gross profit of $2.4increased by 25.3%, or $1.0 million, to $5.1 million for the thirteen week period ended July 1, 2017 decreased 15.4%, or $0.4 million,June 30, 2018 as compared to $2.8$4.1 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenues, offset by lower gross profit margin. The Specialty Health Care segment's gross profit margin for the thirteen week period ended June 30, 2018 decreased to 22.3% as compared to 24.8% for the comparable prior year period. The decrease in gross profit margin was primarily due to thedriven by a decrease in high gross profit margin permanent placement revenues offset by anof $0.3 million, the large increase in lower gross margin paraprofessional revenues in New York City and decreases in gross profit margin. The Information Technology gross profit margin forfrom the thirteen week period ended July 1, 2017 was 27.5% as compared to 25.4% for the comparable prior year period. Gross profit margin increasedtravel nursing staffing group, generally due to more favorable utilization in the Company's solutions businessmarket factors including increased competition and a general focus on improving the Company's staffing gross margin. The Information Technology segmentconstrained labor. Specialty Health Care experienced operating income of $0.2$0.8 million for the thirteen week period ended July 1, 2017June 30, 2018 as compared to marginally positive operating income$0.2 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to gross profit, offset by an increase of $0.4 million in SGA expense. SGA expense increased primarily due to a decreasethe need to increase SGA infrastructure expense in SGA expense of $0.5 million, primarily dueorder to lower selling costssupport the increased activity levels associated with lower gross profithigher revenues and a focus on reducinghigher allocation of corporate-generated SGA expense.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Thirteen Week Period Ended July 1, 2017June 30, 2018 Compared to Thirteen Week Period Ended July 2, 20161, 2017 (Continued)
Segment Discussion (Continued)
Specialty Health Care
Specialty Health CareInformation Technology
Information Technology revenues of $16.4$7.3 million for the thirteen week period ended June 30, 2018 decreased 14.9%, or $1.3 million, as compared to $8.6 million for the comparable prior year period. The decrease was primarily from reductions in project revenues from several large clients that were not replaced. Additionally, on the last day of fiscal 2017, the Company sold its Microsoft Business which generated $0.5 million in revenues for the thirteen week period ended July 1, 2017 increased 4.4%, or $0.7 million, as compared to the comparable prior year period. The primary reasons for the increase in the revenues for the Specialty Health Care segment were increases2017. Gross profit of $0.7 million from the Chicago office, $0.6 million from the Honolulu office and $0.1 million from the travel nursing staffing group, partially offset by decreases of $0.4 million from the permanent placement division and $0.4 million from the Health Information Management ("HIM") practice. The Specialty Health Care segment's gross profit decreased by 5.4%, or $0.2 million, to $4.1$2.0 million for the thirteen week period ended July 1, 2017June 30, 2018 decreased 14.7%, or $0.3 million, as compared to $4.3$2.4 million for the prior year period. The decrease in gross profit was primarily driven by a decrease in gross profit margin. The Specialty Health Care segment's gross profit margin for the thirteen week period ended July 1, 2017 was 24.8% as compared to 27.4% for the comparable prior year period. The decrease in gross profit margin was primarily driven by decreased highdue to the decrease in revenues. Additionally, the Microsoft Business contributed $0.1 million in gross profit in the comparable prior year period. The Information Technology gross profit margin permanent placement revenuesfor the thirteen week period ended June 30, 2018 slightly increased at 27.6% as compared to 27.5% for the comparable prior year period. The Information Technology segment experienced operating income of $0.1 million for the thirteen week period ended June 30, 2018 and decreases in gross profit margin from the travel nursing staffing group and HIM practice. Specialty Health Care experienced operating income of $0.2 million for the thirteen weekcomparable prior year period. The current period ended July 1, 2017 as comparedreflects a decrease in SGA expense of $0.3 million. The decrease in SGA expense was primarily due to operating incomelower selling costs associated with lower revenue and gross profit, a focus on rightsizing SGA expense and also a lower allocation of $0.7corporate SGA expense. Additionally, the Microsoft Business generated $0.1 million in SGA expense for the comparable prior year period, a decrease of $0.5 million. Operating income decreased due to the decrease in gross profit and an increase in SGA expense. SGA expense increased by $0.2 million, primarily due to the need to increase SGA infrastructure expense in order to support the increased activity levels associated with higher revenues in the current period and anticipated, continued increased activity for the balance of the Company's fiscal 2017.period.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Twenty-Six Week Period Ended July 1, 2017June 30, 2018 Compared to Twenty-Six Week Period Ended July 2, 20161, 2017
