RCM TECHNOLOGIES INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2019
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
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RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Nevada
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95-1480559
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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2500 McClellan Avenue, Suite 350,
Pennsauken, New Jersey
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08109-4613
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant's telephone number, including area code:
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(856) 356-4500
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.05 per share
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RCMT
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
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None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. (See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). (Check one):
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Large Accelerated Filer [ ]
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Accelerated Filer [ ]
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Non-Accelerated Filer [X]
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Smaller Reporting Company [X]
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Emerging Growth Company [ ]
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $25.1 million based upon the closing price of $4.00 per share of the registrant’s common
stock on June 28, 2019 on The NASDAQ Global Market. For purposes of making this calculation only, the registrant included all directors, executive officers and beneficial owners of more than 5% of the Common Stock of the Company as affiliates.
The number of shares of registrant’s common stock (par value $0.05 per share) outstanding as of March 5, 2020: 13,120,970.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the registrant’s 2020 Annual Meeting of Stockholders (the “2020 Proxy Statement”) are incorporated by reference into Items 10, 11, 12, 13 and 14 in Part
III of this Annual Report on Form 10-K. If the 2020 Proxy Statement is not filed by April 27, 2020 (the first business day following the day that is 120 days after the last day of the registrant’s 2019 fiscal year), an amendment to this annual
report on Form 10-K setting forth this information will be duly filed with the Securities and Exchange Commission.
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RCM TECHNOLOGIES, INC.
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FORM 10-K
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TABLE OF CONTENTS
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PART I
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1
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Item 1.
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Business
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2
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Item 1A.
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Risk Factors
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14
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Item 1B.
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Unresolved Staff Comments
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19
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Item 2.
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Properties
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19
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Item 3.
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Legal Proceedings
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20
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Item 4.
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Mine Safety Disclosures
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20
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PART II
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21
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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21
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Item 6.
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Selected Financial Data
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21
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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22
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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39
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Item 8.
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Financial Statements and Supplementary Data
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39
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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39
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Item 9A.
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Controls and Procedures
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40
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Item 9B.
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Other Information
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40
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PART III
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41
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Item 10.
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Directors, Executive Officers and Corporate Governance
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41
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Item 11.
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Executive Compensation
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41
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
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41
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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41
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Item 14.
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Principal Accountant Fees and Services
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41
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PART IV
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42
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Item 15.
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Exhibits and Financial Statement Schedules
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42
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Item 16.
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Form 10-K Summary
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44
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Signatures
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45
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PART I
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Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. (“RCM” or the “Company”) are forward-looking within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company, in connection
with such adoption; the Company’s strategic and business initiatives and growth strategies; and the outcome of litigation (at both the trial and appellate levels) and arbitrations, or other business disputes, involving the Company. Readers are
cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,” and similar expressions,
are only predictions and are subject to risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i)
unemployment and general economic conditions affecting the provision of information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the Company’s ability to continue to attract, train and
retain personnel qualified to meet the requirements of its clients; (iii) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) the Company’s
relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (v) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the
Canadian dollar; (vi) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vii) the adverse effect a potential decrease in the trading price of the Company’s
common stock would have upon the Company’s ability to acquire businesses through the issuance of its securities; (viii) the Company’s ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of
its executive officers; (x) the Company’s ability to remain competitive in the markets that it serves; (xi) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims being made
against the Company associated with providing temporary staffing services; (xiii) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xiv) the risk of cyber
attacks on our information technology systems or those of our third party vendors; (xv) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xvi) uncertainties in predictions as to the future need
for the Company’s services; (xvii) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (xviii) the costs of conducting and the outcome of litigation, arbitrations and other business disputes
involving the Company, and the applicability of insurance coverage with respect to any such litigation; (ixx) the results of, and costs relating to, any interactions with shareholders of the Company who may pursue specific initiatives with respect to
the Company’s governance and strategic direction, including without limitation a contested proxy solicitation initiated by such shareholders, or any similar such interactions; and (xx) other economic, competitive, health and governmental factors
affecting the Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by law, the Company undertakes no
obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
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ITEM 1. BUSINESS
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General
RCM Technologies, Inc. is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the adaptation and deployment of advanced
engineering, specialty health care and information technology services. RCM has been an innovative leader in the design, development, and delivery of these services to commercial and government sectors for over 40 years. Over the years, the Company
has developed and assembled an attractive, diverse and extensive portfolio of capabilities, service offerings and delivery options, established a proven record of performance and credibility, and built an efficient pricing structure. This
combination offers clients a compelling value proposition with the potential to substantially accelerate the successful attainment of their business objectives
.
RCM consists of three operating segments: Engineering, Specialty Health Care and Information Technology Services. RCM’s Engineering segment provides engineering and
design, engineering analysis, technical writing and technical support services, process and industrial, Engineer, Procure and Construction Management (“EPC”) as well as Demand Side Management/Energy Conservation Services. The Company’s Specialty
Health Care Services segment provides the staffing of health care professionals, primarily health information management professionals, nurses, paraprofessionals, physicians and therapists. The Company’s Information Technology, or IT, segment
provides enterprise business solutions, application services, infrastructure solutions, competitive advantage & productivity solutions, life sciences solutions and other selected vertical market specific offerings.
The Company services some of the largest national and international companies in North America as well as a lengthy roster of Fortune 1000 and mid-sized businesses in such industries as Aerospace/Defense, Educational
Institutions, Energy, Financial Services, Health Care, Life Sciences, Manufacturing & Distribution, the Public Sector and Technology. RCM believes it offers a range of solutions that foster long-term client relationships, affords cross-selling
opportunities, and minimizes the Company’s dependence on any single technology or industry sector. RCM sells and delivers its services through a network of approximately 29 offices in selected regions throughout North America and Serbia.
The Company is a Nevada corporation organized in 1971. The address of its principal executive office is 2500 McClellan Avenue, Suite 350, Pennsauken, NJ 08109-4613.
During the fiscal year ended December 28, 2019, approximately 35.5% of RCM’s total revenues were derived from Engineering services, 46.8% from Specialty Health Care services, and the remaining 17.7% from IT services.
Demand for the Company’s services, spending by its customers and pricing can be significantly impacted by changes in the general level of economic activity, particularly technology spending. Extended periods of
weakness in the economy can have a material adverse impact on the Company’s business and results of operations.
Industry Overview
Businesses today face intense competition, the challenge of constant technological change and the ongoing need for business process optimization. To address these issues and to compete more effectively, companies are
continually evaluating the need for implementing innovative solutions to upgrade their systems, applications and processes. As a result, the ability of an organization to integrate and align advanced technologies with new business objectives is
critical.
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ITEM 1. BUSINESS (CONTINUED)
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Industry Overview (Continued)
Although most companies recognize the importance of optimizing their systems, applications and processes to compete in today’s challenging environment, the process of designing, developing and implementing business and
technology solutions is becoming increasingly complex. The Company believes that many businesses are focused on return on investment analysis in prioritizing their initiatives.
The Company’s Engineering group continues to focus on areas of growth within the energy, aerospace and commercial building industries as well as the industrial and oil and gas industries. In recent years, many
businesses have been adversely impacted by oil prices and other energy-related costs and developments, and for that reason as well as the concern of climate change, there has been growing sentiment around the world for the development of alternative
sources of energy.
In the health care services industry, a shortage of nurses and other medical personnel in the United States has led to increases in business activity for health care service companies, including the Company’s Specialty
Health Care Services group. Due in part to an aging population and improved medical technology, the demand for selected health care professionals is expected to continue over the next several years. In addition, public educational institutions are
outsourcing their requirements for school nurses, therapists and paraprofessionals to lower their costs and it is expected that this will continue and grow. Medical coding standards have become increasingly complex and this is driving increased
demand among hospitals for consulting services regarding hospital information managements system, which also is expected to continue into the future.
Companies must integrate and manage computing environments consisting of multiple computing platforms, operating systems, databases and networking protocols and off-the-shelf software applications to support business
objectives. Companies also need to keep pace with new technology developments, which often rapidly render existing equipment and internal skills obsolete. At the same time, varied factors have caused many organizations to focus on core competencies
and trim workforces in the IT management area. Accordingly, these organizations often lack the quantity, quality and variety of IT skills necessary to design and support IT solutions. IT managers are charged with supporting increasingly complex
systems and applications of significant strategic value, while working under budgetary, personnel and expertise constraints within their own organizations.
The Company believes its target market for IT services is among middle-market companies, which typically lack the time and technical resources to satisfy all of their IT needs internally. These companies commonly
require sophisticated, experienced IT assistance to achieve their business objectives and often rely on IT service providers to help implement and manage their systems. RCM is structured to provide middle-market companies a single source for their
IT needs.
Business Strategy
RCM is dedicated to providing solutions to meet its clients’ business needs by delivering engineering, specialty health care and information technology services. The Company’s objective is to remain a recognized
leader of specialized professional staffing, consulting services and solutions in major markets throughout North America. The Company adapts operating strategies to achieve this objective. The following is a discussion of the key elements of its
growth and operating strategies:
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ITEM 1. BUSINESS (CONTINUED)
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Growth Strategy
Promote Full Life Cycle Solution Capability
The Company promotes a full life cycle solution capability to its customers. The goal of the full life cycle solution strategy is to fully address a client’s project implementation cycle at each stage of its
development and deployment. This entails the Company working with its clients from the initial conceptualization of a project through its design and project execution, and extending into ongoing management and support of the delivered product.
