-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rk2a5P/fKZCDsIzq4HyDzaebhY4h+sxP1qPFltazsiFzfv97+TgvI8rBelMs0D7o 5yK44E3jPg68DYNHHBUKvQ== 0000700841-07-000029.txt : 20071108 0000700841-07-000029.hdr.sgml : 20071108 20071108103545 ACCESSION NUMBER: 0000700841-07-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20070929 FILED AS OF DATE: 20071108 DATE AS OF CHANGE: 20071108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RCM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000700841 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 951480559 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10245 FILM NUMBER: 071223870 BUSINESS ADDRESS: STREET 1: 2500 MCCLELLAN AVENUE STREET 2: STE 350 CITY: PENNSAUKEN STATE: NJ ZIP: 08109-4613 BUSINESS PHONE: 8564861777 MAIL ADDRESS: STREET 1: 2500 MCCLELLAN AVENUE STREET 2: STE 350 CITY: PENNSAUKEN STATE: NJ ZIP: 08109-4613 10-Q 1 form10q092907.txt FORM 10-Q QUARTERLY REPORT 09/29/2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-10245 RCM TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 95-1480559 ------ ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613 (Address of Principal Executive Offices) (Zip Code) (856) 486-1777 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X ---- ----- ---- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X ----- ---- Indicate the number of shares outstanding of the Registrant's class of common stock, as of the latest practicable date. Common Stock, $0.05 par value, 12,043,143 shares outstanding as of November 7, 2007. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ---------------------------------------------------------------------------
Page Item 1 - Consolidated Financial Statements Consolidated Balance Sheets as of September 29, 2007 (Unaudited) and December 30, 2006 3 Unaudited Consolidated Statements of Income for the Thirteen Weeks and Thirty-Nine Weeks Ended September 29, 2007 and September 30, 2006 5 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Thirteen Weeks and Thirty-Nine Weeks Ended September 29, 2007 6 and September 30, 2006 Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 29, 2007 and September 30, 2006 7 Notes to Unaudited Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 37 Item 4T - Controls and Procedures 37 PART II - OTHER INFORMATION --------------------------------------------------------------------------- Item 1 - Legal Proceedings 38 Item 1A. - Risk Factors 38 Item 6 - Exhibits 39 Signatures 40
2 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 29, 2007 and December 30, 2006 (In Thousands, Except Share Data) ASSETS
September 29, December 30, 2007 2006 - ---------------------------------------------------------------------------------------------------------------- (Unaudited) Current assets Cash and cash equivalents $7,916 $2,449 Accounts receivable, net of allowance for doubtful accounts of $1,827 (September 29, 2007) and $1,672 (December 30, 2006), respectively 53,097 48,141 Prepaid expenses and other current assets 2,422 1,716 Deferred tax assets 1,032 3,185 - ---------------------------------------------------------------------------------------------------------------- Total current assets 64,467 55,491 - ---------------------------------------------------------------------------------------------------------------- Property and equipment, at cost Equipment and leasehold improvements 9,069 10,087 Less: accumulated depreciation and amortization 5,024 5,695 - ---------------------------------------------------------------------------------------------------------------- 4,045 4,392 - ---------------------------------------------------------------------------------------------------------------- Other assets Deposits 153 159 Goodwill 39,588 39,329 Intangible assets, net of accumulated amortization of $646 (September 29, 2007) and $406 (December 30, 2006), respectively 429 669 - ---------------------------------------------------------------------------------------------------------------- 40,170 40,157 - ---------------------------------------------------------------------------------------------------------------- Total assets $108,682 $100,040 ================================================================================================================
3 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (Continued) September 29, 2007 and December 30, 2006 (In Thousands, Except Share Data) - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY
September 29, December 30, -------------- 2006 2007 - ---------------------------------------------------------------------------------------------------------------- (Unaudited) Current liabilities Accounts payable and accrued expenses $8,915 $7,317 Accrued compensation 8,068 8,122 Payroll and withheld taxes 1,298 1,146 Income taxes payable 581 62 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 18,862 16,647 - ---------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued or outstanding Common stock, $0.05 par value; 40,000,000 shares authorized; 12,035,643 and 11,822,126 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively 602 591 Additional paid-in capital 102,580 101,559 Accumulated other comprehensive income 1,249 1,002 Accumulated deficit (14,611) (19,759) - ---------------------------------------------------------------------------------------------------------------- 89,820 83,393 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $108,682 $100,040 ================================================================================================================ 4 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands, Except Per Share Data) - ------------------------------------------------------------------------------- Thirteen Weeks Ended Thirty-Nine Weeks Ended - ------------------------------------------------------- ------------------------------------- -- --------------------------------- September 29, September 30, September 29, September 30, 2007 2006 2007 2006 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Revenues $54,079 $51,650 $165,418 $147,729 Cost of services (1)(3) 40,646 38,698 125,650 110,566 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Gross profit 13,433 12,952 39,768 37,163 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Operating costs and expenses Selling, general and administrative (2)(4) 10,288 10,250 31,010 30,522 Depreciation 289 307 849 884 Amortization 80 87 240 230 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- 10,657 10,644 32,099 31,636 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Operating income 2,776 2,308 7,669 5,527 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Other income (expenses) Interest income (expense) 32 (75) 32 (204) Gain (loss) on foreign currency transactions 41 (5) 53 (16) Legal settlement 800 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- 73 (80) 885 (220) - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Income before income taxes 2,849 2,228 8,554 5,307 Income tax expense 1,125 879 3,406 1,287 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Net income $1,724 $1,349 $5,148 $4,020 ======================================================= ================= == ================ == ============== === ============== Basic earnings per share $.14 $.11 $.43 $.34 Diluted earnings per share $.14 $.11 $.41 $.33 (1) Includes share-based compensation expense of $1 and share-based compensation credit of $1 for the thirteen weeks ended September 29, 2007 and September 30, 2006, respectively. (2) Includes share-based compensation expense of $56 and $100 for the thirteen weeks ended September 29, 2007 and September 30, 2006, respectively. (3) Includes share-based compensation expense of $5 and $30 for the thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively. (4) Includes share-based compensation expense of $146 and $663 for the thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively.