A summary of operating results for the twenty-six week periods ended June 30, 2018 and July 1, 2017 and July 2, 2016 is as follows (in thousands):
| | July 1, 2017 | | July 2, 2016 | | June 30, 2018 | | July 1, 2017 | |
| | Amount | | % of Revenue | | Amount | | % of Revenue | | Amount | | % of Revenue | | Amount | | % of Revenue | |
| Revenues | $91,853 | | 100.0 | | $92,555 | | 100.0 | | $102,522 | | 100.0 | | $91,853 | | 100.0 | |
| Cost of services | 67,988 | | 74.0 | | 67,775 | | 73.2 | | 77,232 | | 75.3 | | 67,988 | | 74.0 | |
| Gross profit | 23,865 | | 26.0 | | 24,780 | | 26.8 | | 25,290 | | 24.7 | | 23,865 | | 26.0 | |
| | | | | | | | | | | | | | | | | |
| Selling, general and administrative | 20,392 | | 22.2 | | 20,642 | | 22.3 | | 20,497 | | 20.0 | | 20,392 | | 22.2 | |
| Depreciation and amortization | | 812 | | 0.8 | | 807 | | 0.9 | |
| Severance, professional fees and other charges | | 1,371 | | 1.3 | | - | | - | |
| Change in contingent consideration | 781 | | 0.8 | | - | | - | | - | | - | | 781 | | 0.8 | |
| Depreciation and amortization | 807 | | 0.9 | | 789 | | 0.9 | | |
| | 21,980 | | 23.9 | | 21,431 | | 23.2 | | 22,680 | | 22.1 | | 21,980 | | 23.9 | |
| | | | | | | | | | | | | | | | | |
| Operating income | 1,885 | | 2.1 | | 3,349 | | 3.6 | | 2,610 | | 2.6 | | 1,885 | | 2.1 | |
| Interest expense, net and foreign currency transactions | (217 | ) | (0.3 | ) | (285 | ) | (0.2 | ) | (695 | ) | (0.8 | ) | (217 | ) | (0.3 | ) |
| | | | | | | | | | | | | | | | | |
| Income before income taxes | 1,668 | | 1.8 | | 3,064 | | 3.3 | | 1,915 | | 1.8 | | 1,668 | | 1.8 | |
| Income tax expense | 929 | | 1.0 | | 1,200 | | 1.3 | | 483 | | 0.5 | | 929 | | 1.0 | |
| | | | | | | | | | | | | | | | | |
| Net income | $739 | | 0.8 | | $1,864 | | 2.0 | | $1,432 | | 1.3 | | $739 | | 0.8 | |
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended June 30, 2018 and July 1, 2017 and July 2, 2016 consisted of twenty-six weeks each.
Revenues. Revenues decreased 0.8%increased 11.6%, or $0.7$10.7 million, for the twenty-six week period ended July 1, 2017June 30, 2018 as compared to the twenty-six week period ended July 2, 20161, 2017 (the "comparable prior year period"). Revenues increased $2.4$3.2 million in the Engineering segment, decreased $6.5 million in the Information Technology segment and increased $3.4$10.6 million in the Specialty Health Care segment and decreased $3.1 million in the Information Technology segment. On the last day of fiscal 2017, the Company disposed of its Microsoft Solutions Business Unit ("Microsoft Business"), which generated $1.0 million in revenues for the twenty-six week period ended July 1, 2017. See Segment Discussion for further information on revenue changes.
The Company has material operations in Canada, primarily from the Company's Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the "Exchange Rate"). For the twenty-six week period ended July 1, 2017,June 30, 2018, the Company generated total revenues from its Canadian clients of $15.6 million in U.S. dollars at an Exchange Rate of 78.3% as compared to $13.7 million in U.S. dollars at an Exchange Rate of 74.9% as compared to $12.6 million in U.S. dollars at an Exchange Rate of 75.3%74.9 % for the prior year comparable period.
Cost of Services and Gross Profit. Cost of services increased 0.3%13.6%, or $0.2$9.2 million, for the twenty-six week period ended July 1, 2017June 30, 2018 as compared to the comparable prior year period. Cost of services increased due to the increase in revenues. Cost of services as a percentage of revenues for the twenty-six week periods ended June 30, 2018 and July 1, 2017 was 75.3% and July 2, 2016 was 74.0% and 73.2%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Twenty-Six Week Period Ended July 1, 2017June 30, 2018 Compared to Twenty-Six Week Period Ended July 2, 20161, 2017 (Continued)
Selling, General and Administrative. Selling, general and administrative ("SGA") expenses decreased 1.2%increased 0.5%, or $0.3$0.1 million, for the twenty-six week period ended July 1, 2017 as compared to the comparable prior year period. SGA expense decreased primarilyexpenses increased due to the decreaseincrease in revenues and the Company's focus on reducing overall general and administrative costs.revenues. As a percentage of revenues, SGA expenses were 22.2%20.0% for the twenty-six week period ended July 1, 2017June 30, 2018 and 22.3%22.2% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Severance, Professional Fees and Other Charges. The Company experienced $1.4 million in severance, professional fees and other charges for the thirteen week period ended June 30, 2018. These charges include severance accrued for the Company's former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.5 million incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. The Company did not incur any such charges in the comparable prior year period.
Change in Contingent Consideration. There was no change to contingent consideration for the twenty-six week period ended June 30, 2018. The Company incurred charges of $0.8 million for increases to contingent consideration for the twenty-six week period ended July 1, 2017. The increase can be principally attributed to the PCI acquisition. Since the PCI acquisition was for stock in Canada the increase in purchase price is not tax deductible and is treated as a permanent difference. There was no change to contingent consideration for the twenty-six week period ended July 2, 2016.
Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company's loan agreement,line of credit, net of interest income and gains and losses on foreign currency transactions and any other non-operating items that may occur from time to time. There were no material changes to othertransactions. Other expense, net for the twenty-six week period ended July 1, 2017increased to $0.7 million as compared to $0.3 million for the comparable prior comparableyear period. The primary component of the increase was interest expense which increased due to increased borrowings under the Company's line of credit. The primary reason for the increased borrowing was to fund the Company's $12.2 million cash dividend paid in December 2017.
Income Tax Expense.Expense. The Company recognized $0.9$0.5 million of income tax expense for the twenty-six week period ended July 1, 2017June 30, 2018, as compared to $1.2$0.9 million for the comparable prior year period. The consolidated effective income tax rate for the current period was 55.7%25.2% as compared to 39.2%55.7% for the comparable prior year period. The twenty-six week period ended July 1, 2017 is impacted by a discrete permanent difference due to the increase in contingent consideration of $0.8 million. The projected fiscal 20172018 income tax rates as of July 1, 2017June 30, 2018 were approximately 41.6%28.3%, 26.5% and 26.5%17.3% in the United States, Canada and Canada,Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The consolidated effective income tax rate for the twenty-six week period ended June 30, 2018 was lower than the comparable prior year period primarily due to the reduction of the Company's federal income tax rate to 21.0% from 34.0% as provided for in the Tax Cuts and Jobs Act and the impact of its Serbian operations acquired in October 2017. The Company did not have Serbian operations for the comparable prior year period. Additionally, the consolidated effective income tax rate for the comparable prior year period is impacted by a discrete permanent difference due to the increase in contingent consideration of $0.8 million. The consolidated effective income tax rate after eliminating this discrete permanent difference decreased for the twenty-six week period ended July 1, 2017 towas 37.9% as compared to 39.2% for the comparable prior year period because the Company's projected fiscal 2017 Canadian income before taxes is higher as a percentage of the total projected 2017 income before taxes as compared to the projected 2016 Canadian income before taxes as a percentage of the total projected 2016 income before taxes at the same time in the comparable prior year period..
Segment Discussion
Engineering
Engineering revenues of $39.8 million for the twenty-six week period ended July 1, 2017 increased 6.4%, or $2.4 million, as compared to the comparable prior year period. The increase was primarily due to increases in revenues of $2.1 million from the Company's Energy Services Group and $0.6 million from the Company's Canadian Power Systems Engineering Group, partially offset by a decrease of $0.3 million from the Company's Aerospace Engineering Group. Gross profit increased 8.9%, or $0.9 million, as compared to the comparable prior year period. Gross profit increased due to the increase in revenues and an increase in gross margin to 27.0% for the current period as compared to 26.3% for the comparable prior year period. The gross margin increase was primarily due to more favorable utilization of billable consultants on fixed price contracts as the Company naturally experiences variability in utilization from quarter to quarter. The Engineering segment operating income was $1.9 million for the twenty-six week period ended July 1, 2017 as compared to $1.5 million for the comparable prior year period. The improvement in operating income was primarily driven by the increase in gross profit and was offset by an increase in SGA expense of $0.5 million. The increase in SGA expense was primarily due to increased investment in selling costs and a higher allocation of corporate-generated SGA expense.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Twenty-SixTwenty-six Week Period Ended June 30, 2018 Compared to Twenty-six Week Period Ended July 1, 2017 Compared to Twenty-Six Week Period Ended July 2, 2016 (Continued)
Segment Discussion (Continued)
Information TechnologyEngineering
Information TechnologyEngineering revenues of $17.2$43.0 million for the twenty-six week period ended July 1, 2017 decreased 27.6%June 30, 2018 increased 8.0%, or $6.5$3.2 million, as compared to $23.7the comparable prior year period. The increase was due to increases in revenues of $3.6 million from the Company's Energy Services Group and $0.3 million from the Company's Canadian Power Systems Engineering Group offset by a decrease in revenues of $0.7 million from the Company's Aerospace Group. Gross profit increased 5.6%, or $0.6 million, as compared to the comparable prior year period. Gross profit increased due to the increase in revenues offset by a decrease in gross margin to 26.4% for the current period as compared to 27.0% for the comparable prior year period. The gross margin decrease was primarily due to less favorable utilization of billable consultants on fixed price contracts as the Company naturally experiences variability in utilization from quarter to quarter. The Engineering segment operating income was $2.6 million for the twenty-six week period ended June 30, 2018 as compared to $1.9 million for the comparable prior year period. The improvement in operating income was primarily driven by the increase in gross profit. SGA expense was essentially unchanged in the current period.