RCM’s strategy is to build projects and solutions offerings selectively, utilizing its extensive resource base.
The Company believes that the effective execution of this strategy will generate improved margins on its existing resources. The completion of this service-offering continuum is intended to afford the Company the
opportunity to strengthen long-term client relationships that will further contribute to a more predictable revenue stream.
In addition to a full life cycle solution offering, the Company continues to focus on transitioning into higher value oriented services in an effort to increase its margins on its various service lines and generate
revenue that is more sustainable. The Company believes this transition is accomplished by pursuing additional vertical market specific solutions in conjunction or combination with longer-term based solutions, through expansion of its client
relationships and by pursuing strategic alliances and partnerships.
Achieve Internal Growth
The Company continues to promote its internal growth strategies which it designed to better serve the Company’s customers, generate higher revenue and achieve greater operating efficiencies. Every division of the
Company continuously focuses on services and client diversification. Business units are collaborating on penetrating and servicing accounts as sales teams are increasing their activity levels. This enables clients to be supported by specialists in
their areas of need while RCM productivity increases.
RCM provides an orientation program in which sales managers and professionals receive relevant information about Company operations.
RCM has adopted an industry-centric approach to sales and marketing. This initiative contemplates that clients within the same industry sectors tend to have common business challenges. It therefore allows the Company
to present and deliver enhanced value to those clients in the vertical markets in which RCM has assembled the greatest work experience. RCM’s consultants continue to acquire project experience that offers differentiated awareness of the business
challenges that clients in that industry are facing. This alignment also facilitates and creates additional cross-selling opportunities. The Company believes this strategy will lead to greater account penetration and enhanced client relationships.
Operational strategies contributing to RCM’s internal productivity include the delineation of certain new solutions practice areas in markets where its clients had historically known the Company as a contract service
provider. The formation of these practice areas facilitates the flow of project opportunities and the delivery of project-based solutions.
Pursue Selective Strategic Acquisitions
The industries in which the Company operates continues to be highly fragmented, and the Company plans to continue to selectively assess opportunities to make strategic acquisitions as such opportunities are presented
to the Company. The Company's acquisition strategy is designed to broaden the scope of services and technical competencies and grow its full life cycle solution capabilities. In considering acquisition opportunities, the Company focuses principally
on companies with (i) technologies or market segments RCM has targeted for strategic value enhancement, (ii) margins that are accretive to existing margins, (iii) experienced management personnel, (iv) substantial growth prospects and (v) sellers who
desire to join the Company’s management team. To retain and provide incentives for management of its acquired companies, the Company has generally structured a significant portion of the acquisition price in the form of multi-tiered consideration
based on growth of operating profitability of the acquired company over a two to four year period.
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ITEM 1. BUSINESS (CONTINUED)
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Operating Strategy
Develop and Maintain Strong Customer Relationships
The Company seeks to develop and maintain strong interactive customer relationships by anticipating and focusing on its customers’ needs. The Company emphasizes a relationship-oriented approach to business, rather
than the transaction or assignment-oriented approach that the Company believes is used by many of its competitors. This industry-centric strategy is designed to allow RCM to expand further its relationships with clients in RCM’s targeted sectors.
To develop close customer relationships, the Company’s practice managers and/or sales people regularly meet with both existing and prospective clients to identify areas of need and help design solutions and identify
the resources needed to execute their strategies. The Company’s managers also maintain close communications with their customers during each project and on an ongoing basis after its completion. The Company believes that this relationship-oriented
approach can result in greater customer satisfaction. Additionally, the Company believes that by collaborating with its customers in designing business solutions, it can generate new opportunities to cross-sell additional services that the Company
has to offer. The Company focuses on providing customers with qualified individuals or teams of experts compatible with the business needs of its customers and makes a concerted effort to follow the progress of such relationships to ensure their
continued success.
Attract and Retain Highly Qualified Consultants and Technical Resources
The Company believes it has been successful in attracting and retaining highly qualified consultants and contractors by (i) providing stimulating and challenging work assignments, (ii) offering competitive wages, (iii)
effectively communicating with its candidates, (iv) providing selective training to maintain and upgrade skills and (v) aligning the needs of its customers with appropriately skilled personnel. The Company believes it has been successful in
retaining these personnel due in part to its use of practice managers who are dedicated to maintaining contact with, and monitoring the satisfaction levels of, the Company’s consultants and contractors while they are on assignment.
Centralize Administrative Functions
The Company continues to improve its operational efficiencies by integrating general and administrative functions at the corporate or regional level and reducing or eliminating redundant functions formerly performed at
smaller branch offices. This enables the Company to realize savings and synergies and to control and monitor its operations efficiently, as well as to quickly integrate new acquisitions. It also allows local branches to focus more on growing their
local operations.
To accomplish this, the Company’s financial reporting and accounting systems are centralized in the Company’s operational headquarters in Parsippany, NJ. The systems have been configured to perform all back office
functions, including payroll, project cost accounting, billing, human resource administration and financial reporting and consolidation. The Company utilizes third-party software for its financial reporting and accounting system which was
implemented in 1999 and has not undergone significant upgrades since its initial implementation. The Company believes that it will become necessary to upgrade or replace its financial reporting and accounting system at some point in the future and
anticipates a comprehensive review of the system may take place during fiscal 2020. The Company has not determined when this contemplated replacement may be necessary. The Company estimates this upgrade or replacement of their financial reporting and
accounting system will cost somewhere between $0.5 million and $1.0 million. These estimates are subject to change.
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ITEM 1. BUSINESS (CONTINUED)
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Engineering
The Company’s Engineering segment consists of three business units – Energy Services, Aerospace Services and Process and Industrial Services. Energy Services provides solutions to the utility industry, both power
generation and transmission and distribution. Aerospace Services provides engineering and technical services to the aircraft industry. Process and Industrial Services provides engineering services to the industrial, chemical, commercial and oil and
gas industries in the United States, Europe and Canada.
RCM provides a full range of Engineering services including Project Management Engineering & Design, Engineering Analysis, Engineer-Procure-Construct, Configuration Management, Hardware/Software Validation &
Verification, Quality Assurance, Technical Writing & Publications, Manufacturing Process Planning & Improvement and 3D/BIM Integrated Design. Engineering services are provided at the site of the client or at the Company’s own facilities.
The Company believes that the deregulation of the utilities industry and the aging of nuclear power plants offer the Company an opportunity to capture a greater share of professional services and project management
requirements of the utilities industry both in engineering services and through cross-selling of its information technology services. Heightened competition, deregulation and rapid technological advances are forcing the utilities industry to make
fundamental changes in its business process. These pressures have compelled the utilities industry to focus on internal operations and maintenance activities and to increasingly outsource their design and engineering modification requirements.
Additionally, the Company believes that competitive performance demands from deregulation should increase the importance of information technology to this industry. The Company believes that its expertise and strong relationships with certain
customers within the utilities industry position the Company to be a leading provider of professional services to the utilities industry.
RCM provides a wide array of turnkey energy management services offering clients/customers opportunities for demand side management from concept to turnover.
The Company provides its engineering services through a number of delivery methods. These include managed tasks and resources, complete project services, outsourcing, both on and off-site, and a full complement of
resourcing alternatives.
As of December 28, 2019, the Company assigned approximately 460 engineering and technical personnel to its customers.
Specialty Health Care
The Company’s Specialty Health Care Group specializes in long-term and short-term staffing as well as executive search and placement for the following fields: rehabilitation (physical therapists, occupational
therapists and speech language pathologists), nursing, managed care, allied health care, health care management, medical office support and non-medical caregivers or companions. The Specialty Health Care Group provides services to hospitals,
long-term care facilities, schools, sports medicine facilities and private practices. Services include in-patient, outpatient, sub-acute and acute care, multilingual speech pathology, rehabilitation, and geriatric, pediatric, and adult day care. The
Specialty Healthcare Group also provides Hospital Information Management System consulting services to the hospital industry. Typical engagements either range from three to six months or are on a day-to-day shift basis.
As of December 28, 2019, the Company assigned approximately 2,470 specialty health care services personnel to its customers.
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ITEM 1. BUSINESS (CONTINUED)
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Information Technology
The Company’s IT segment is an integrated group of business units providing staff supplementation services and project solutions with physical locations in the United States, Canada and Puerto Rico primarily supporting
Financial, Technical, Manufacturing, Life Sciences and Distribution applications. Areas of specialization in project solutions include:
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Enterprise Infrastructure Management
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Enterprise Integration
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Enterprise Supply Chain
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Enterprise Project Management
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Enterprise HCM
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Life Sciences
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Assessment and Remediation of Federally Regulated Life Science Equipment and Processes
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The RCM Enterprise Business Solutions Group’s core business mission is to continue its strategic transformation designed to focus the Company on developing proprietary customized solutions and methodologies by bundling
software, systems, tools and services into integrated business and technology solutions. Invoices on projects whereby the Company sold its own proprietary software were not material for the fiscal year ended December 28, 2019.
RCM’s sector knowledge coupled with technical and business process experience enable the Company to provide strategic planning, project execution and management and support services throughout the entire project life
cycle. RCM has successfully completed multimillion-dollar projects in a variety of industry verticals using time-tested methodologies that manage strict budgets, timelines and quality metrics.