5 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (In Thousands) - -------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-Nine Weeks Ended - ------------------------------------------------------- ------------------------------------- -- --------------------------------- September 29, September 30, September 29, September 30, 2007 2006 2007 2006 - ------------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Common stock Beginning of period $599 $589 $591 $586 Issuance of stock under employee stock purchase plan 1 Exercise of stock options 3 11 2 - ----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- End of period $602 $589 $602 $589 ===== ================================================= ================= == ================ == ============== === ============== Additional paid-in-capital Beginning of period $102,265 $101,071 $101,559 $100,235 Issuance of stock under employee stock purchase plan 66 65 Exercise of stock options 258 1 804 178 Stock-based compensation expense 57 99 151 693 - ----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- End of period $102,580 $101,171 $102,580 $101,171 ===== ================================================= ================= == ================ == ============== === ============== Accumulated other comprehensive income Beginning of period $1,171 $1,054 $1,002 $982 Translation adjustment 78 (17) 247 55 - ----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- End of period $1,249 $1,037 $1,249 $1,037 ===== ================================================= ================= == ================ == ============== === ============== Accumulated deficit Beginning of period ($16,335) ($23,444) ($19,759) ($26,115) Net income 1,724 1,349 5,148 4,020 - ----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- End of period ($14,611) ($22,095) ($14,611) ($22,095) ===== ================================================= ================= == ================ == ============== === ============== Comprehensive income Net earnings $1,724 $1,349 $5,148 $4,020 Translation adjustment 78 (17) 247 55 - ----- ------------------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Total $1,802 $1,332 $5,395 $4,075 ===== ================================================= ================= == ================ == ============== === ==============
6 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) - -------------------------------------------------------------------------------
Thirty-Nine Weeks Ended - ----------------------------------------------------------------------------------------------------------------- September 29, September 30, ---------------- 2006 2007 - ----------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $5,148 $4,020 - ----------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisition: Depreciation and amortization 1,089 1,114 Share-based compensation expense 151 693 Provision for losses on accounts receivable 155 (109) Deferred tax assets 2,153 (145) Changes in assets and liabilities: Accounts receivable (4,195) (3,797) Restricted cash 8,572 Prepaid expenses and other current assets (690) 66 Accounts payable and accrued expenses 648 (5,270) Accrued compensation (111) 1,337 Payroll and withheld taxes 131 250 Income taxes payable 547 (2,149) - ----------------------------------------------------------------------------------------------------------------- Total adjustments (122) 562 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $5,026 $4,582 - -----------------------------------------------------------------------------------------------------------------
7 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) (In Thousands) - -------------------------------------------------------------------------------
Thirty-Nine Weeks Ended - ----------------------------------------------------------------------------------------------------------------- September 29, September 30, 2007 2006 - ----------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Property and equipment acquired ($502) ($1,340) Decrease (increase) in deposits 5 (16) Cash paid for acquisition, net of working capital acquired (259) (622) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (756) (1,978) - ----------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Sale of stock for employee stock purchase plan 66 66 Exercise of stock options 815 180 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 881 246 - ----------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 316 56 - ----------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 5,467 2,905 Cash and cash equivalents at beginning of period 2,449 3,761 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $7,916 $6,666 ================================================================================================================= Supplemental cash flow information: Cash paid for: Interest expense $147 $1,176 Income taxes $734 $3,166
8 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 1. Basis of Presentation The accompanying consolidated interim financial statements of RCM Technologies, Inc and Subsidiaries ("RCM" or the "Company") are unaudited. The balance sheet as of December 30, 2006 is derived from the audited balance sheet of the Company at that date. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company's consolidated financial statements and the notes thereto for the year ended December 30, 2006 included in the Company's Annual Report Form 10-K for such period, filed on March 22, 2007. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior period information has been reclassified to conform to the current period presentation. The consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Results for the thirteen weeks and thirty-nine weeks ended September 29, 2007 are not necessarily indicative of results that may be expected for the full year. 2. Fiscal Year The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. A 53-week year occurs periodically. The fiscal year ended December 30, 2006 was a 52-week reporting year. The third quarter of 2006, the 2006 fiscal year and the third quarter of 2007 ended on the following dates, respectively: Period Ended Weeks in Quarter Weeks in Year to Date ------------------------------------------ ------------------------- September 30, 2006 Thirteen Thirty-Nine December 30, 2006 Thirteen Fifty-Two September 29, 2007 Thirteen Thirty-Nine 3. Use of Estimates and Uncertainties The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company's costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company's claims experience or the providers included in the associated insurance programs. The Company can be affected by a variety of factors including uncertainty relating to the performance of the U.S. economy, competition, demand for the Company's services, adverse litigation and claims, as well as the hiring, training and retention of key employees. 9 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------ 4. Acquisitions On April 17, 2006, the Company purchased the operating assets of Techpubs, LLC ("Techpubs"), a Rhode Island limited liability company. Techpubs is a specialty provider of engineering services. The acquisition has been accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations." Accordingly, the results of operations of the acquired company have been included in the consolidated results of operations of the Company from the date of acquisition and are included in the Engineering segment. The purchase consideration at closing consisted of $.6 million in cash and $.3 million of deferred consideration contingent upon achieving certain base levels of operating income for each of the three twelve month periods following the purchase. The allocation of the purchase price, including the earnout of $.3 million paid for the twelve months ended April 30, 2007 is as follows: Period of Amount Amortization ----------------- -- ----------------- Non-compete agreements $31 5 years Customer relationships 140 5 years Goodwill 710 ---------------------------------- ----------------- -- ----------------- $881 ================================== ================= == ================= In connection with certain acquisitions, the Company is obligated to pay contingent consideration to the selling shareholders upon the acquired business achieving certain earnings targets over periods ranging from two to three years following the acquisition. In general, the contingent consideration amounts fall into two categories: (a) Deferred Consideration - fixed amounts are due if the acquisition achieves a base level of earnings which has been determined at the time of acquisition and (b) Earnouts - amounts payable are not fixed and are based on the growth in excess of the base level earnings. The Company's outstanding Deferred Consideration obligations, which relate to various acquisitions, are anticipated to result in approximately the following payments: Year Ending Amount -------------------------------------- -- ---------------- December 27, 2008 $800 January 2, 2010 100 -------------------------------------- -- ---------------- $900 ====================================== == ================ The Deferred Consideration and Earnouts, when paid, will be recorded as additional purchase consideration and added to goodwill on the consolidated balance sheet. Earnouts cannot be estimated with any certainty. 10 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------ 4. Acquisitions (Continued) The following results of operations have been prepared assuming the Techpubs acquisition had occurred as of the beginning of the periods presented. These results are not necessarily indicative of results of future operations nor of results that would have occurred had the acquisition of Techpubs been occurred as of the beginning of the periods presented.