Specialty Health Care
Specialty Health Care revenues of $45.5 million for the twenty-six week period ended June 30, 2018 increased 30.4%, or $10.6 million, as compared to the comparable prior year period. The primary drivers of the increase in the revenues for the Specialty Health Care segment were increases of $8.5 million from the New York City Office, $2.4 million from the Honolulu office and $0.6 million from the HIM practice, offset by a decrease in revenue of $0.8 million from travel nursing staffing group. The primary reason for revenue increases in New York City and Hawaii were incremental additions of paraprofessionals billed on school contracts. The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment's gross profit increased by 19.9%, or $1.7 million, to $10.3 million for the twenty-six week period ended June 30, 2018 as compared to $8.6 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenues, offset by lower gross profit margin. The Specialty Health Care segment's gross profit margin for the twenty-six week period ended June 30, 2018 decreased to 22.7% as compared to 24.7% for the comparable prior year period. The decrease in gross profit margin was primarily driven by a decrease in high gross profit margin permanent placement revenues of $0.4 million, the large increase in lower gross margin paraprofessional revenues in New York City and decreases in gross profit margin from the travel nursing staffing group, generally due to market factors including increased competition and constrained labor. Specialty Health Care experienced operating income of $1.5 million for the twenty-six week period ended June 30, 2018 as compared to $0.8 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to gross profit, offset by an increase of $0.9 million in SGA expense. SGA expense increased primarily due to the need to increase SGA infrastructure expense in order to support the increased activity levels associated with higher revenues and a higher allocation of corporate-generated SGA expense.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Twenty-six Week Period Ended June 30, 2018 Compared to Twenty-six Week Period Ended July 1, 2017 (Continued)
Segment Discussion (Continued)
Information Technology
Information Technology revenues of $14.0 million for the twenty-six week period ended June 30, 2018 decreased 18.2%, or $3.1 million, as compared to $17.2 million for the comparable prior year period. The decrease was primarily from reductions in project revenues from several large clients that were not replaced. Gross profitAdditionally, on the last day of $4.5fiscal 2017, the Company sold its Microsoft Business which generated $1.0 million in revenues for the twenty-six week period ended July 1, 20172017. Gross profit of $3.6 million for the twenty-six week period ended June 30, 2018 decreased 31.4%19.6%, or $2.1$0.9 million, as compared to $6.6$4.5 million for the comparable prior year period. The decrease in gross profit was primarily due to the decrease in revenues and a decrease in gross profit margin. Additionally, the Microsoft Business contributed $0.2 million in the comparable prior year period. The Information Technology gross profit margin for the twenty-six week period ended July 1, 2017June 30, 2018 was 26.3%25.8% as compared to 27.8%26.3% for the comparable prior year period. Gross profit margin decreased because large project high-value, high-margin revenues decreased and thereby increased the portion of lower gross profit margin staffing-oriented revenues. The Information Technology segment experienced an operating loss of ($0.1) million for the twenty-six week period ended July 1, 2017 as compared to operating income of $0.6 million for the comparable priorboth periods The current year period. The decrease in operating income was due to the decrease in gross profit, partially offset byreflects a decrease in SGA expense.expense of $0.8 million. The decrease in SGA expense of $4.5 million for the twenty-six week period ended July 1, 2017 decreased $1.3 million as compared to $5.8 million in the comparable prior year period,was primarily due to lower selling costs associated with lower revenue and gross profit, and a focus on reducingrightsizing SGA expense.
Specialty Health Care
Specialty Health Care revenuesexpense and also a lower allocation of $34.9 million forcorporate SGA expense. Additionally, the twenty-six week period ended July 1, 2017 increased 11.0%, or $3.4 million, as compared to the comparable prior year period. The primary reasons for the increase in the revenues for the Specialty Health Care segment were increases of $1.5 million from the Chicago office, $1.4 million from the travel nursing staffing group and $1.3 million from the Honolulu office, partially offset by a decrease in revenues of $0.5 million from the permanent placement group andMicrosoft Business generated $0.2 million from the HIM practice. The Specialty Health Care segment's gross profit increased by 3.3%, or $0.3 million, to $8.6 million for the twenty-six week period ended July 1, 2017 as compared to $8.3 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenues, offset by lower gross profit margin. The Specialty Health Care segment's gross profit margin for the twenty-six week period ended July 1, 2017 decreased to 24.7% as compared to 26.6%SGA expense for the comparable prior year period. The decrease in gross profit margin was primarily driven by a decrease in high gross profit margin permanent placement revenues and increased revenues with new clients at a lower gross profit margin, particularly in the travel nurse staffing group and Chicago office. Specialty Health Care experienced operating income of $0.8 million for the twenty-six week period ended July 1, 2017 as compared to operating income of $1.2 million for the comparable prior year period. The primary reason for the decrease in operating income was an increase in SGA expense, partially offset by the increase in gross profit. SGA expense increased by $0.6 million, primarily due to the need to increase SGA infrastructure expense in order to support the increased activity levels associated with higher revenues in the current period and anticipated, continued increased activity for the balance of the Company's fiscal 2017.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Twenty-Six Week Period Ended July 1, 2017 Compared to Twenty-Six Week Period Ended July 2, 2016 (Continued)
Segment Discussion (Continued)
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP measures, which adjust for the categories of expenses described below, primarily changes in contingent consideration as a result of re-measurement in the amount of contingent consideration we expect to pay with respect to past acquisitions, are non-GAAP financial measures. Our management believes that these non-GAAP financial measures ("EBITDA", "Adjusted EBITDA", "Adjusted Net Income" and "Diluted EPS") are useful information for investors, shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis and to enhance investors' overall understanding of our current financial performance and period-to-period comparisons. We believe that EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net income and EBITDA and Adjusted EBITDA has been provided. EBITDA should not be considered as an alternative to net income as an indicator of performance. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
The following unaudited table presents the Company's GAAP Net Income measure and the corresponding adjustments used to calculate "EBITDA", "Adjusted EBITDA", "Adjusted Net Income" and "Diluted EPS" for the thirteen weeks and twenty-six weeks ended July 1, 2017 and July 2, 2016.
| | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended | |
| | July 1, 2017 | | July 2, 2016 | | July 1, 2017 | | July 2, 2016 | |
| GAAP net income | $189 | | $863 | | $739 | | $1,864 | |
| Income tax expense | 577 | | 580 | | 929 | | 1,200 | |
| Interest expense | 134 | | 96 | | 272 | | 308 | |
| Depreciation and amortization | 410 | | 399 | | 807 | | 789 | |
| EBITDA (non-GAAP) | $1,310 | | $1,938 | | $2,747 | | $4,161 | |
| | | | | | | | | |
| Adjustments | | | | | | | | |
| Change in contingent consideration | 781 | | - | | 781 | | - | |
| Gain on foreign currency transactions | (53 | ) | (11 | ) | (55 | ) | (23 | ) |
| Adjusted EBITDA (non-GAAP) | $2,038 | | $1,927 | | $3,473 | | $4,138 | |
| | | | | | | | | |
| GAAP net income | $189 | | $863 | | $739 | | $1,864 | |
| Adjustments | | | | | | | | |
| Change in contingent consideration | 781 | | - | | 781 | | - | |
| Adjusted net income (non-GAAP) | $970 | | $863 | | $1,520 | | $1,864 | |
| | | | | | | | | |
| GAAP Diluted EPS | $0.02 | | $0.07 | | $0.06 | | $0.15 | |
| Adjustments | | | | | | | | |
| Change in contingent consideration | $0.06 | | - | | $0.06 | | - | |
| Adjusted Diluted EPS (non-GAAP) | $0.08 | | $0.07 | | $0.12 | | $0.15 | |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's Consolidated Statements of Cash Flows (in thousands):
| | Twenty-Six Week Periods Ended | |
| | July 1, 2017 | | July 2, 2016 | |
| Cash provided by (used in): | | | | |
| | Operating activities | $5,330 | | $7,681 | |
| | Investing activities | ($551 | ) | ($642 | ) |
| | Financing activities | ($4,649 | ) | ($7,766 | ) |
| | Twenty-Six Week Periods Ended | |
| | June 30, 2018 | | July1, 2017 | |
| Cash provided by (used in): | | | | |
| | Operating activities | ($3,610 | ) | $5,330 | |
| | Investing activities | ($613 | ) | ($551 | ) |
| | Financing activities | $1,817 | | ($4,649 | ) |
Operating Activities
Operating activities provided $5.3used $3.6 million of cash for the twenty-six week period ended July 1, 2017June 30, 2018 as compared to $7.7providing $5.3 million in the comparable prior year period. The major components of cash provided by or used in operating activities in the twenty-six week period ended July 1, 2017June 30, 2018 and the comparable prior year period are as follows: net income and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and accrued payroll and related costs.
Net income for the twenty-six week period ended July 1, 2017June 30, 2018 was $0.7$1.4 million as compared to $1.9$0.7 million for the comparable prior year period. A decreaseAn increase in accounts receivables in the twenty-six week period ended July 1, 2017 provided $1.6June 30, 2018 used $6.2 million of cash as compared to $3.2providing $1.6 million in the comparable prior year period. The Company primarily attributes the decreaseincrease in accounts receivables for the twenty-six week period ended July 1, 2017June 30, 2018 to improved collections, particularly from the Company'sseveral different clients in both its Engineering and Specialty Health Care segments that experienced temporary delays in its approval and Canadian Engineering clients.payment processes. The Company anticipates that its accounts receivable balance relative to revenues will improve during the second half of fiscal 2018.
The Company's transit accounts payable generally exceeds the Company's transit accounts receivable, but absolute amounts and differences fluctuate significantly from quarter to quarter in the normal course of business. The net of transit accounts payable and transit accounts receivable was a net liabilitypayable of $0.6 million and $1.7 million as of June 30, 2018 and December 30, 2017, respectively, so the cash impact during the twenty-six week period ended June 30, 2018 used $1.1 million in cash. The net of transit accounts payable and transit accounts receivable was a net payable of $2.2 million and $2.5 million as of July 1, 2017 and December 31, 2016, respectively, so the cash impact during the twenty-six week period ended July 1, 2017 used $0.3 million in cash. The net of transit accounts payable and transit accounts receivable was a net liability of $3.2 million as of July 2, 2016 and of $1.5 million as of January 2, 2016, so the cash impact during the twenty-six week period ended July 2, 2016 provided $1.7 million in cash.