Among those IT services provided by RCM to its clients are:
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Enterprise Business Solutions
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Application Services
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Infrastructure Solutions
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Competitive Advantage & Productivity Solutions
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Life Sciences Solutions
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The Company believes that its ability to deliver information technology solutions across a wide range of technical platforms provides an important competitive advantage. RCM ensures that its consultants have the
expertise and skills needed to keep pace with rapidly evolving information technologies. The Company’s strategy is to maintain expertise and acquire knowledge in multiple technologies so it can offer its clients non-biased technology solutions best
suited to their business needs.
The Company provides its IT services through a number of flexible delivery methods. These include management consulting engagements, project management of client efforts, project implementation of client initiatives,
outsourcing, both on and off site, and a full complement of resourcing alternatives.
As of December 28, 2019, the Company assigned approximately 250 information technology personnel to its customers.
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ITEM 1. BUSINESS (CONTINUED)
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Branch Offices
The Company’s organization consists of 29 branch offices located in the United States, Canada, Puerto Rico and Serbia. The locations and services of each of the branch offices are set forth in the table below.
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NUMBER OF
OFFICES
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SERVICES
PROVIDED(1)
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UNITED STATES
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California
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2
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HC
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Connecticut
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2
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E
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Delaware
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1
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HC
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Florida
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2
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HC
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Hawaii
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1
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HC
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Illinois
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1
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HC
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Maryland
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1
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IT
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Massachusetts
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1
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IT
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Missouri
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1
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HC
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New Jersey
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3
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E, IT
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New York
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4
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E, HC, IT
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Ohio
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1
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E
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Pennsylvania
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1
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E
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Rhode Island
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1
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E
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22
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CANADA
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3
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E, IT
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PUERTO RICO
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1
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E, IT
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SERBIA
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3
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E, IT
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(1) Services provided are abbreviated as follows:
E - Engineering
HC - Specialty Health Care
IT - Information Technology
Branch offices are primarily located in markets that the Company believes have strong growth prospects for the Company’s services. The Company’s branches are operated in a decentralized, entrepreneurial manner with
most branch offices operating as independent profit centers. The Company’s branch managers are given significant autonomy in the daily operations of their respective offices and, with respect to such offices, are responsible for overall guidance and
supervision, budgeting and forecasting, sales and marketing strategies, pricing, hiring and training. Branch managers are paid on a performance-based compensation system designed to motivate the managers to maximize growth and profitability.
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ITEM 1. BUSINESS (CONTINUED)
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Branch Offices (Continued)
The Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Serbia.
The Company believes that substantial portions of the buying decisions made by users of the Company’s services are made on a local or regional basis and that the Company’s branch offices most often compete with local
and regional providers. Since the Company’s branch managers are in the best position to understand their local markets and customers often prefer local providers, the Company believes that a decentralized operating environment enhances operating
performance and contributes to employee and customer satisfaction.
From its headquarters locations in New Jersey, the Company provides its branch offices with centralized administrative, marketing, finance, MIS, human resources and legal support. Centralized administrative functions
minimize the administrative burdens on branch office managers and allow them to spend more time focusing on sales and marketing and practice development activities.
The Company’s principal sales offices typically have one general manager, one sales manager, three to six sales people, several technical delivery or practice managers and several recruiters. The general managers
report to regional vice presidents who are responsible for ensuring that performance goals are achieved. The Company’s regional vice presidents meet frequently to discuss “best practices” and ways to increase the Company’s cross selling of its
professional services. The Company’s practice managers meet periodically to strategize, maintain continuity, and identify developmental needs and cross-selling opportunities.
Sales and Marketing
Sales and marketing efforts are conducted at the local and national level through the Company’s network of branch offices. Sales activities and productivity are tracked and rankings established and published. Sales
between business units are recognized and financially encouraged. The Company emphasizes long-term personal relationships with customers that are developed through regular assessment of customer requirements and proactive monitoring of service
performance. The Company’s sales personnel make regular visits to existing and prospective customers. New customers are obtained through active sales programs and referrals. The Company encourages its employees to participate in national and
regional trade associations, local chambers of commerce and other civic associations. The Company seeks to develop strategic partnering relationships with its customers by providing comprehensive solutions for all aspects of a customer’s
engineering, information technology and other professional services needs. The Company concentrates on providing carefully screened professionals with the appropriate skills in a timely manner and at competitive prices. The Company regularly
monitors the quality of the services provided by its personnel and obtains feedback from its customers as to their satisfaction with the services provided.
The Company’s larger recognizable customers include ADP, Alstom Grid, American Electric Power, Amgen, AMN Healthcare, Atlantic City Electric Company, Atrium Medical, Aya Healthcare, Baltimore Gas & Electric, Bimbo
Bakeries, Black and McDonald, Bruce Power Limited Partnership (“Bruce Power”), Bruckner Supply Company, Chicago Public Schools, Chrysler Corporation, Con Edison, Covanta, Entergy, Cross Country, Eversource Energy, Equifax, Exelon, First Energy,
FlightSafety International, Granges Americas, Hamilton Sundstrand, Hawaii Department of Education, Hawaii Department of Public Safety, Hawaii State Hospital, Heartland Corn Products, ImClone Systems, Immucor, Johnson and Johnson, Lilly del Caribe,
Lockheed Martin, New York City Board of Education, New York Power Authority, Ontario Power Generation, Pfizer, Pratt and Whitney, Praxair, PSE&G, Regeneron Pharmaceuticals, Remedy Partners, Right Sourcing, School District of Philadelphia, Scope
Infotech, Sikorsky Aircraft, SNC Lavalin, United Health Group, United Technologies Corporation, Verizon, Vermont Yankee Nuclear Power, WE Energies and Western Alliance Bank. The Company serves Fortune 1000 companies and many middle market clients.
The Company’s relationships with these customers are typically formed at the customers’ local or regional level and from time to time, when appropriate, at the corporate level for national accounts.
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ITEM 1. BUSINESS (CONTINUED)
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Sales and Marketing (Continued)
During the fiscal year ended December 28, 2019, New York City Board of Education and Hawaii Department of Education represented 17.6% and 11.1% of the Company’s revenues, respectively. No other client accounted for
10% or more of total revenues during the year. The Company’s five, ten and twenty largest customers accounted for approximately 43.5%, 57.0% and 69.2%, respectively, of the Company’s revenues for the fiscal year ended December 28, 2019.
Recruiting and Training
The Company devotes a significant amount of time and resources, primarily at the branch level, to locating, training and retaining its professional personnel. Full-time recruiters utilize the Company’s proprietary
databases of available personnel, which are cross-indexed by competency and skill to match potential candidates with the specific project requirements of the customer. The qualified personnel in the databases are identified through numerous
channels, including networking, referrals, trade shows, job fairs, schools, newspaper and trade journal advertising, internet recruiting services and the Company’s website.
The Company believes that a significant element of the Company’s success in retaining qualified consultants and contract personnel is the Company’s use of consultant relationship managers and technical practice
managers. Consultant relationship managers are qualified Company personnel dedicated to maintaining on-site contact with, and monitoring the satisfaction levels of, the Company’s consultants and contract personnel while they are on assignment.
Practice managers are consulting managers responsible for the technical development and career development of the Company’s technical personnel within the defined practice areas. The Company provides technical training and skills development through
vendor-sponsored courses, computer-based training tools and on the job mentoring programs.
RCM has continued to engage in strategic initiatives to improve upon its ability to secure data, deliver services and improve on its communication infrastructure.
RCM has partnered with several internationally recognized vendors to deploy their business solutions internally, with systems designed to provide centralized management and a supported network.
RCM has upgraded its perimeter network and WAN architecture throughout the United States and Canada to a secure centralized model. The hub datacenter at its operational headquarters has been outfitted with redundant
fiber circuits, and redundant firewalls, routers and switching architecture that protects against hardware failure. Access to the network is restricted for security reasons.
The Company has enhanced its ERP hardware, Application and Operating system to accommodate its growing needs. The branch offices of the Company are networked to the corporate offices via private circuits, which enable
the ERP application to be accessed securely at all operational locations. The ERP system supports Company-wide operations such as payroll, billing, human resources, project systems, accounts receivable, accounts payable, all general ledger
accounting, budgeting and consolidation reporting functionality. The Company believes that it will become necessary to upgrade or replace its financial reporting and accounting system at some point in the future and anticipates a comprehensive
review of the system may take place during fiscal 2020. The Company has not determined when this contemplated replacement may be necessary. The Company estimates this upgrade or replacement of their financial reporting and accounting system will cost
somewhere between $0.5 million and $1.0 million. These estimates are subject to change.
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ITEM 1. BUSINESS (CONTINUED)
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Information Systems (Continued)
The Company’s internet presence is an integral part of its strategic initiative to improve visibility and contextualize its business offerings. The Company’s website has been revised, making the site more interactive,
with improved web analytics.
The Company uses a cloud based solution for sourcing candidates and fulfilling client requirements. The integrated solution allows RCM to track all client requirements on an enterprise level. RCM recruiters are able
to search multiple sources (e.g. job boards) to identify and match suitable candidates for an opportunity or need, and to build and maintain a proprietary database of prequalified candidates, thereby enhancing our ability to respond quickly to client
demands. Customized reporting and query capabilities allow RCM management to monitor personnel performance and client responsiveness. All data and information is accessible via a web portal.
In the interest of consolidation and being green, RCM continues to deploy sophisticated virtualization technology. Implementation of V-motion, fault tolerance, high availability and centralized management are an
integral part of this solution. Green initiatives include partnerships with vendors for the recycling of used printers, toners, servers, desktops and mobile devices.