Thirteen Weeks Ended Thirty-Nine Weeks Ended ------------------------------------ ----------------------------------- Amounts September 30, September 29, September 30, September 29, 2006 2007 2006 2007 (Proforma) ------------------------------- --------------- --- ---------------- -- --------------- --- --------------- Revenues $54,079 $51,650 $165,418 $148,029 Operating income 2,776 2,308 7,669 5,584 Net income $1,724 $1,349 $5,148 $4,039 Earnings per share (Diluted) $.14 $0.11 $.41 $0.34
5. Property and Equipment Property and equipment are stated at cost and are depreciated on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives. The annual rates are 20% for computer hardware and software as well as furniture and office equipment. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term. The Company writes off fully depreciated assets periodically. During the nine months ended September 29, 2007, the write offs were $1.4 million. 6. New Accounting Standards In February 2007, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting but does not affect existing standards, which require assets and liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and other eligible financial instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), an interpretation of FASB Statement No. 109 ("SFAS 109"). FIN 48 prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. Implementation of FIN 48 did not result in a cumulative effect adjustment to retained earnings. With few exceptions, the Company is no longer subject to audits by tax authorities for tax years prior to 2001. At September 29, 2007, the Company did not have any unrecognized tax benefits. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the principle that fair value should be based on assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company beginning after November 15, 2007. The Company's is currently evaluating the impact, if any, that the adoption of SFAS 157 and 159 will have on the Company's consolidated financial statements. 11 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------ 7. Line of Credit The Company and its subsidiaries are party to a loan agreement with Citizens Bank of Pennsylvania, administrative agent for a syndicate of banks, which provides for a $25 million revolving credit facility and includes a sub-limit of $5.0 million for letters of credit (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's prime rate. All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as restrictions on the Company's ability to pay dividends. The Revolving Credit Facility expires in August 2011. The weighted average interest rates, which include unused line fees, under the Revolving Credit Facility for the thirty-nine weeks ended September 29, 2007 and September 30, 2006 were 26.7% and 8.8%, respectively. The weighted average interest rate for the 2007 period was disproportionately high in relation to the interest expense incurred because of the inclusion of unused line fees. During the thirty-nine weeks ended September 29, 2007 and September 30, 2006, the Company's outstanding borrowings ranged from $-0- to $1.5 million and $.2 million to $1.0 million, respectively. At September 29, 2007 and December 30, 2006, there were no outstanding borrowings under this facility. At September 29, 2007, there were letters of credit outstanding for $.4 million. At September 29, 2007, the Company had availability for additional borrowings under the Revolving Credit Facility of $24.6 million. 8. Interest Expense, Net Interest expense, net consisted of the following:
Thirty-Nine Weeks Ended Thirteen Weeks Ended ---------------------------------------------------------------------------------------------- September 29, September 30, September 29, September 30, 2007 2006 2007 2006 ---------------------------------------------------------------------------------------------- Interest expense ($53) ($464) ($15) ($115) Interest income 85 260 47 40 ---------------------------------------------------------------------------------------------- $32 ($204) $32 ($75) ==============================================================================================
9. Goodwill and Intangibles SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires the Company to perform a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of the Company's weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company conducts its annual goodwill impairment test as of November 30. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. There were no triggering events during the thirty-nine weeks ended September 29, 2007 that have indicated a need to perform the impairment test prior to the Company's annual test date. 12 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------- 9. Goodwill and Intangibles (Continued) The following table reflects the components of intangible assets, excluding goodwill:
September 29, 2007 December 30, 2006 ---------------------------------- --------------------------------- --- --------------------------------- Gross Accumulated Gross Accumulated Carrying Carrying Amount Amortization Amount Amortization ---------------------------------- ------------- -- ---------------- --- ------------- -- ---------------- Definite-lived intangible assets Non-compete agreements $145 $57 $145 $35 Customer relationships 930 589 930 371 ---------------------------------- ------------- -- ---------------- --- ------------- -- ---------------- Total $1,075 $646 $1,075 $406 ================================== ============= == ================ === ============= == ================
10. Stockholders' Equity Common Stock Reserved Unissued Shares of common stock were reserved for the following purposes:
September 29, December 30, 2007 2006 ------------------------------------------------------------------------------------ Exercise of options outstanding 1,502,500 1,768,000 Future grants of options 728,694 29,194 ------------------------------------------------------------------------------------ Total 2,231,194 1,797,194 ====================================================================================
11. Earnings Per Share Both basic and diluted earnings per share for all periods are calculated based on the reported earnings in the Company's consolidated statements of income. The number of common shares used to calculate basic and diluted earnings per share for the thirteen weeks and thirty-nine weeks ended September 29, 2007 and September 30, 2006 was determined as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------------------------- ------------------------------------- -- --------------------------------- September 29, September 30, September 29, September 30, 2007 2006 2007 2006 ----------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- Basic Weighted average shares outstanding 12,019,951 11,788,581 11,946,085 11,764,056 ========================================= ================= == ================ == ============== === ============== Diluted Shares used for basic calculation 12,019,951 11,788,581 11,946,085 11,764,056 Dilutive effect of options granted under the Company's Stock Option Plans 596,454 215,169 546,514 256,845 ----------------------------------------- ----------------- -- ---------------- -- -------------- --- -------------- 12,616,405 12,003,750 12,492,599 12,020,901 ========================================= ================= == ================ == ============== === ==============
13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts , unless otherwise indicated) - ------------------------------------------------------------------------------ 12. Share - Based Compensation Effective as of January 1, 2006, the Company adopted SFAS 123R, "Share Based Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, SFAS 123R includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. At September 29, 2007, the Company had five share-based employee compensation plans. Share-based compensation expense of $.2 million, or $0.01 per share, and of $.7 million, or $0.06 per share, was recognized for the thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively. Share-based compensation expense of $.1 million, or $0.0 per share, and $.1 million, or $0.01 per share, were recognized for the thirteen weeks ended September 29, 2007 and September 30, 2006, respectively. The Company anticipates that share-based compensation expense will not exceed approximately $.2 million, or $0.02 per share, for the year ending December 29, 2007. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model. There were options to purchase 40,000 shares and 35,000 shares of common stock granted during the thirty-nine weeks and the thirteen weeks ended September 29, 2007, respectively. The share-based compensation expense attributable to the 40,000 options was $8 for the thirty-nine weeks and $6 for the thirteen weeks ended September 29, 2007, respectively. Expected volatility is based on the historical volatility of the price of the Company's common stock since September 30, 2002. The Company uses historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures. The share price volatility, risk free interest rate and annualized forfeiture rate were 56.7%, 4.2% and 29.5% for the thirty-nine weeks ended September 29, 2007, respectively. The share price volatility, risk free interest rate and annualized forfeiture rate were 58.0%, 4.6% and 5.7% for the thirty-nine weeks ended September 30, 2006, respectively. As of September 29, 2007, the Company had approximately $.3 million of total unrecognized compensation cost related to non-vested awards granted under the Company's various share-based plans, which the Company expects to recognize over a weighted-average period of three years. These amounts do not include the cost of any additional options that may be granted in future periods or reflect any potential changes in the Company's forfeiture rate. The Company received cash from options exercised during the first thirty-nine weeks of fiscal years 2007 and 2006 of $.8 million and $.2 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. 14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------ 12. Stock - Based Compensation (Continued) Incentive Stock Option Plans 1992 Incentive Stock Option Plan (the 1992 Plan) The 1992 Plan, approved by the Company's stockholders in April 1992 and amended in April 1998, provided for the issuance of up to 500,000 shares of common stock per individual to officers, directors, and key employees of the Company and its subsidiaries through February 13, 2002, at which time the 1992 Plan expired. The options issued were intended to be incentive stock options pursuant to Section 422A of the Internal Revenue Code. The option terms were not permitted to exceed ten years and the exercise price was not permitted to be less than 100% of the fair market value of the shares at the time of grant. The Compensation Committee of the Board of Directors determined the vesting period at the time of grant for each of these options. As of September 29, 2007, options to purchase 68,455 shares of common stock were outstanding. 