Prepaid expenses and other current assets provided $0.3 million inof cash for both the twenty-six week periodperiods ended June 30, 2018 and July 1, 2017 as compared to providing $1.6 million in the comparable prior year period.2017. The Company attributes these changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of business.
A decrease in accounts payable and accrued expenses used $0.5$1.4 million for the twenty-six week period ended July 1, 2017June 30, 2018 as compared to $1.9$0.5 million of cash for the comparable prior year period. The Company attributes these changes to general timing of payments to vendors in the normal course of business.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
An increaseChanges in accrued payroll and related costs for the twenty-six week periodperiods ended June 30, 2018 and July 1, 2017 provided $1.7 million and $0.5 million in cash, as comparedrespectively. A large portion of current period cash provided from changes in accrued payroll and related costs consists of $0.9 million in severance and related costs accrued for payment to using $0.8 million for the comparable prior year period.Company's former chief executive officer. There are three primary factors that impact accrued payroll and related costs: 1) there is a general correlation to operating expenses as payroll and related costs is the Company's largest expense group, so as operating costs increase or decrease, absent all other factors, so will the accrued payroll and related costs; 2) the Company pays the majority of its employeespayroll every two weeks and normally has thirteen weekstwenty-six periods in a fiscal quarter, which means that the Company normally has a major payroll on the last business day of every other quarter; and 3) most of the Company's senior management participate in annual incentive plans and while progress advances are oftensometimes made during the fiscal year these accrued bonus balances to the extent they are projected to be achieved generally accumulate throughout the year. The Company's last major payroll for the twenty-six week period ended July 1, 2017June 30, 2018 was paid on June 23, 2017.22, 2018.
Investing Activities
Investing activities used cash of $0.6 million for both the twenty-six week periodperiods ended June 30, 2018 and July 1, 2017 and the comparable prior year period.2017. Investing activities for both periods presented were primarily related to expenditures for property and equipment.
Financing Activities
Financing activities used $4.6provided $1.8 million of cash for the twenty-six week period ended July 1, 2017June 30, 2018 as compared to $7.8using $4.6 million in the comparable prior year period. The Company made net repaymentsborrowings under its line of credit of $4.2$1.9 million during the twenty-six week period ended July 1, 2017June 30, 2018 as compared to net repayments of $6.1$4.2 million in the comparable prior year period. The Company also used $0.4 million to repurchase common stock and $0.3 million to pay contingent consideration during the twenty-six week period ended July 1, 2017. The Company generated cash of $0.2 million from sales of shares from its equity plans for both periods presented.
The Company and its subsidiaries are party to a loan agreement with Citizens Bank of Pennsylvania which, as of June 30, 2018, provides for a $35$40 million revolving credit facility and includes a sub-limit of $5 million for letters of credit (the "Revolving Credit Facility") and expires December 11, 2019. The Revolving Credit Facility has been amended several times, most recently pursuant to the SeventhEleventh Amendment entered into on MarchMay 21, 2018 when a tier from its interest rate pricing grid was eliminated. The Company also entered into to the Tenth Amendment on February 14, 2018 when the Company increased the Revolving Credit Facility to $40 million from its previous amount of $35 million and entered into the Ninth Amendment on December 8, 2017 when the Company was granted a waiverwaivers that expressly excludesallowed a cash dividend of up to $12.4 million and waived certain expenses from the Company's loan covenant calculations, including $1.3 million of certain expenses related legal settlementcosts, office closures and office closureother expenses in the calculation of the Company's loan covenants.fiscal 2017, up to $1.0 million consulting expenses for analyzing tax credits for research and development costs and 179D energy savings tax credits on a rolling four quarter basis and up to $4.6 million for goodwill impairment. 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, typically borrowed in fixed 30-day increments or (ii) the agent bank's prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the twenty-six week period ended July 1, 2017June 30, 2018 was 2.5%3.6%.
The Company and its subsidiaries amended and restated the Revolving Credit Facility on August 9, 2018 as more fully detailed in Footnote 18 – Subsequent Events.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company's ability to borrow in order to pay dividends. As of July 1, 2017,June 30, 2018, the Company was in compliance with all covenants contained in itsthe Revolving Credit Facility.
Borrowings under the line of credit as of July 1, 2017June 30, 2018 and December 31, 201630, 2017 were $10.1$29.2 million and $14.3$27.3 million, respectively. At July 1, 2017June 30, 2018 and December 31, 201630, 2017 there were letters of credit outstanding for $0.8 million. At July 1, 2017,June 30, 2018, the Company had availability for additional borrowings under the Revolving Credit Facility of $24.1$10.0 million.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations.
The Company's business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company's future acquisition and expansion opportunities or how such opportunities will be financed.