Other Information
Safeguards - Business, Disaster and Contingency Planning
RCM has implemented a number of safeguards to protect the Company from various system-related risks including Redundant Telecommunications and server systems architecture, multi-tiered server and desktop backup
infrastructure, and data center physical and environmental controls. In addition, RCM has developed disaster recovery / business continuity procedures for all offices.
Given the significant amount of data generated in the Company’s key processes including recruiting, sales, payroll and customer invoicing, RCM has established redundant procedures, functioning on a daily basis, within
the Company’s primary data center. This redundancy should mitigate the risks related to hardware, application and data loss by utilizing the concept of live differential backups of servers and desktops to Storage Area Network (SAN) devices on its
backup LAN, culminating in offsite tape storage at an independent facility. Controls within the data center environment ensure that all systems are proactively monitored and data is properly archived.
Additionally, RCM has contracted and brokered strategic relationships with third-party vendors to meet its recovery objectives in the event of a system disruption. For example, comprehensive service level agreements
for RCM’s data circuits and network devices guarantee minimal outages as well as network redundancy and scalability.
The Company’s ability to protect its data assets against damage from fire, power loss, telecommunications failures, and facility violations is critical. To address potential cyber security threats, the Company uses a
third-party mail management service to filter all emails destined for the RCMT domain before being delivered to the corporate mail servers. The service has also been deployed to safeguard the enterprise from malicious internet content. The deployment
of virus, spam, and patch management controls extends from the perimeter network to all desktops and is centrally monitored and managed. In addition to the virus and malware controls, an Intrusion Protection System (IPS) monitors and alerts on
changes in network traffic patterns as well as known hostile signatures.
The Company maintains a disaster recovery plan that outlines the recovery time / point objectives (RTO / RPO), organization structure, roles and procedures, including site addendum disaster plans for all of its key
operating offices. Corporate IT personnel regulate the maintenance and integrity of backed-up data throughout the Company.
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ITEM 1. BUSINESS (CONTINUED)
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Other Information (Continued)
The Parsippany Datacenter moved in the first quarter of fiscal 2015 to a third-party Internet Data Center (“IDC”). The IDC provides RCM with a robust data center environment with redundant HVAC, commercial power feeds,
ten 2000kW diesel generator sets with five 10,000-gallon, above-ground fuel oil storage tanks to provide standby power and dry pipe fire suppression. In addition, the IDC provides 24x7 security staffing, closed-circuit monitors, secure-card key
access, biometrics scanners, man traps, and alarmed doors.
The market for engineering and IT services is highly competitive and is subject to rapid change. As the market demand has shifted, many software companies have adopted tactics to pursue services and consulting
offerings making them direct competitors when in the past they may have been alliance partners. Primary competitors include participants from a variety of market segments, including publicly and privately held firms, systems consulting and
implementation firms, application software firms, service groups of computer equipment companies, facilities management companies, general management consulting firms and staffing companies. In addition, the Company competes with its clients’
internal resources, particularly where these resources represent a fixed cost to the client. Such competition may impose additional pricing pressures on the Company.
The Company believes its principal competitive advantages in the engineering and IT services market include: strong relationships with existing clients, a long-term track record with over 1,000 clients, a broad range
of services, technical expertise, knowledge and experience in multiple industry sectors, quality and flexibility of service, responsiveness to client needs and speed in delivering IT solutions.
Additionally, the Company competes for suitable acquisition candidates based on its differentiated acquisition model, its entrepreneurial and decentralized operating philosophy, and its strong corporate-level support
and resources.
Seasonality
The Company’s operating results can be affected by the seasonal fluctuations in client expenditures. Expenditures in the Engineering and Information Technology segments can be negatively impacted during the first
quarter of the year when clients are finalizing their budgets. Quarterly results generally fluctuate depending on, among other things, the number of billing days in a quarter and the seasonality of clients’ businesses. The business is also affected
by the timing of holidays and seasonal vacation patterns, generally resulting in lower revenues and gross profit in the fourth quarter of each year, not considering any non-seasonal impact. Extreme weather conditions may also affect demand in the
first and fourth quarters of the year as certain clients’ facilities are located in geographic areas subject to closure or reduced hours due to inclement weather. The Company generally experiences an increase in its cost of sales and a corresponding
decrease in gross profit and gross margin percentage in the first and second fiscal quarters of each year as a result of resetting certain state and federal employment tax rates and related salary limitations. Also, the Company’s Specialty Health
Care segment typically experiences a significant decline in revenues due to the substantial closure of one of its largest customers, the New York City Department of Education, and other educational institution clients during the third quarter due to
their summer recess.
Government Regulations
The Company is a consulting firm and employment service provider and is generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee relationship between a
firm and its employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-discrimination, immigration and workers’ compensation, (2) registration, licensing, record keeping and
reporting requirements, and (3) federal contractor compliance. The Company believes it is in material compliance with all employee related statutes.
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ITEM 1. BUSINESS (CONTINUED)
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Intellectual Property
Management believes the RCM Technologies, Inc. name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights and maintain certain trademarks, trade names,
service marks and other intellectual property rights, including The Source of Smart Solutions®. The Company is not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the
Company’s use of its proprietary rights.
Workforce
As of December 28, 2019, the Company employed an administrative, sales, recruiting and management staff of approximately 230 people, including licensed engineers and certified IT specialists who, from time to time,
participate in engineering design and IT projects undertaken by the Company. As of December 28, 2019, there were approximately 460 engineering and technical personnel, 2,470 specialty health care services personnel and 250 information technology
personnel assigned by the Company to work on client projects or assignments for various periods. None of the Company’s employees are party to a collective bargaining agreement.
Access to Company Information
RCM electronically files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The SEC
maintains an Internet site (http://www.sec.gov) that contains reports, proxies, information statements, and other information regarding issuers that file electronically.
RCM makes available on its website or by responding free of charge to requests addressed to the Company’s Corporate Secretary, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports filed by the Company with the SEC pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. The Company’s website is http://www.rcmt.com. The information contained on the Company’s website, or on other websites linked to the Company’s website, is not part of this document. Reference
herein to the Company’s website is an inactive text reference only.
RCM has adopted a Code of Conduct applicable to all of its directors, officers and employees. In addition, the Company has adopted a Code of Ethics, within the meaning of applicable SEC rules, applicable to its Chief
Executive Officer, Chief Financial Officer and Controller. Both the Code of Conduct and Code of Ethics are available, free of charge, by sending a written request to the Company’s Corporate Secretary. If the Company makes any amendments to either of
these Codes (other than technical, administrative, or other non-substantive amendments), or waives (explicitly or implicitly) any provision of the Code of Ethics to the benefit of its Chief Executive Officer, Chief Financial Officer or Controller, it
intends to disclose the nature of the amendment or waiver, its effective date and to whom it applies in the investor relations portion of the website, or in a report on Form 8-K filed with the SEC.
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ITEM 1A. RISK FACTORS
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The Company’s business involves a number of risks, some of which are beyond its control. The risk and uncertainties described below are not the only ones the Company faces. Set forth below is a
discussion of the risks and uncertainties that management believes to be material to the Company.
Economic Trends
Adverse global economic conditions, such as the worldwide crisis that began in mid-2007, may create conditions such as a general tightening in the credit markets, lower levels of liquidity, increases in the rates of
default and bankruptcy, and volatility in credit, equity and fixed income markets. Any or all of these developments can negatively affect the Company’s business, operating results or financial condition in a number of ways. For example, current or
potential customers may be unable to fund capital spending programs, new product launches of other similar endeavors whereby they might procure services from the Company, and therefore delay, decrease or cancel purchases of services or not pay or
delay paying for previously purchased services. In addition, these conditions may cause the Company to incur increased expenses or make it more difficult either to utilize existing debt capacity or otherwise obtain financing for operations,
investing activities (including the financing of any future acquisitions), or financing activities, all of which could adversely affect the Company’s business, financial condition and results of operations.
Our business could be adversely impacted by the effects of epidemic outbreaks such as the recent Coronavirus outbreak in Asia and throughout the world, including North
America. Such an epidemic could harm the global economy in general. We may experience impacts to certain of our customers or internal operations as a result of a health epidemic or other outbreak occurring in one or more locations, which in turn may
materially and adversely affect our business, financial condition and results of operations.
Government Regulations
Staffing firms and employment service providers are generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee relationship between a firm and its
employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-discrimination, immigration and workers’ compensation; (2) registration, licensing, record keeping and reporting
requirements; and (3) federal contractor compliance. Failure to comply with these regulations could result in the Company incurring penalties and other liabilities, monetary and otherwise.
Highly Competitive Business
The staffing services and outsourcing markets are highly competitive and have limited barriers to entry. RCM competes in global, national, regional, and local markets with numerous temporary staffing and permanent
placement companies. Price competition in the staffing industry is significant and pricing pressures from competitors and customers are increasing. In addition, there is increasing pressure on companies to outsource certain areas of their business
to low cost offshore outsourcing firms. 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. Our inability to compete successfully with
our competitors could adversely affect the Company’s business, financial condition and results of operations.
Seasonality of Business
As described in “Item 1. Business,” our operating results are subject to seasonal fluctuations, with reduced demand often occurring during the first quarter of the year when clients are finalizing their engineering and
IT budgets, and also during periods in which there are a substantial amount of holidays and season vacations. In particular, one of the largest customers in our Specialty Health Care group, the New York City Department of Education, significantly
reduces activity during the third quarter, when schools are closed for summer recess. Our operating results for any given period may fluctuate as a result of the timing of holidays, vacations and other events, and if we were to experience
unfavorable performance during periods in which we would otherwise expect to have high seasonal demand, we may have limited ability to make up for such performance during periods of seasonally lower demand.