1994 Non-employee Directors Stock Option Plan (the 1994 Plan) The 1994 Plan, approved by the Company's stockholders in May 1994 and amended in April 1998, provided for issuance of up to 110,000 shares of common stock to non-employee directors of the Company through February 19, 2004, at which time the 1994 Plan expired. Options granted under the 1994 Plan were granted at fair market value at the date of grant, and the exercise of options is contingent upon service as a director for a period of one year. Options granted under the 1994 Plan terminate when an optionee ceases to be a Director of the Company. As of September 29, 2007, options to purchase 50,000 shares of common stock were outstanding. 1996 Executive Stock Option Plan (the 1996 Plan) The 1996 Plan, approved by the Company's stockholders in August 1996 and amended in April 1999, provides for issuance of up to 1,250,000 shares of common stock to officers and key employees of the Company and its subsidiaries through January 1, 2006, at which time the 1996 Plan expired. Options are generally granted at fair market value at the date of grant. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant. As of September 29, 2007, options to purchase 909,545 shares of common stock were outstanding. 2000 Employee Stock Incentive Plan (the 2000 Plan) The 2000 Plan, approved by the Company's stockholders in April 2001, provides for issuance of up to 1,500,000 shares of the Company's common stock to officers and key employees of the Company and its subsidiaries or to consultants and advisors utilized by the Company. The Compensation Committee of the Board of Directors may award incentive stock options or non-qualified stock options, as well as stock appreciation rights, and determines the vesting period at the time of grant. As of September 29, 2007, options to purchase 28,694 shares of common stock were available for future grants, and options to purchase 474,500 shares of common stock were outstanding. 2007 Omnibus Equity Compensation Plan (the 2007 Plan) The 2007 Plan, approved by the Company's stockholders in June 2007, provides for the issuance of up to 700,000 shares of the Company's common stock to officers, non-employee directors, employees of the Company and its subsidiaries or to consultants and advisors utilized by the Company. No more than 350,000 shares of common stock in the aggregate may be issued pursuant to grants of stock awards, stock units, performance shares and other stock-based awards. No more than 300,000 shares of common stock with respect to awards may be granted to any individual during any fiscal year. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant. As of September 29, 2007, options to purchase 700,000 shares of common stock were available for future grants, and there were no options to purchase shares of common stock outstanding. 15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) - ------------------------------------------------------------------------------ 12. Stock - Based Compensation (Continued) Incentive Stock Option Plans (Continued) Employee Stock Purchase Plan The Company implemented an Employee Stock Purchase Plan (the "Purchase Plan") with stockholder approval, effective January 1, 2002. Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation. During the thirty-nine weeks ended September 29, 2007, there were 13,017 shares issued under the Purchase Plan for net proceeds of $66. As of September 29, 2007, there were 212,171 shares available for issuance under the Purchase Plan. The share-based compensation expense attributable to the 13,017 shares issued was $.02 million and $.01 million for the thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively. 13. Income Taxes As of December 31, 2002, the Company had accrued approximately $2.5 million for income tax liabilities, which related to the potential repayment of tax benefits associated with previously claimed tax deductions claimed from goodwill impairments. On June 8, 2006, the goodwill impairment deductions of approximately $13.5 million were disallowed by the Internal Revenue Service as a deduction in the December 31, 2002 income tax return. Based upon the methodology applied by the Internal Revenue Service, these deductions were best substantiated by facts and circumstances arising during 2005 and therefore the deductions were included in the December 31, 2005 federal income tax return. This reclassification of the deduction from the year ended December 31, 2002 to the year ended December 31, 2005 resulted in the reversal of the income tax reserve of approximately $1.6 million, of which approximately $1.0 million was recorded in the thirty-nine weeks ended September 30, 2006. 16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 14. Segment Information The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for companies to report information about operating segments, geographic areas, and major customers. The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 to the consolidated financial statements). The Company uses earnings before interest and taxes (operating income) to measure segment profit. Segment operating income includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. The following tables reflect the results of the segments consistent with the Company's management system:
Thirty-Nine Weeks Ended Information September 29, 2007 Technology Engineering Commercial Corporate Total ------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------ Revenue $76,813 $56,346 $32,259 $165,418 Operating expenses (1) (2) 71,940 53,509 31,211 156,660 ------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------ EBITDA ((4)) 4,873 2,837 1,048 8,758 Depreciation 386 350 113 849 Amortization of intangibles 215 25 240 ------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------ Operating income 4,272 2,462 935 7,669 Interest income, net of interest expense (18) (10) (4) (32) Gain on foreign currency transactions (53) (53) Legal settlement (800) (800) Income taxes 1,708 1,005 373 320 3,406 ------------------------------ - --------------- - --------------- -- -------------- ------------- - ------------ Net income $2,582 $1,520 $566 $480 $5,148 ============================== = =============== = =============== == ============== ============= = ============ Total assets $53,161 $29,978 $11,647 $13,896 $108,682 Capital expenditures $272 $58 $10 $162 $502
17 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 14. Segment Information (Continued)
Thirty-Nine Weeks Ended Information September 30, 2006 Technology Engineering Commercial Corporate Total ------------------------------------------------------------------------------------------------------------------ Revenue $74,759 $40,589 $32,381 $147,729 Operating expenses (1) 70,157 39,942 30,989 141,088 ------------------------------------------------------------------------------------------------------------------- EBITDA (4) 4,602 647 1,392 6,641 Depreciation 394 363 127 884 Amortization of intangibles 215 15 230 ------------------------------------------------------------------------------------------------------------------- Operating income 3,993 269 1,265 5,527 Interest expense, net of interest income 103 56 45 204 Loss on foreign currency transactions 16 16 Income taxes 931 49 307 1,287 ------------------------------------------------------------------------------------------------------------------- Net income $2,959 $148 $913 $4,020 =================================================================================================================== Total assets $50,152 $26,316 $13,069 $16,417 $105,954 Capital expenditures $146 $890 $305 $1,341
18 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 14. Segment Information (Continued)
Thirteen Weeks Ended Information September 29, 2007 Technology Engineering Commercial Corporate Total --------------------------------------------------------------------------------------------------------------------- Revenue $24,507 $19,115 $10,457 $54,079 Operating expenses (1) (3) 22,960 17,805 10,169 50,934 --------------------------------------------------------------------------------------------------------------------- EBITDA (4) 1,547 1,310 288 3,145 Depreciation 133 118 38 289 Amortization of intangibles 72 8 80 --------------------------------------------------------------------------------------------------------------------- Operating income 1,342 1,184 250 2,776 Interest income, net of interest expense (17 ) (11 ) (4 ) (32 ) Gain on foreign currency transactions (41 ) (41 ) Income taxes 536 490 99 1,125 --------------------------------------------------------------------------------------------------------------------- Net income $823 $746 $155 $1,724 ===================================================================================================================== Total assets $53,161 $29,978 $11,647 $13,896 $108,682 Capital expenditures $32 $6 $3 $87 $128
19 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 14. Segment Information (Continued)
Thirteen Weeks Ended Information September 30, 2006 Technology Engineering Commercial Corporate Total ------------------------------ - --------------- - -------------- -- -------------- - ------------ -- ------------- Revenue $25,872 $15,504 $10,274 $51,650 Operating expenses (1) 24,045 14,985 9,919 48,949 ------------------------------ - --------------- - -------------- -- -------------- - ------------ -- ------------- EBITDA (4) 1,827 519 355 2,701 Depreciation 136 130 40 306 Amortization intangibles 72 15 87 ------------------------------ - --------------- - -------------- -- -------------- - ------------ -- ------------- Operating income 1,619 374 315 2,308 Interest expense, net of interest income 37 22 16 75 Gain on foreign currency transactions 5 5 Income taxes 624 70 185 879 ------------------------------ - --------------- - -------------- -- -------------- - ------------ -- ------------- Net income $958 $277 $114 $1,349 ============================== = =============== = ============== == ============== = ============ == ============= Total assets $50,152 $26,316 $13,069 $16,417 $105,954 Capital expenditures $149 $149 (1) Operating expenses exclude depreciation and amortization. (2) Operating expenses include $151 and $693 of share-based compensation expense for the thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively. (3) Operating expenses include $57 and $99 of share-based compensation expense for the thirteen weeks ended September 29, 2007 and September 30, 2006, respectively. (4) EBITDA means earnings before interest, taxes, depreciation and amortization. The Company believes that EBITDA, as presented, represents a useful measure of assessing the performance of the Company's operating activities, as it reflects the Company's earnings trends without the impact of certain non-cash and unusual charges or income. EBITDA is also used by the Company's creditors in assessing debt covenant compliance. The Company understands that, although security analysts frequently use EBITDA in the evaluation of companies, it is not necessarily comparable to EBITDA of other companies due to potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to cash flow provided by operating activities as a measure of liquidity, nor as an alternative to net income as an indicator of the Company's operating performance, nor as an alternative to any other measure of performance in conformity with generally accepted accounting principles.