The Company has a dispute with a customer that is a major utility in the United States. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed to the Company for certain disputed projects. The Company recently compelled arbitration with this customer. As of June 30, 2018 the total amount of outstanding receivables from this customer is $6.4 million, subject to an upward adjustment following disclosures by the customer in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter claims of $9.3 million. The Company also believes these counter claims were retaliatory in nature. Prior to the arbitration, the customer had not asserted any claims. The Company believes these asserted claims have no merit and were merely asserted as a strategy to reduce the Company's claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude sometime late in fiscal year 2018 or early fiscal 2019. While the Company believes the customer's counter claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
The Company utilizes SAP software for its financial reporting and accounting system which was implemented in 1999 and has not undergone significant upgrades since its initial implementation. The Company believes that it will become necessary to upgrade or replace its SAP financial reporting and accounting system. The Company has not determined when this contemplated replacement may be necessary, but expects tomay undertake a comprehensive review of the system during fiscal 2017.2018. The Company estimates this upgrade or replacement of the third-partytheir financial reporting and accounting system will cost between $1.0 million and $2.0 million. These estimates are subject to material change.
The Company's current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for at least the next 12 months.
The Company leases office facilities and various equipment under non-cancelable leases expiring at various dates through November 2022. Certain leases are subject to escalation clauses based upon changes in various factors. The minimum future annual operating lease commitments for leases with non-cancelable terms, exclusive of unknown operating escalation charges, are as follows (in thousands):
| Fiscal Years | Amount |
| 2017 (after July 1, 2017) | $1,700 |
| 2018 | 2,894 |
| 2019 | 1,513 |
| 2020 | 902 |
| 2021 | 399 |
| Thereafter | 252 |
| Total | $7,660 |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Liquidity and Capital Resources (Continued)
| Fiscal Years Ending | Amount |
| 2018 (after June 30, 2018) | $1,766 |
| 2019 | 1,764 |
| 2020 | 1,098 |
| 2021 | 579 |
| 2022 | 339 |
| Total | $5,546 |
Future Contingent Payments
As of July 1, 2017,June 30, 2018, the Company had fivethree active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective July 1, 2012 the Company acquired certain assets of BGA, LLC ("BGA"); 2) effective August 1, 2014 the Company acquired all of the stock of Point Comm, Inc. ("PCI"); 3) effective July 5, 2015, the Company acquired certain assets of Substation Design Services, LLC ("SDS"); 4)and 3) effective December 31, 2016, the Company acquired certain assets of Allied Health Professionals, LLC ("AHP") and 5) effective April 16,October 1, 2017, the Company acquired certain assetsall of RAF Services, Inc.the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) ("RAF"PSR"). The Company estimates future contingent payments at July 1, 2017June 30, 2018 as follows:
Fiscal YearYears Ending | Total |
December 29, 2018 (after June 30, 2017 (after July 1, 2017)2018) | $1,525482 |
December 30, 201828, 2019 | 240526 |
| January 2, 2021 | 725 |
| Estimated future contingent consideration payments | $1,7651,733 |
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions are capped at cumulative maximum of $3.2.$2.3 million. The Company estimates future contingent consideration in payments based on forecasted performance and recorded at the net present value of those expected payments as of July 1, 2017.June 30, 2018. The measurement is based on significant inputs that are not observable in the market, which "Fair Value Measurements and Disclosures" (ASU Topic 820-10-35) refers to as Level 3 inputs. There was no change in the fair value of contingent consideration for the twenty-six week period ended June 30, 2018.
| 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 itsthe Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of July 1, 2017,June 30, 2018, the Company's investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. Based on the Company's variable-rate line of credit balances during the twenty-six week period ended July 1, 2017,June 30, 2018, if the interest rate on the Company's variable-rate line of credit (using an incremental borrowing rate) during the period had been 1.0% higher, the Company's interest expense on an annualized basis would have increased by $0.1$0.3 million. The Company does not expect any material loss with respect to its investment portfolio.
| ITEM 4. | CONTROLS AND PROCEDURES |
The Company's management, under the supervision and with the participation of the Company's 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 effective 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 beenwere no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter andended June 30, 2018, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION |
See discussion of Contingencies in Note 16 to the Consolidated Financial Statements included in Item 1 of this report.
There have been no material changes from the risk factors disclosed in the "Risk Factors" sectionsections (Item 1A) of the Company's Annual Report on Form 10-K for the year ended December 30, 2017 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.2018.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION |
None.On August 9, 2018, the Company and all of its subsidiaries (collectively, the "Borrowers") entered into a Third Amended & Restated Loan and Security Agreement (the "Amended and Restated Loan Agreement") with Citizens Bank of Pennsylvania, as lender (in such capacity, the "Lender") and as administrative agent and arranger (in such capacity, the "Administrative Agent"), to amend and restate in its entirety that certain Second Amended and Restated Loan and Security Agreement dated as of the 19th day of February, 2009 (as the same has been amended and modified prior to the date hereof, the "Existing Loan Agreement").
Under the Amended and Restated Loan Agreement, the total commitment is $45.0 million (increased from $40.0 million under the Existing Loan Agreement). The Amended and Restated Loan Agreement no longer has a sub-limit for letters of credit (the Existing Loan Agreement had a $5.0 million sub-limit for letters of credit). The Amended and Restated Loan Agreement has a maturity date of August 8, 2023. Borrowings under the Amended and Restated Loan Agreement remain collateralized with substantially all of the Company's assets, as well as the capital stock of our subsidiaries.