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ITEM 1A. RISK FACTORS (CONTINUED)
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Events Affecting Significant Customers
As disclosed in “Item 1. Business,” the Company’s five, ten and twenty largest customers accounted for approximately 43.5%, 57.0% and 69.2%, respectively, of revenues for the fiscal year ended
December 28, 2019. During the fiscal year ended December 28, 2019, New York City Board of Education and Hawaii Department of Education represented 17.6% and 11.1% of the Company’s revenues, respectively. No other client accounted for 10% or more of
total revenues during the year. The Company’s customers may be affected by the current state of the economy or developments in the credit markets or may engage in mergers or similar transactions. In addition, customers may choose to reduce the
business they do with RCM for other reasons or no reason. The Company could also be materially impacted by actions of prime contractors whereby the Company derives revenues through a subcontractor relationship. Should any significant customers
experience a downturn in their business that weakens their financial condition or merge with another company or otherwise cease independent operation, or limit their relationship with us, it is possible that the business that the customer does with
the Company would be reduced or eliminated, which could adversely affect the Company’s business, financial condition and results of operations.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer
started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of December 28, 2019 and December 29, 2018, the total amount of outstanding
receivables from this customer on these disputed projects was $14.1 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has
asserted counter-claims. While the total amount of asserted counter-claims is unknown as of December 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are
retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce
the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will
conclude prior to reporting its first quarter of fiscal 2020 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a
portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
Safety Concerns Regarding Nuclear Power Plants; Limitations on Insurance
Especially in light of the Fukushima Daiichi nuclear plant malfunction that occurred in March 2011, new and existing concerns are being expressed in public forums about the safety of nuclear generating units and
nuclear fuel. Among other things, these concerns have led to, and are expected to continue to lead to, various proposals to regulators and governing bodies in some localities where nuclear facilities are located for legislative and regulatory
changes that could lead to the shut-down of nuclear units, denial of license renewal applications, municipalization of nuclear units, restrictions on nuclear units or other adverse effects on owning and operating nuclear generating units. Should
these concerns or proposals lead to a diminishment of or reduced growth in the nuclear power industry, the Company’s Engineering segment, which has a focus on the nuclear power industry, could be harmed, and the Company’s business, financial
condition and results of operations could be materially adversely affected.
In addition, our liability insurance does not cover accidents occurring at nuclear power facilities. Should we be found to be responsible for such an event, we may not be able to cover relating damages, and our
business would be adversely affected.
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ITEM 1A. RISK FACTORS (CONTINUED)
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Subcontractors, Transit Accounts Receivable and Transit Accounts Payables Related to Construction Management Contracts
The Company’s Engineering segment has entered into arrangements to provide construction management and engineering services to customers under which arrangements the Company then engages subcontractors to provide the
construction services. Ultimately, as a primary contractor, the Company is responsible for the nonperformance or negligence of its subcontractors, whom the Company requires to be adequately insured and to issue performance bonds for their
assignment. Should a subcontractor not perform or act negligently and should there be inadequate insurance or performance bonds in place, the Company might not be able to mitigate its primary liability to the customer, and the Company’s business,
financial condition and results of operations could be materially adversely affected. In addition, while payments to subcontractors typically are due from the Company only after the Company receives payment from the ultimate customer, the Company
faces the risk that, should a customer not pay the Company, or should a subcontractor demand payment from the Company prior to the Company’s receipt of payment from its customer, the Company’s business, financial condition and results of operations
could be materially adversely affected.
Dependence Upon Personnel
The Company’s operations depend on the continued efforts of its officers and other executive management. The loss of key officers and members of executive management may cause a significant disruption to the Company’s
business.
RCM also depends on the performance and productivity of its local managers and field personnel. The Company’s ability to attract and retain new business is significantly affected by local relationships and the quality
of service rendered. The loss of key managers and field personnel may also jeopardize existing client relationships with businesses that continue to use the Company’s services based upon past relationships with local managers and field personnel.
In order to fulfill the requirements of the Company’s customers, the Company must be able to recruit and retain appropriate personnel for client assignments.
Revolving Credit Facility and Liquidity
If the Company were unable to borrow under its Revolving Credit Facility (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources –
Financing Activities”), it may adversely affect liquidity, results of operations and financial condition. The Company’s liquidity depends on its ability to generate sufficient cash flows from operations and, from time to time, borrowings under the
Revolving Credit Facility with the Company’s agent lender Citizens Bank of Pennsylvania. The Company believes that Citizens Bank is liquid and is not aware of any current risk that they will become illiquid. At December 28, 2019, the Company had
$34.8 million in borrowings under the Revolving Credit Facility outstanding and $1.6 million outstanding under letters of credit, with availability for additional borrowings under the Revolving Credit Facility of $8.6 million.
The Revolving Credit Facility contains various financial and non-financial covenants. At December 28, 2019, the Company was in compliance with the covenants and other provisions of the Credit Facility. Any failure to
be in compliance could have a material adverse effect on liquidity, results of operations and financial condition.
In addition, the Revolving Credit Facility may use London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, international and other
regulatory guidance and proposals for reform, and LIBOR is expected to be phased out as a benchmark after 2021. The transition to an alternative rate will require careful and deliberate consideration and implementation so as to not disrupt the
stability of financial markets. There is no guarantee that a transition from LIBOR to an alternative rate will not result in financial market disruptions, significant increases in benchmark rates, or an increase in our borrowing costs to under the
Revolving Credit Facility.
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ITEM 1A. RISK FACTORS (CONTINUED)
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Foreign Currency Fluctuations and Changes in Exchange Rates
The Company is exposed to risks associated with foreign currency fluctuations and changes in exchange rates. RCM’s exposure to foreign currency fluctuations relates to operations in Canada and Serbia, principally
conducted through its Canadian and Serbian subsidiaries. Exchange rate fluctuations affect the United States dollar value of reported earnings derived from the Canadian operations as well as the carrying value of the Company’s investment in the net
assets related to these operations. The Company does not engage in hedging activities with respect to foreign operations.
Changes in Tax Laws
At any time, United States federal tax laws or the administrative interpretations of those laws may be changed. In December 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act, which made widespread
changes to the Internal Revenue Code, was signed into law. While the Company believes that this law generally has had and will continue to have a favorable effect on corporations and their shareholders, the Company cannot predict whether, when or to
what extent other new United States federal tax laws, regulations, interpretations or rulings will be issued. As a result, changes in United States federal tax laws could negatively impact our operating results, financial condition and business
operations, and adversely impact the Company’s shareholders. At any time, tax laws in the Company’s other jurisdictions, Canada, Puerto Rico and Serbia, may also change. These tax law changes may have a material impact on the Company’s income tax
expense.
Workers’ Compensation and Employee Medical Insurance
The Company self-insures a portion of the exposure for losses related to workers’ compensation and employees’ medical insurance. The Company has established reserves for workers’ compensation and employee medical
insurance claims based on historical loss statistics and periodic independent actuarial valuations. Significant differences in actual experience or significant changes in assumptions may materially affect the Company’s future financial results.
Improper Activities of Temporary Professionals Could Result in Damage to Business Reputation, Discontinuation of Client Relationships and Exposure to Liability
The Company may be subject to claims by clients related to errors and omissions, misuse of proprietary information, discrimination and harassment, theft and other criminal activity, malpractice, and other claims
stemming from the improper activities or alleged activities of temporary professionals. There can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts to cover damages or
other costs associated with such claims.
Claims raised by clients stemming from the improper actions of temporary professionals, even if without merit, could cause the Company to incur significant expense associated with rework costs or other damages related
to such claims. Furthermore, such claims by clients could damage the Company’s business reputation and result in the discontinuation of client relationships.
Acquisitions May Not Succeed
The Company reviews prospective acquisitions as an element of its growth strategy. The failure of any acquisition to meet the Company’s expectations, whether due to a failure to successfully integrate any future
acquisition or otherwise, may result in damage to the Company’s financial performance and/or divert management’s attention from its core operations or could negatively affect the Company’s ability to meet the needs of its customers promptly.
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ITEM 1A. RISK FACTORS (CONTINUED)
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International Operations
The Company operates its business in Canada and, to a less significant extent, in Puerto Rico and Serbia. For the fiscal year ended December 28, 2019, approximately 12.7% of the Company’s revenues were generated
outside the United States. There are certain risks inherent in conducting business internationally including: the imposition of trade barriers, foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivables
collection, difficulties in complying with a variety of foreign laws (including without limitation the U.S. Foreign Corrupt Practices Act), changes in legal or regulatory requirements, difficulties in staffing and managing foreign operations, complex
and uncertain employment environments, political instability and potentially adverse tax consequences. To the extent the Company experiences these risks, the business and results of operations could be adversely affected.
Trademarks
Management believes the RCM Technologies, Inc. name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights and maintain certain trademarks, trade names,
service marks and other intellectual property rights, including The Source of Smart Solutions®. The Company is not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the
Company’s use of its proprietary rights. The Company’s success depends on its ability to successfully obtain and maintain, and prevent misappropriation or infringement of, its intellectual property, maintain trade secret protection, and conduct
operations without violating or infringing on the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and it is often difficult, if not impossible, to predict the outcome of such
litigation. If the Company is involved in an intellectual property litigation, its business, financial condition and results of operations could be materially adversely affected.