20 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 14. Segment Information (Continued) Revenues reported for each operating segment are from external customers. The Company is domiciled in the United States and its segments operate in the United States and Canada. Revenues and fixed assets by geographic area as of and for the thirty-nine weeks ended September 29, 2007 and September 30, 2006 are as follows:
Thirty-Nine Weeks Ended ----------------------------------------------------------------------------------- September 29, September 30, 2007 2006 ----------------------------------------------------------------------------------- Revenues U. S. $153,777 $139,524 Canada 11,641 8,205 ----------------------------------------------------------------------------------- $165,418 $147,729 =================================================================================== Fixed Assets U. S. $4,045 $4,397 Canada 79 ----------------------------------------------------------------------------------- $4,045 $4,476 ===================================================================================
Revenues by geographic area for the thirteen weeks ended September 29, 2007 and September 30, 2006 are as follows:
Thirteen Weeks Ended ----------------------------------------------------------------------------------- September 29, September 30, 2007 2006 ----------------------------------------------------------------------------------- Revenues U. S. $49,282 $48,564 Canada 4,797 3,086 ----------------------------------------------------------------------------------- $54,079 $51,650 ===================================================================================
21 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (Dollars in thousands, except share and per share amounts, unless otherwise indicated) 15. Contingencies In late 1998, two shareholders who were formerly officers and directors of the Company filed suit against the Company. The former officers and directors alleged that the Company wrongfully limited the number of shares of the Company's common stock that could have been sold by the plaintiffs under a registration rights agreement entered into in connection with an acquisition transaction pursuant to which the plaintiffs became shareholders of the Company. A trial in 2002 resulted in a judgment in favor of the plaintiffs for $7.6 million that was affirmed on appeal. In June 2006, the Company paid $8.6 million, which included post-judgment interest and other items totaling $1.0 million to the plaintiffs to satisfy the judgment. In November 2002, the Company filed suit on professional liability claims against the attorneys and law firms who had served as its counsel in the acquisition transaction and in connection with its subsequent dealings with the plaintiffs concerning their various relationships with the Company resulting from that transaction. In its lawsuit against its former counsel, the Company is seeking complete indemnification with respect to (1) its costs and counsel fees incurred in defending itself against the claims of the plaintiffs; (2) the amount it paid to satisfy the judgment; and (3) its costs and counsel fees incurred in the prosecution of the legal malpractice action itself. In February 2007, the Company reached a settlement with one of the law firm defendants resulting in the recovery of $.8 million. Discovery proceedings are continuing with the other defendants and a trial will likely be scheduled in the first half of 2008. The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. 22 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Private Securities Litigation Reform Act Safe Harbor Statement Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. ("RCM" or the "Company") are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company in connection with such adoption; and the outcome of litigation (at both the trial and appellate levels) involving the Company. Readers are cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "believe," and similar expressions, are only predictions and are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i) unemployment and general economic conditions affecting the provision of information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the Company's ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iii) the Company's ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) uncertainties regarding pro forma financial information and the underlying assumptions relating to acquisitions and acquired businesses; (v) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vi) adverse effects on the market price of the Company's common stock due to the potential resale into the market of significant amounts of common stock; (vii) the adverse effect a potential decrease in the trading price of the Company's common stock would have upon the Company's ability to acquire businesses through the issuance of its securities; (viii) the Company's ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of its executive officers; (x) the Company's ability to remain competitive in the markets that it serves; (xi) the Company's ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiii) the Company's ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xiv) the Company's ability to remain in compliance with federal and state wage and hour laws and regulations; (xv) uncertainties in predictions as to the future need for the Company's services; (xvi) uncertainties relating to the allocation of costs and expenses to each of the Company's operating segments; (xvii) the costs of conducting and the outcome of litigation involving the Company, and (xviii) other economic, competitive and governmental factors affecting the Company's operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events. 23 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------- Overview RCM participates in a market that is cyclical in nature and extremely sensitive to economic changes. As a result, the impact of economic changes on revenues and operations can be substantial, resulting in significant volatility in the Company's financial performance. RCM's operational performance gained momentum in 2006 with a moderate increase in revenues and earnings. This was attributed to an improvement in the general economy, strength in the Company's sector and increased capital spending by clients in selected markets. All three major business segments of the Company benefited from stronger economic conditions. So far in 2007, RCM's financial performance continues to show modest improvement as compared to the same period a year ago, despite a slowdown in the overall economy and a tightening of the labor market. In addition, RCM's management continues to monitor its operating cost structure with a strong focus on working capital management and cash flows. Over the years, RCM has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility, and built an efficient pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform. The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today's business climate. However, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has an impact on spending by current and prospective clients for many emerging new solutions. Nonetheless, the Company continues to believe that businesses must implement more advanced IT and engineering solutions to upgrade their systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications, and processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems, applications, and processes. The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenues from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company's consultants based upon their skill level, experience and the type of work performed. The majority of the Company's services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days' notice. Revenues are recognized when services are provided. 24 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Overview (Continued) Costs of services consist primarily of salaries and compensation-related expenses for billable consultants, including payroll taxes, employee benefits, and insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's corporate marketing, administrative and reporting responsibilities and acquisition program. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization relates to the allocation of the purchase price of an acquisition, which has been assigned to covenants not to compete, and customer lists. Acquisitions have been accounted for under SFAS No. 141, "Business Combinations," and have created goodwill. Critical Accounting Policies The Company's interim financial statements were prepared in accordance with generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions identified in the Company's 2006 Annual Report on Form 10-K filed on March 22, 2007 with the Securities and Exchange Commission have not materially changed. Revenue Recognition The Company derives its revenues from several sources. All of the Company's segments perform consulting and staffing services. The Company's Engineering Services and Information Technology Services segments also perform project services. All of the Company's segments derive revenue from permanent placement fees. Project Services - The Company recognizes revenues in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104") which clarifies application of U.S. generally accepted accounting principles to revenue transactions. Project services are generally provided on a cost-plus-fixed-fee or time-and-material basis. Typically, a customer will outsource a discrete project or activity and the Company assumes responsibility for the performance of such project or activity. The Company recognizes revenues and associated costs on a gross basis as services are provided to the customer and costs are incurred using its employees. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables. In instances where project services are provided on a fixed-price basis and the contract will extend beyond a 12-month period, revenue is recorded in accordance with the terms of each contract. In some instances, revenue is billed and recorded at the time certain milestones are reached, as defined in the contract. In other instances, revenue is billed and recorded based upon contractual rates per hour. In addition, some contracts contain "Performance Fees" (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when the contract is completed and the revenue is reasonably certain of collection. Some contracts also limit revenues and billings to maximum amounts. Provision for contract losses, if any, is made in the period such losses are determined. For contracts where there are multiple deliverables and the work has not been 100% complete on a specific deliverable the costs have been deferred. The associated costs are expensed when the related revenue is recognized. 25 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Revenue Recognition (Continued) Consulting and Staffing Services - Revenues derived from consulting and staffing services are recorded on a gross basis as services are performed and associated costs have been incurred using employees of the Company. In these circumstances, the Company assumes the risk of acceptability of its employees to its customers. In certain cases, the Company may utilize other companies and their employees to fulfill customer requirements. In these cases, the Company receives an administrative fee for arranging for, billing for, and collecting the billings related to these companies. The customer is typically responsible for assessing the work of these companies who have responsibility for acceptability of their personnel to the customer. Under these circumstances, the Company's reported revenues are net of associated costs (effectively the administrative fee). Permanent Placement Services - The Company earns permanent placement fees from providing permanent placement services. Fees for placements are recognized at the time the candidate commences employment. The Company guarantees its permanent placements on a prorated basis for 90 days. In the event a candidate is not retained for the 90-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. An allowance for refunds, based upon the Company's historical experience, is recorded in the financial statements. Revenues are recorded on a gross basis as a component of revenue. Accounts Receivable The Company's accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers' financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Goodwill Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable assets. In accordance with SFAS 142, "Goodwill and Other Intangible Assets," the Company performs its annual goodwill impairment testing, by reportable segment, in the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur, and determination of the Company's weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company conducted its annual goodwill impairment test for 2006 as of November 30, 2006 and identified no impairments. Goodwill was $39.6 million and $39.3 million at September 29, 2007 and December 30, 2006, respectively. 26 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Long-Lived Assets The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. Accounting for Stock Options The Company has used stock options to attract, retain, and reward employees for long-term service. Effective as of January 1, 2006, the Company adopted SFAS 123R. SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of stock-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, SFAS 123R includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. Since the Company adopted SFAS 123R, effective January 1, 2006 using the modified-prospective-transition-method the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measures share-based compensation cost using the Black-Scholes option pricing model. Accounting for Income Taxes In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted tax laws, published tax guidance, and estimates of future earnings. As of September 29, 2007, the Company had total net deferred tax assets of $1.0 million, primarily representing the tax effect of a tax net operating loss carryfoward. Realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the effectiveness of tax planning strategies in the relevant tax jurisdictions. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required. The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), on January 1, 2007. Because of the implementation of FIN 48, the Company recognized no material adjustments in the liability for unrecognized income tax benefits. The Company conducts its operations in multiple tax jurisdictions in the United States and Canada. With limited exceptions, the Company is no longer subject to audits by tax authorities for tax years prior to 2001. At September 29, 2007, the Company did not have any uncertain tax positions. 27 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Accounting for income taxes (continued) The Company's future effective tax rates could be adversely affected by changes in the valuation of its deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Accrued Bonuses The Company pays bonuses to certain executive management, field management and corporate employees based on, or after giving consideration to, a variety of financial performance measures. Executive management, field management, and certain corporate employees' bonuses are accrued throughout the year for payment during the first quarter of the following year, based in part upon anticipated annual results compared to annual budgets. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore the estimates of the required accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals. Forward-looking Information The Company's growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for consulting and engineering services as well as temporary and permanent employees. Should the U.S. economy decline, the Company's operating performance could be adversely impacted. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, declines in the economy could result in the need for future cost reductions or changes in strategy. Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce RCM's future earnings. There can be no assurance that RCM will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing. The employment services market is highly competitive with limited barriers to entry. RCM competes in global, national, regional, and local markets with numerous consulting, engineering and employment companies. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. RCM expects that the level of competition will remain high in the future, which could limit RCM's ability to maintain or increase its market share or profitability. 28 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks Ended September 30, 2006 A summary of operating results for the fiscal periods ended September 29, 2007 and September 30, 2006 is as follows (in thousands, except for earnings per share data):
September 29, 2007 September 30, 2006 - -------------------------------------------------------------------------------------------------------------- % of % of Amount Revenue Amount Revenue - -------------------------------------------------------------------------------------------------------------- Revenues $165,418 100.0 $147,729 100.0 Cost of services 125,650 76.0 110,566 74.8 - -------------------------------------------------------------------------------------------------------------- Gross profit 39,768 24.0 37,163 25.2 - -------------------------------------------------------------------------------------------------------------- Selling, general and administrative 31,010 18.7 30,522 20.7 Depreciation and amortization 1,089 .7 1,114 .8 - -------------------------------------------------------------------------------------------------------------- 32,099 19.4 31,636 21.5 - -------------------------------------------------------------------------------------------------------------- Operating income 7,669 4.6 5,527 3.7 Other income (expense) 885 .5 (220) (0.1) - -------------------------------------------------------------------------------------------------------------- Income before income taxes 8,554 5.1 5,307 3.6 Income taxes 3,406 2.0 1,287 0.9 - -------------------------------------------------------------------------------------------------------------- Net income $5,148 3.1 $4,020 2.7 ============================================================================================================== Earnings per share Basic: $.43 $.34 Diluted: $.41 $.33 ==============================================================================================================
The above summary is not a presentation of results of operations under accounting principles generally accepted in the United States of America and should not be considered in isolation or as an alternative to results of operations as an indication of the Company's performance. The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. A 53-week year occurs periodically. The year to date reporting periods ended September 29, 2007 and September 30, 2006 consisted of thirty-nine weeks each. Revenues. Revenues increased 12.0%, or $17.7 million, for the thirty-nine weeks ended September 29, 2007 as compared to the same period in the prior year (the "comparable prior year period"). Revenues increased $2.1 million in the Information Technology ("IT") segment, increased $15.8 million in the Engineering segment, and decreased $122,000 in the Commercial segment. Management attributes the increase in the Engineering revenues to strong business activity with certain existing customers. The increase in the IT revenues was attributable to successful marketing and sales efforts. Management expects revenues for the remainder of fiscal 2007 to remain generally consistent on a prorated basis with the revenues for the thirty-nine weeks ended September 29, 2007. 