Borrowings under the Amended and Restated Loan Agreement 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, typically borrowed in fixed 30-day increments or (ii) the agent bank's prime rate, plus applicable margin, generally borrowed over shorter durations. The amount of the spread depends on the ratio of consolidated funded debt to consolidated EBITDA (which, for purposes of the Amended and Restated Loan Agreement, is defined as the sum of (a) consolidated net income (excluding any realized gains or losses from foreign exchange transactions) before interest, income taxes, depreciation and amortization, (b) non-cash charges (including, but not limited to, any write-offs of goodwill), (c) the net loss if any (expressed as a positive number) arising solely from Permitted Asset or Stock Sales (as defined in the Amended and Restated Loan Agreement) up to an amount, which when added to other net losses previously recognized under clause (c) does not exceed $5,000,000.00 in the aggregate, subject to certain permitted add-backs and (d) up to $1.0 million consulting expenses for analyzing tax credits for research and development costs and 179D energy savings tax credits on a rolling four quarter basis.
The Amended and Restated Loan Agreement contains certain affirmative and negative covenants including limitations on specified levels of capital expenditures, consolidated leverage, and consolidated fixed charges, and includes limitations on, among other things, dividends, liens, mergers, consolidations, sales of assets, incurrence of debt and capital expenditures. We are also required to pay a monthly unused facility fee on the amount of the Amended and Restated Loan Agreement not drawn which ranges from 10 to 20 basis points, depending upon the ratio of consolidated funded debt to consolidated EBITDA. Upon the occurrence of an event of default under the Credit Facility, such as non-payment or failure to observe specific covenants, the Lender would be entitled to declare all amounts outstanding under the Amended and Restated Loan Agreement immediately due and payable.
The Amended and Restated Loan Agreement provides the Company waivers from certain financial covenant calculations of up to $1.4 million in the borrowers' fiscal year ending on December 31, 2018 for certain expenses including severance accrued for the Company's former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, charges incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive and up to $1.4 million in the borrowers' fiscal year ending on December 30, 2017 of certain expenses related to legal costs, office closures and other expenses.
This description of the Amended and Restated Loan Agreement is only a summary and is qualified in its entirety by reference to the full text of the Amended and Restated Loan Agreement, which is attached as Exhibit 10(d) to this Quarterly Report on Form 10-Q.
| Eleventh Amendment to Second Amended and Restated Amendment, dated as of May 21, 2018, to Amended and Restated Loan and Security Agreement dated as of February 19, 2009, by and among the Company and all of its subsidiaries, Citizens Bank of Pennsylvania, a Pennsylvania state chartered bank, in its capacity as administrative agent and arranger, and Citizens Bank of Pennsylvania, as lender; incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2018. |
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| Executive Severance Agreement, dated as of June 1, 2018, by and between the Company and Bradley S. Vizi; incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2018. |
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| Release and Separation Agreement, dated as of June 6, 2018, by and between the Company and Rocco Campanelli; incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2018. |
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| Third Amended & Restated Loan and Security Agreement, dated as of August 9, 2018, by and among the Company and all of its subsidiaries, Citizens Bank of Pennsylvania, a Pennsylvania state chartered bank, in its capacity as administrative agent and arranger, and Citizens Bank of Pennsylvania, as lender. |
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| Certification of President and ChiefPrincipal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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| Certification of ChiefPrincipal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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| Certification of President and ChiefPrincipal 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.) |
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| Certification of ChiefPrincipal 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.) |
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| 101.INS* | XBRL Instance Document |
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| 101.SCH* | XBRL Taxonomy Extension Schema Document |
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| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Documents |
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| 101.DEF* | XBRL Taxonomy Definition Linkbase Document |
__________
* Filed herewith
** Furnished herewith
RCM TECHNOLOGIES, INC. SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | RCM Technologies, Inc. |
Date: August 10, 201714, 2018 | | By: /s/ Rocco CampanelliBradley S. Vizi |
| | | | Rocco CampanelliBradley S. Vizi
PresidentExecutive Chairman and Chief Executive OfficerPresident
(Principal Executive Officer and Duly Authorized Officer of the Registrant) |
Date: August 10, 201714, 2018 | | By: /s/ Kevin D. Miller |
| | | | Kevin D. Miller Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of the Registrant) |
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Rocco Campanelli,Bradley S. Vizi, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) 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
(d) disclosed in this annual 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 10, 201714, 2018 | | /s/ Rocco CampanelliBradley S. Vizi Rocco CampanelliBradley S. Vizi
PresidentExecutive Chairman and Chief Executive OfficerPresident
|
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Kevin D. Miller, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) 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
(d) disclosed in this annual 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 10, 201714, 2018 | | /s/ Kevin D. Miller Kevin D. Miller Chief Financial Officer |
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Rocco Campanelli,Bradley S. Vizi, Executive Chairman and 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 July 1, 2017June 30, 2018 (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/ Rocco CampanelliBradley S. Vizi
Rocco CampanelliBradley S. Vizi
PresidentExecutive Chairman and Chief Executive OfficerPresident
Date: August 10, 201714, 2018
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Kevin D. Miller, 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 July 1, 2017June 30, 2018 (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/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
Date: August 10, 201714, 2018