Data Center Capacity and Telecommunication Links
Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect RCM’s datacenter. All systems are monitored on a 24/7 basis with alerting capabilities via voice or
email. The telecommunications architecture at RCM utilizes managed private circuits from AT&T, which encompasses provisioning redundancy and diversity.
The Company’s ability to protect its data center against damage from fire, power loss, telecommunications failure and other disasters is critical to business operations. In order to provide many of its services, RCM
must be able to store, retrieve, process and manage large databases and periodically expand and upgrade its capabilities. Any damage to the Company’s data centers or any failure of the Company’s telecommunication links that interrupts its operations
or results in an inadvertent loss of data could adversely affect the Company’s ability to meet its customers’ needs and their confidence in utilizing the Company for future services.
RCM’s ability to protect its data, provide services and safeguard its installations, as it relates to the IT infrastructure, is in part dependent on several outside vendors with whom the Company maintains service level
agreements.
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ITEM 1A. RISK FACTORS (CONTINUED)
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Cyber Security
We are highly dependent on information technology systems to operate our business. A breakdown, invasion, corruption, destruction or interruption of critical information technology systems by employees, others with
authorized access to our systems or unauthorized persons could negatively impact operations. In the ordinary course of business, we collect, store and transmit confidential information and it is critical that we do so in a secure manner to maintain
the confidentiality and integrity of such information. Additionally, we outsource certain elements of our information technology systems to third parties. As a result of this outsourcing, our third party vendors may or could have access to our
confidential information making such systems vulnerable. Data breaches of our information technology systems, or those of our third party vendors, may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we
believe that we have taken appropriate security measures to protect our data and information technology systems, and have been informed by our third party vendors that they have as well, there can be no assurance that our efforts will prevent
breakdowns or breaches in our systems, or those of our third party vendors, that could adversely affect our business.
Litigation and Other Disputes
The Company is currently, and may in the future become, involved in legal or arbitration proceedings and claims arising from time to time in the course of its business. An adverse outcome in any such litigation or
arbitration could have an adverse impact on the consolidated financial position, consolidated results of operations and cash flows of the Company.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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Not applicable.
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ITEM 2. PROPERTIES
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The Company provides specialty professional consulting services, principally performed at various client locations, through 29 administrative and sales offices located in the United States, Puerto Rico, Canada and
Serbia. The majority of the Company’s offices typically consist of 1,000 to 15,000 square feet and are typically leased by the Company for terms of one to five years. Offices in larger or smaller markets may vary in size from the typical office.
The Company does not expect that it will be difficult to maintain or find suitable lease space at reasonable rates in its markets or in areas where the Company contemplates expansion.
The Company’s executive office is located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613. These premises consist of approximately 11,100 square feet and are leased at a rate of approximately
$15.00 per square foot per annum for a term ending on June 30, 2020.
The Company’s operational office is located at 20 Waterview Boulevard, 4
th
Floor, Parsippany, NJ 07054-1271. These premises consist of approximately 9,200 square feet and are leased at a rate of
approximately $24.45 per square foot per annum for a term ending on January 31, 2024.
|
ITEM 3. LEGAL PROCEEDINGS
|
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. As such, the Company is required to assess the likelihood of any adverse outcomes to
these matters as well as potential ranges of losses and possible recoveries. The Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments
and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. Once established, a provision may change in the future due to new developments or changes in circumstances and could increase or decrease
the Company’s earnings in the period that the changes are made. Asserted claims in these matters sought approximately $10.3 million in damages (as further described below) as of December 28, 2019. As of December 28, 2019, the Company did not have
an accrual for any such liabilities.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer
started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of December 28, 2019 and December 29, 2018, the total amount of outstanding
receivables from this customer on these disputed projects was $14.1 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has
asserted counter-claims. While the total amount of asserted counter-claims is unknown as of December 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are
retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce
the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will
conclude prior to reporting its first quarter of fiscal 2020 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a
portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.
|
ITEM 4. MINE SAFETY DISCLOSURES
|
Not applicable.
|
PART II
|
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
|
|
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Shares of the Company’s common stock are traded on The NASDAQ Global Market under the Symbol “RCMT.”
Holders
As of February 14, 2020, the approximate number of holders of record of the Company’s Common Stock was 313 and the number of beneficial owners of its Common Stock was approximately 1,795.
Dividends
No dividends were declared in fiscal 2019 or fiscal 2018. All restricted share units contain a dividend equivalent provision entitling holders to dividends paid between the restricted stock unit grant date and
ultimate share distribution date. Total accrued dividends as of December 28, 2019 were $40,000 and are eligible to be paid in fiscal 2020. Dividends on any forfeited restricted share units will be forfeited.
While the Company, at this time, has no plans to issue any future dividends, any future payment of dividends will depend upon, among other things, the Company’s earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions, and other factors that the Board of Directors deems relevant. The Revolving Credit Facility (as discussed in Item 7 hereof) prohibits the payment of any dividends or distributions on account of the
Company’s capital stock without the prior consent of the majority of the Company’s lenders.
|
ITEM 6. SELECTED FINANCIAL DATA
|
Not required.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS
|
Overview
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenue and operations can be substantial, resulting in significant volatility
in the Company’s financial performance.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is
committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the process of designing, developing and implementing
business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by
current and prospective clients for many emerging new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced information technology and engineering solutions to upgrade their systems, applications and processes so that they can maximize
their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and
processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems,
applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project
management and solutions services are generally higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes
revenue from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly
rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.
The majority of the Company’s services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on
the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the
customer on 60 to 90 days’ notice. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. Typically, these contracts are for less than one year. In certain instances, the Company recognizes revenue
when invoiced at the time certain milestones are reached, as defined in the contract. The Company may also recognize revenue between milestones when costs are incurred using the percentage of completion method.
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and insurance. Selling, general and administrative
expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and
benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when incurred. Corporate
overhead expenses are allocated to the segments based on revenue for the purpose of segment financial reporting.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. In our condensed consolidated financial statements, estimates are used for, but not limited to,
accounts receivable and allowance for doubtful accounts, goodwill, long-lived intangible assets, accounting for stock options and restricted stock units, insurance liabilities, accounting for income taxes and accrued bonuses.
Revenue Recognition
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606,
Revenue from Contracts
with Customers
. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those
services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance
obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the Company’s segments
perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenues disaggregated by revenue source for the fifty-two week periods ended December 28, 2019 and December 29, 2018:
|
December 28,
2019
|
December 29,
2018
|
||
|
Engineering:
|
|||
|
Time and Material
|
$55,195
|
$71,639
|
|
|
Fixed Fee
|
12,678
|
14,424
|
|
|
Permanent Placement Services
|
-
|
15
|
|
|
Total Engineering
|
$67,873
|
$86,078
|
|
|
Specialty Health Care:
|
|||
|
Time and Material
|
$88,057
|
$82,153
|
|
|
Permanent Placement Services
|
1,291
|
1,510
|
|
|
Total Specialty Health Care
|
$89,348
|
$83,663
|
|
|
Information Technology:
|
|||
|
Time and Material
|
$33,384
|
$30,361
|
|
|
Permanent Placement Services
|
495
|
250
|
|
|
Total Information Technology
|
$33,879
|
$30,611
|
|
|
$191,100
|
$200,352
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Revenue Recognition (Continued)
Time and Material
The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both time and material and fixed fee work. The Company’s
time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its
customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these
master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine-month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in
accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on these contracts are
incurred. On an infrequent basis, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed
and recorded based upon contractual rates per hour. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenue and
billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable, the work is not complete and the revenue is not recognized, the
costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the person placed with the Company’s client.
Deferred revenue was $0.4 million and $0.2 million at December 28, 2019 and December 29, 2018, respectively and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at
those dates. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet. For the fifty-two week period ended December 28, 2019,
the Company recognized revenue of $0.2 million that was included in deferred revenue at the beginning of the reporting period.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Accounts receivable
payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its 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 previously written off are credited to bad debt expense.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “
Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible
Assets for Impairment”
(“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that
the fair value of the goodwill may be below its carrying amount. The Company has three reporting units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of
similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” effective December 29, 2018 which has eliminated Step 2 from the goodwill impairment test. Under this update, an entity should perform its goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount.
There was no goodwill impairment in fiscal 2019 or 2018. During all periods presented, the Company determined that the existing qualitative factors did not suggest that an impairment of goodwill exists. There can be
no assurance that future indicators of impairment and tests of goodwill impairment will not result in impairment charges for both its Engineering and Specialty Healthcare segments.
Long-Lived and Intangible Assets
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When
the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the
lower of the carrying amount or fair value less cost to sell.
Accounting for Restricted Stock Units
The Company uses restricted stock units to attract, retain and reward employees for long-term service. The Company follows Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) Topic 718
“Compensation – Stock Compensation” which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. This compensation cost is measured based on the fair value of the equity or
liability instruments issued. The Company measures stock-based compensation cost using the Black-Scholes option pricing model for stock options and the fair value of the underlying common stock at the date of grant for restricted stock units.