29 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------- Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks Ended September 30, 2006 - (Continued) Cost of Services. Cost of services increased 13.6%, or $15.1 million, for the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was primarily due to the increase in revenues. Cost of services as a percentage of revenues increased to 76.0% for the thirty-nine weeks ended September 29, 2007 from 74.8% for the comparable prior year period. This increase was primarily attributable to increased revenues in the Engineering segment, which had lower gross margins. Management anticipates the ratio of cost of sales to revenues for the remainder of fiscal 2007 to remain comparable to the thirty-nine weeks ended September 29, 2007. Selling, General and Administrative. Selling, general and administrative ("SGA") expenses increased 1.6%, or $489,000, for the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. As a percentage of revenues, SGA expenses were 18.7% for the thirty-nine weeks ended September 29, 2007 as compared to 20.7% for the comparable prior year period. This percentage decrease was primarily attributable to the spreading of certain fixed administrative costs over a larger revenue base as well as lower stock-based compensation expense. Management reasonably expects SGA expenses for the remainder of fiscal 2007 to remain consistent with the SGA expenses for the thirty-nine weeks ended September 29, 2007. Depreciation and Amortization. Depreciation and amortization were essentially unchanged for the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. Other Income (Expense). Other income (expense) consists of interest income, net of interest expense and gains and losses on foreign currency transactions and, in 2007, the proceeds from a legal settlement. For the thirty-nine weeks ended September 29, 2007, actual interest expense of $53,000 was offset by $85,000 of interest income, which was earned from short-term money market deposits. Interest income, net increased $237,000 for the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was primarily due to decreased borrowing requirements, which was offset by an increase in weighted average interest rates on borrowed funds. Gains on foreign currency transactions increased $68,000 in the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was attributable to the favorable exchange rates realized during the 2007 period. The proceeds from the legal settlement in 2007 were realized when the Company reached a settlement with one of the law firm defendants resulting in the recovery of $800,000. (See footnote 14 to the consolidated financial statements). Income Tax. Income tax expense increased 164.6%, or $2.1 million, for the thirty-nine weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was principally attributable to an increase in income before taxes. Additionally, for the thirty-nine weeks ended September 30, 2006, there was a reversal of $1.0 million ($.08 diluted earnings per share) of previously accrued income taxes. (See footnote 13 to the consolidated financial statements). The effective tax rate was 39.8% for the thirty-nine weeks ended September 29, 2007 as compared to 43.0% before the tax reversal in the comparable prior year period. The decrease in effective tax rate was attributable to the decreased amount of non-tax-deductible items in relation to increased income before income tax purposes. 30 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Thirty-Nine Weeks Ended September 29, 2007 Compared to Thirty-Nine Weeks Ended September 30, 2006 - (Continued) Segment Discussion (See Footnote 14) Information Technology IT revenues of $76.8 million in 2007 increased $2.1 million, or 2.7%, compared to 2006. The increase in revenue was attributable to the strengthening of demand for the Company's IT services. The IT segment EBITDA was $4.9 million, or 55.6% of the overall EBITDA for 2007, as compared to $4.6 million, or 69.3% of the overall EBITDA for 2006. Engineering Engineering revenues of $56.3 million in 2007 increased $15.8 million, or 38.8%, compared to 2006. The increase in revenue was attributable to strong business activity with certain existing customers. Management expects the Engineering revenue levels to remain consistent over the next twelve months. The Engineering segment EBITDA was $2.8 million, or 32.4% of the overall EBITDA for 2007, as compared to $647,000, or 9.7% of the overall EBITDA for 2006. Commercial Commercial revenues of $32.3 million in 2007 decreased $122,000, or 0.4% compared to 2006. Revenues in the Commercial segment were essentially unchanged. The Commercial segment EBITDA was $1.0 million, or 12.0% of the overall EBITDA for 2007, as compared to $1.4 million, or 21.0% of the overall EBITDA for 2006. 31 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended September 30, 2006 A summary of operating results for the fiscal periods ended September 29, 2007 and September 30, 2006 is as follows (in thousands, except for earnings per share data):
September 29, 2007 September 30, 2006 - -------------------------------------------------------------------------------------------------------------- % of % of Amount Revenue Amount Revenue - -------------------------------------------------------------------------------------------------------------- Revenues $54,079 100.0 $51,650 100.0 Cost of services 40,646 75.2 38,698 74.9 - -------------------------------------------------------------------------------------------------------------- Gross profit 13,433 24.8 12,952 25.1 - -------------------------------------------------------------------------------------------------------------- Selling, general and administrative 10,288 19.0 10,251 19.8 Depreciation and amortization 369 .7 393 .8 - -------------------------------------------------------------------------------------------------------------- 10,657 19.7 10,644 20.6 - -------------------------------------------------------------------------------------------------------------- Operating income 2,776 5.1 2,308 4.5 Other income 73 .2 (80 ) (.2) - -------------------------------------------------------------------------------------------------------------- Income before income tax 2,849 5.3 2,228 4.3 Income tax expense 1,125 2.1 879 1.8 - -------------------------------------------------------------------------------------------------------------- Net income $1,724 3.2 $1,349 2.5 ============================================================================================================== Earnings per share Basic: $.14 $.11 Diluted: $.14 $.11 ==============================================================================================================
The above summary is not a presentation of results of operations under accounting principles generally accepted in the United States of America and should not be considered in isolation or as an alternative to results of operations as an indication of the Company's performance. The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. A 53-week year occurs periodically. The third quarter reporting periods ended September 29, 2007 and September 30, 2006 consisted of thirteen weeks each. Revenues. Revenues increased 4.7%, or $2.4 million, for the thirteen weeks ended September 29, 2007 as compared to the same period in the prior year (the "comparable prior year period"). The revenue decreased $1.4 million in the IT segment, increased $3.6 million in the Engineering segment and increased $183,000 in the Commercial segment. Management attributes the increase in the Engineering revenues to strong business activity with certain existing customers. The increase in the IT revenues was attributable to successful marketing and sales efforts. Management expects revenues for the remainder of fiscal 2007 to remain generally consistent with the thirteen weeks ended September 29, 2007. 32 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended September 30, 2006 - (Continued) Cost of Services. Cost of services increased 5.0%, or $1.9 million, for the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was primarily due to the increase in revenues. Cost of services as a percentage of revenues increased to 75.2% for the thirteen weeks ended September 29, 2007 from 74.9% for the comparable prior year period. This modest increase was attributable to increased revenues in the engineering segment, which historically has a lower gross margin percentage (See footnote 14 to the consolidated financial statements). Management anticipates the ratio of cost of sales to revenues for the remainder of fiscal 2007 to be consistent with the thirteen weeks ended September 29, 2007. Selling, General and Administrative. SGA expenses increased 0.4%, or $37,000, for the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. As a percentage of revenues, SGA expenses were 19.0% for the thirteen weeks ended September 29, 2007 as compared to 19.8% for the comparable prior year period. This decrease was primarily attributable to the spreading of certain fixed administrative costs over a larger revenue base as well as lower stock-based compensation expense. Management reasonably expects SGA expenses for the remainder of fiscal 2007 to remain consistent with the SGA expenses for the thirteen weeks ended September 29, 2007. Depreciation and Amortization. Depreciation and amortization were essentially unchanged for the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. Other Income (Expense). Other income (expense) consists of interest income, net of interest expense and gains and losses on foreign currency transactions. For the thirteen weeks ended September 29, 2007, actual interest expense of $15,000 was offset by $47,000 of interest income, which was earned from short-term money market deposits. Interest income, net increased $106,000 for the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was primarily due to decreased borrowing requirements, which was offset by an increase in weighted average interest rates resulting from unused line fees. Gains on foreign currency transactions increased $46,000 in the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was principally attributable to the favorable exchange rates realized during the 2007 period. Income Tax. Income tax expense increased $246,000 for the thirteen weeks ended September 29, 2007 as compared to the comparable prior year period. This increase was principally attributable to an increase in income before taxes. The effective tax rate was 39.5% for the thirteen weeks ended September 29, 2007 and September 30, 2006. 33 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Thirteen Weeks Ended September 29, 2007 Compared to Thirteen Weeks Ended September 30, 2006 - (Continued) Segment Discussion (See Footnote 14) Information Technology IT revenues of $24.5 million in the third quarter of 2007 decreased $1.4 million, or 5.3%, compared to the third quarter of 2006. The increase in revenue was attributable to the strengthening of demand for the Company's IT services. The IT segment EBITDA was $1.5 million, or 49.2% of the overall EBITDA for the third quarter of 2007, as compared to $1.8 million, or 67.6% of the overall EBITDA for the third quarter of 2006. Engineering Engineering revenues of $19.1 million in the third quarter of 2007 increased $3.6 million, or 23.3%, compared to the third quarter of 2006. The increase in revenue was attributable to the strengthening of demand for the Company's engineering services. The Engineering segment EBITDA was $1.3 million, or 41.7% of the overall EBITDA for the third quarter of 2007, as compared to $519,000, or 19.2% of the overall EBITDA for the third quarter of 2006. Commercial Commercial revenues of $10.5 million in the third quarter of 2007 increased $183,000, or 1.8%, compared to the third quarter of 2006. Revenues in the Commercial segment were essentially unchanged. The Commercial segment EBITDA was $288,000 or 9.2% of the overall EBITDA for the third quarter of 2007, as compared to $355,000, or 13.2% of the overall EBITDA for the third quarter of 2006. 34 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------ Liquidity and Capital Resources The following table summarizes the major captions from the Company's Consolidated Statements of Cash Flows:
Thirty-Nine Weeks Ended ----------------------------------------- September 29, September 30, 2007 2006 ------------------ -- ------------------- (In thousands) ------------------ -- ------------------- Cash provided by (used in): Operating Activities $5,026 $4,582 Investing Activities ($756) ($1,978) Financing Activities $881 $246
Operating Activities Operating activities provided $5.0 million of cash for the thirty-nine weeks ended September 29, 2007 as compared to $4.6 million for the comparable 2006 period. The increase in cash provided by operating activities was primarily attributable to increased earnings of $1.1 million and a decrease in deferred tax assets of $2.2 million, which was offset by an increase in accounts receivable of $4.2 million. Based on current operating activities and the drivers of those activities, management reasonably expects that cash will be provided from operating activities for the remainder of fiscal 2007. The Company continues to institute enhanced controls and standardization over its receivables collection and disbursement processes. Investing Activities Investing activities used $756,000 for the thirty-nine weeks ended September 29, 2007 as compared to $2.0 million for the comparable 2006 period. The decrease in the use of cash for investing activities for 2007 as compared to the comparable 2006 period was primarily attributable to a decrease in expenditures for property and equipment and cash used for acquisitions. Financing Activities Financing activities principally consisted of receipt of proceeds from the exercise of stock options of $804,000 in 2007 as compared to $180,000 for the comparable 2006 period. The Company and its subsidiaries are party to a loan agreement with Citizens Bank of Pennsylvania, administrative agent for a syndicate of banks, which provides for a $25 million revolving credit facility and includes a sub-limit of $5.0 million for letters of credit (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's prime rate. All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as restrictions on the Company's ability to pay dividends. 35 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ----------------------------------------------------------------------------- Liquidity and Capital Resources - (Continued) The Revolving Credit Facility expires in August 2011. The weighted average interest rates, which include unused line fees, under the Revolving Credit Facility for the thirty-nine weeks ended September 29, 2007 and September 30, 2006 were 27.7% and 8.8%, respectively. The weighted average interest rate for the 2007 period was disproportionately high in relation to the interest expense incurred because of the inclusion of unused line fees. During the thirty-nine weeks ended September 29, 2007 and September 30, 2006, the Company's outstanding borrowings ranged from $-0- to $1.5 million and $.2 million to $1.0 million, respectively. At September 29, 2007 and December 30, 2006, there were no outstanding borrowings under this facility. At September 29, 2007, there were letters of credit outstanding for $.4 million. At September 29, 2007, the Company had availability for additional borrowings under the Revolving Credit Facility of $24.6 million. The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility, funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company's financial position, liquidity, and the results of operations for the period in which the effect becomes reasonably estimable. The Company's business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. As the size of the Company and its financial resources increase, however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company's future acquisition and expansion opportunities or how such opportunities will be financed. The Company does not currently have material commitments for capital expenditures and does not currently anticipate entering into any such commitments during the next twelve months. The Company's current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for the next twelve months. At September 29, 2007, the Company had a deferred tax asset totaling $1.3 million, primarily representing the tax effect of a tax net operating loss carryforward. The Company expects to utilize the deferred tax asset during the twelve months ending June 28, 2008 by offsetting the related tax benefits of such assets against tax liabilities incurred from forecasted taxable income. Summarized below are the Company's obligations and commitments to make future payments under lease agreements and debt obligations as of September 29, 2007:
Payments Due by Period - --------------------------------------------------------------------------------------------------------------- Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years - --------------------------------------------------------------------------------------------------------------- Long-Term Debt Obligations (1) - - - - - Operating Lease Obligations $7,418 $1,365 $4,000 $2,053 - - --------------------------------------------------------------------------------------------------------------- Total $7,418 $1,365 $4,000 $2,053 - =============================================================================================================== (1) The Revolving Credit Facility is for $25.0 million and includes a sub-limit of $5.0 million for letters of credit. The agreement expires in August 2011. At September 29, 2007, there were outstanding letters of credit for $.4 million.
36 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) - ------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and debt instruments, which primarily consist of its Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of September 29, 2007, the Company's investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. Presently the impact of a 10% (approximately 90 basis points) increase in interest rates on its variable debt (using an incremental borrowing rate) would have a relatively nominal impact on the Company's results of operations. The Company does not expect any material loss with respect to its investment portfolio. ITEM 4. CONTROLS AND PROCEDURES The Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures as of the end of the period covered by this report were functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. There have been no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter and that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 37 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION - ------------------------------------------------------------------------------ ITEM 1. LEGAL PROCEEDINGS See discussion of Legal Proceedings in Note 15 to the consolidated financial statements included in Item 1 of this report. ITEM 1 A. RISK FACTORS There have been no material changes from the risk factors disclosed in the "Risk Factors" section (Item 1A) of the Company's Annual Report on Form 10-K for the year ended December 30, 2006. 38 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS - ------------------------------------------------------------------------------ 31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) 32.2 Certification of Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) 39 RCM TECHNOLOGIES, INC. SIGNATURES - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RCM Technologies, Inc. Date: November 8, 2007 By: /s/ Stanton Remer ----------------------------- Stanton Remer Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) 40 Exhibit 31.1 - ------------------------------------------------------------------------------ RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 CERTIFICATION I, Leon Kopyt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2007 /s/ Leon Kopyt Leon Kopyt Chief Executive Officer 41 Exhibit 31.2 - ------------------------------------------------------------------------------ RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 CERTIFICATION I, Stanton Remer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2007 /s/ Stanton Remer Stanton Remer Chief Financial Officer 42 Exhibit 32.1 - ------------------------------------------------------------------------------ RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Leon Kopyt, President and Chief Executive Officer of RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify that, to my knowledge: (1) The Company's periodic report on Form 10-Q for the quarter ended September 29, 2007 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Leon Kopyt Leon Kopyt Chief Executive Officer Date: November 8, 2007 43 Exhibit 32.2 - ------------------------------------------------------------------------------ RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Stanton Remer, Chief Financial Officer of RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify that, to my knowledge: (1) The Company's periodic report on Form 10-Q for the quarter ended September 29, 2007 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Stanton Remer Stanton Remer Chief Financial Officer Date: November 8, 2007 44 -----END PRIVACY-ENHANCED MESSAGE-----