Insurance Liabilities
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The Company establishes loss provisions based on historical experience and in the case of expected losses
from workers compensation, considers input from third parties. The amounts included in the Company’s costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the
providers included in the associated insurance programs.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
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 December 28, 2019, the Company had both domestic and foreign net deferred tax net liabilities of $0.4 million. The domestic long term deferred tax net liability includes $1.2
million in deferred assets offset by $1.6 million in deferred tax liabilities. The domestic deferred tax assets consist of a net operating loss carryforward of $0.3 million and various deferred expense accruals and reserves of $0.9 million. The
deferred tax liabilities consist of prepaid expenses of $0.7 million, acquisition amortization of $0.6 million and advance depreciation deductions of $0.3 million. The 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. If actual results differ from these estimates and assessments, valuation allowances may be
required.
The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated United States Federal income tax return and
file in various states. The Company’s federal income tax returns have been examined through 2012. The Internal Revenue Service is currently examining fiscal tax years 2013, 2015, 2016 and 2017. The State of New Jersey is currently examining fiscal
tax years 2009 through 2012. Except for New Jersey and other limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2015. The Company is no longer subject to audit in Canada for the
tax years prior to tax year 2015. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2009.
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. Bonuses for executive
management, field management and certain corporate employees are accrued throughout the year for payment during the first quarter of the following year, based in part upon anticipated annual results compared to annual budgets. In addition, the
Company pays discretionary bonuses to certain employees, which are not related to budget performance. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore on the estimates of the required
accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Performance-Based Restricted Stock Units
From time-to-time the Company issues performance-based restricted stock units to its executives. Performance-based restricted stock units are typically vested based on certain multi-year performance metrics as
determined by the Board of Directors Compensation Committee. The Company will reassess at each reporting date whether achievement of any performance condition is probable and would begin recognizing additional compensation cost if and when
achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the remaining requisite
service period. If at a later measurement date the Company determines that performance-based restricted stock units deemed as likely to vest are deemed as unlikely to vest, the expense recognized will be reversed. These performance-based restricted
stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period on any stock units that actually vest, if any. Dividends for
these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. Dividends for performance-based restricted stock units that ultimately do not vest are
forfeited.
Forward-looking Information
The Company’s growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for engineering and
information technology services. When the U.S., Canadian or global economies decline, the Company’s operating performance could be adversely impacted. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and
diversification of service offerings provides some insulation from adverse trends. However, declines in the economy could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements
with respect to the provision of employment services that may reduce the Company’s future earnings. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to
cover increased costs as a result of any of the foregoing.
The consulting and employment services market is highly competitive with limited barriers to entry. The Company competes in global, national, regional and local markets with numerous competitors in all of the
Company’s service lines. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. The Company expects that the level of competition will remain high in the future,
which could limit the Company’s ability to maintain or increase its market share or profitability.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018
A summary of operating results for the fifty-two week periods ended December 28, 2019 and December 29, 2018 is as follows (in thousands):
|
Fiscal Years Ended
|
||||||||
|
December 28, 2019
|
December 29, 2018
|
|||||||
|
Amount
|
% of Revenue
|
Amount
|
% of Revenue
|
|||||
|
Revenues
|
$191,100
|
100
|
$200,352
|
100.0
|
||||
|
Cost of services
|
142,508
|
74.6
|
151,042
|
75.4
|
||||
|
Gross profit
|
48,592
|
25.4
|
49,310
|
24.6
|
||||
|
Selling, general and administrative
|
40,390
|
21.1
|
40,386
|
20.2
|
||||
|
Depreciation and amortization of property and
equipment
|
1,261
|
0.7
|
1,442
|
0.7
|
||||
|
Amortization of acquired intangible assets
|
327
|
0.2
|
125
|
0.1
|
||||
|
Severance, professional fees, office closures and
other charges
|
-
|
-
|
1,571
|
0.7
|
||||
|
Tax credit professional fees
|
47
|
0.0
|
371
|
0.2
|
||||
|
Operating costs and expenses
|
42,025
|
22.0
|
43,895
|
21.9
|
||||
|
Operating income
|
6,567
|
3.4
|
5,415
|
2.7
|
||||
|
Other expense, net and foreign currency transactions
|
(1,745
|
)
|
(0.9
|
)
|
(1,507
|
)
|
(0.7
|
)
|
|
Income before income taxes
|
4,822
|
2.5
|
3,908
|
2.0
|
||||
|
Income tax expense
|
764
|
0.4
|
1,193
|
0.6
|
||||
|
Net income
|
$4,058
|
2.1
|
$2,715
|
1.4
|
||||
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal years ended December 28, 2019 (fiscal 2019) and December 29, 2018 (fiscal 2018) consisted of
fifty-two weeks each.
Revenue.
Revenue decreased 4.6%, or $9.3 million, for the fifty-two week period ended December 28, 2019 as compared to the fifty-two week period ended December 29, 2018 (the
“comparable prior year period”). Revenue decreased $18.2 million in the Engineering segment, increased $5.7 million in the Specialty Health Care segment and increased $3.3 million in the Information Technology segment. See Segment Discussion for
further information on revenue changes.
The Company has material operations in Canada, primarily from the Company’s Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S.
dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the “Exchange Rate”). For the fifty-two week period ended December 28, 2019, the Company
generated total revenue from its Canadian clients of $16.8 million in U.S. dollars at an Exchange Rate of 75.3% as compared to $27.9 million in U.S. dollars at an Exchange Rate of 77.3% for the comparable prior year period.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018
Cost of Services and Gross Profit.
Cost of services decreased 5.7%, or $8.5 million, for the fifty-two week period ended December 28, 2019 as compared to the comparable prior
year period. Cost of services decreased due to the decrease in revenue. Cost of services as a percentage of revenue for the fifty-two week periods ended December 28, 2019 and December 29, 2018 were 74.6% and 75.4%, respectively. See Segment
Discussion for further information regarding changes in cost of services and gross profit.
Selling, General and Administrative.
Selling, general and administrative (“SGA”) expenses were $40.4 million for both the fifty-two week periods ended December 28, 2019 and
December 29, 2018. As a percentage of revenue, SGA expenses were 21.1% for the fifty-two week period ended December 28, 2019 and 20.2% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Severance, Professional Fees and Other Charges
. The Company did not incur any comparative severance, professional fees and other charges for the fifty-two week period ended
December 28, 2019 as compared to $1.6 million for the fifty-two week period ended December 29, 2018. The fiscal 2018 charges include severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of
certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.7 million incurred related to transactional financial advisory fees, legal fees associated with defending a frivolous lawsuit by a competitor
of the Company, professional fees associated with the acquisition of Thermal Kinetics and search fees associated with hiring a senior executive.
Tax Credit Professional Fees
. The Company incurred de minimis tax credit professional fees in the fifty-two week period ended December 28, 2019 as compared to $0.4 million in the
comparable prior year period.
Other Expense.
Other expense consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income imputed interest on
contingent consideration and gains and losses on foreign currency transactions. Other expense, net increased to $1.7 million as compared to $1.5 million for the comparable prior year period. The primary component of the increase was interest
expense which increased due to increased borrowings under the Company’s line of credit. The primary reason for the increased borrowing was to fund the Company’s increase in accounts receivable during the fifty-two week period ended December 28,
2019, as compared to the comparable prior year period.
Income Tax Expense
. The Company recognized $0.8 million of income tax expense for the fifty-two week period ended December 28, 2019, as compared to $1.2 million for the
comparable prior year period. The Company recognized a tax benefit of $0.7 million in fiscal 2019 due to settlements with the U.S. Internal Revenue Service and state New Jersey regarding research and development tax credits generated in prior years.
Otherwise, the consolidated effective income tax rate for the current period was 29.6% as compared to 30.5% for the comparable prior year period. Not including the research and development tax credits and other discrete tax adjustments in fiscal
2018, the Company has income tax rates as of December 28, 2019 of approximately 28.0%, 26.5% and 15.0% in the United States, Canada and Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall
effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018 (Continued)
Segment Discussion
Engineering
Engineering revenues of $67.9 million for the fifty-two week period ended December 28, 2019 decreased 21.1%, or $18.2 million, as compared to the comparable prior year period. The decrease was principally due to a
decrease of $7.7 million from the Company’s Energy Services Group, a decrease of $7.7 million from the Company’s Canadian Power Systems Group, and a decrease of $2.8 million from the Company’s Aerospace Group, partially offset by an increase of $1.9
million from the TKE acquisition. The Company attributes these revenue declines to decreased spending on the part of its Canadian Power Systems and Aerospace clients, increased competition from other vendors to its Canadian Power Systems clients,
and timing of large projects from the Company’s Energy Services clients. Gross profit decreased by 18.2%, or $4.1 million, as compared to the comparable prior year period. Gross profit decreased primarily because of the decrease in revenue. Gross
margin of 27.2% for the current period increased from 26.2% for the comparable prior year period. The increase in gross margin was primarily due to a concerted effort to improve utilization of the Engineering segment’s billable consultants. The
Engineering segment operating income decreased by $1.7 million to $3.7 million for the fifty-two week period ended December 28, 2019, as compared to $5.4 million for the comparable prior year period. The decrease in operating income was primarily due
to the decreases in revenue and gross profit and offset by a decrease of $2.4 million to SGA expense. The decrease in SGA expense was primarily due to a concerted effort to reduce expenses to an efficient level commensurate with current revenue and
gross profit and a lower allocation of corporate-generated SGA expense relative to the Company’s other two segments.
Specialty Health Care
Specialty Health Care revenue of $89.3 million for the fifty-two week period ended December 28, 2019 increased 6.8%, or $5.7 million, as compared to the comparable prior year period. The increase was primarily driven
by increases of $7.2 million from the New York City office, and $3.2 million from the Honolulu office, offset by decreases of $2.2 million from the travel nursing staffing group, $0.7 million from the Chicago office, $0.6 million from the HIM
practice, $0.5 million from the Locum Tenens Group and $0.2 million from the Permanent Placement Group. The primary reason for revenue increases in New York City and Hawaii was the incremental addition of paraprofessionals billed on school contracts.
The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment’s gross profit increased by 11.1%, or $2.1 million, to $20.9
million for the fifty-two week period ended December 28, 2019, as compared to $18.8 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenue. Gross profit margin for the fifty-two week period
ended December 28, 2019 increased to 23.4% as compared to 22.5% for the comparable prior year period. The Company primarily attributes the increase in gross profit margin to bill rate increases on certain major school contracts. Specialty Health Care
experienced operating income of $2.9 million for the fifty-two week period ended December 28, 2019, as compared to $1.9 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to revenue
and gross profit. SGA expense increased by $1.1 million to $17.6 million, as compared to $16.5 million in the comparable prior year period. The increase in SGA expense was primarily due to the need to increase SGA infrastructure expense to support
the increased activity levels associated with higher revenue and a higher allocation of corporate-generated SGA expense.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018 (Continued)
Segment Discussion (Continued)
Information Technology
Information Technology revenue of $33.9 million for the fifty-two week period ended December 28, 2019 increased 10.7%, or $3.3 million, as compared to $30.6 million for the comparable prior year period. The Company
experienced increases to revenue from most of its Information Technology business lines. The Company attributes these increases to investments in management and sales personnel. Gross profit of $9.2 million for the fifty-two week period ended
December 28, 2019 increased 16.6%, or $1.3 million, as compared to $7.9 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenue. The Information Technology gross profit margin for the
fifty-two week period ended December 28, 2019 was 27.2% as compared to 25.9% for the comparable prior year period. The Company attributes the gross margin increase to higher utilization of the Information Technology’s fixed labor consultants. SGA
expense increased by $1.3 million to $9.1 million. The increase in SGA expense was primarily due to increased investments in management and sales personnel and a higher allocation of corporate-generated SGA expense. The Information Technology segment
experienced a negligible increase to operating income as the increase in gross profit approximately offset the increase in SGA expense.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018 (Continued)
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP measures, which adjust for the categories of expenses described below, primarily changes in contingent consideration as a result of re-measurement in the amount of contingent consideration we
expect to pay with respect to past acquisitions, are non-GAAP financial measures. Our management believes that these non-GAAP financial measures (“EBITDA” and “Adjusted EBITDA”) are useful information for investors, shareholders and other
stakeholders of our company in gauging our results of operations on an ongoing basis and to enhance investors’ overall understanding of our current financial performance and period-to-period comparisons. We believe that both EBITDA and Adjusted
EBITDA are performance measures and not liquidity measures, and therefore a reconciliation between net income and EBITDA and Adjusted EBITDA has been provided. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net income
as an indicator of performance. In addition, neither EBITDA nor Adjusted EBITDA takes into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these
non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
The following unaudited table presents the Company's GAAP Net Income measure and the corresponding adjustments used to calculate “EBITDA” and “Adjusted EBITDA” for the fifty-two week periods ended December 28, 2019 and
December 29, 2018.
|
Fifty-Two Week Periods Ended
|
||||
|
December 28, 2019
|
December 29,
2018
|
|||
|
GAAP net income
|
$4,058
|
$2,715
|
||
|
Income tax expense
|
764
|
1,193
|
||
|
Interest expense
|
1,695
|
1,367
|
||
|
Imputed interest on contingent consideration
|
61
|
104
|
||
|
Depreciation of property and equipment
|
1,261
|
1,442
|
||
|
Amortization of acquired intangible assets
|
327
|
125
|
||
|
EBITDA (non-GAAP)
|
$8,166
|
$6,946
|
||
|
Adjustments
|
||||
|
Severance, professional fees, office closures
and other charges
|
-
|
1,571
|
||
|
Tax credit professional fees
|
47
|
371
|
||
|
Loss on foreign currency transactions
|
(11
|
)
|
36
|
|
|
Adjusted EBITDA (non-GAAP)
|
$8,202
|
$8,924
|
||
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources
The following table summarizes the major captions from the Company’s Consolidated Statements of Cash Flows
($ in thousands):
|
Fiscal Years Ended
|
|||||
|
December 28,
2019
|
December 29,
2018
|
||||
|
Cash (used in) provided by:
|
|||||
|
Operating activities
|
($4,778
|
)
|
($64
|
)
|
|
|
Investing activities
|
($363
|
)
|
($2,583
|
)
|
|
|
Financing activities
|
$6,627
|
$346
|
|||
Operating Activities
Operating activities used $4.8 million of cash for the fifty-two week period ended December 28, 2019 as compared to $0.1 million in the comparable prior year period. The major components of cash used in or provided by
operating activities in the fifty-two week period ended December 28, 2019 and the comparable prior year period are as follows: net income and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid
expenses and other current assets, accounts payable and accrued expenses and accrued payroll and related costs.
Net income for the fifty-two week period ended December 28, 2019 was $4.1 million as compared to $2.7 million for the comparable prior year period. An increase in accounts receivables in the fifty-two week period
ended December 28, 2019 used $7.6 million of cash as compared to $7.7 million in the comparable prior year period. The Company attributes the increase in accounts receivables for the fifty-two week period ended December 28, 2019 to several different
clients in both its Engineering and Specialty Health Care segments that experienced temporary delays in its approval and payment processes. The Company anticipates that its accounts receivable balance relative to revenue will improve during the
first quarter of fiscal 2020.
The Company’s transit accounts payable usually exceeds the Company’s transit accounts receivable, but absolute amounts and differences fluctuate significantly from quarter to quarter in the normal course of business.
The net of transit accounts payable and transit accounts receivable was a net receivable of $0.3 million as of December 28, 2019 and negligible as of December 29, 2018, using $0.3 million of cash during the fifty-two week period ended December 28,
2019. The net of transit accounts payable and transit accounts receivable was a net receivable of $0.1 million and a net payable of $1.7 million as of December 29, 2018 and December 30, 2017, respectively, the cash impact during the fifty-two week
period ended December 29, 2018 used $1.8 million in cash.
Prepaid expenses and other current assets used $0.6 million of cash for the fifty-two week period ended December 28, 2019 as compared to using $0.2 million of cash for the comparable prior year period. The Company
attributes changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of business.
A decrease in accounts payable and accrued expenses used $3.1 million for the fifty-two week period ended December 28, 2019 as compared to providing $1.0 million of cash for the comparable prior year period. The
Company attributes these changes to general timing of payments to vendors in the normal course of business.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
Changes in accrued payroll and related costs used $1.3 million for the fifty-two week period ended December 28, 2019 as compared to providing $1.3 million for the fifty-two week period December 29, 2018. There are
three primary factors that generally impact accrued payroll and related costs: 1) there is a general correlation to operating expenses as payroll and related costs is the Company’s largest expense group, so as operating costs increase or decrease,
absent all other factors, so will the accrued payroll and related costs; 2) the Company pays the majority of its payroll every two weeks and normally has thirteen weeks in a fiscal quarter, which means that the Company normally has a major payroll on
the last business day of every other quarter; and 3) most of the Company’s senior management participate in annual incentive plans and while progress advances are sometimes made during the fiscal year, these accrued bonus balances, to the extent they
are projected to be achieved, generally accumulate throughout the year. A significant portion of these incentive plan accruals are typically paid at the beginning of one fiscal year, pertaining to the prior fiscal year. The Company’s last major
payroll for the fifty-two week period ended December 28, 2019 was paid on December 20, 2019. Additionally, the Company accrued $0.8 million as of December 29, 2018 for severance and other benefits for its former CEO that terminated in fiscal 2018.
The entire balance was paid in fiscal 2019.
Investing Activities
Investing activities used cash of $0.4 million and $2.6 million for the fifty-two week periods ended December 28, 2019 and December 29, 2018, respectively. Investing activities included expenditures for property and
equipment of $0.4 million and $1.5 million for the current and comparable prior year period, respectively. The decrease was due to an abnormally high outlay for software in fiscal 2018. The Company spent $1.1 million on the TKE acquisition in fiscal
2018 and did not make any acquisitions in fiscal 2019.
Financing Activities
Financing activities provided $6.7 million of cash for the fifty-two week period ended December 28, 2019 as compared to $0.3 million in the comparable prior year period. The Company made net borrowings under its line
of credit of $7.2 million during the fifty-two week period ended December 28, 2019 as compared to net borrowings of $0.3 million in the comparable prior year period. The primary reason for net borrowings during the fifty-two week period ended
December 28, 2019 was to fund the $7.6 million increase in accounts receivable. The Company generated cash of $0.3 million from sales of shares from its equity plans for the current period and $0.4 million for the comparable prior year period. The
Company paid $0.6 million in contingent consideration during the fifty-two week period ended December 28, 2019, as compared to $0.3 million in the comparable prior year period.
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility provides for a $45.0
million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered
Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility
that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the fifty-two week period ended December 28, 2019 was 4.4%.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility contains
various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of December 28, 2019, the Company was in compliance with all covenants contained in the Revolving
Credit Facility.
Borrowings under the line of credit as of December 28, 2019 and December 29, 2018 were $34.8 million and $27.5 million, respectively. At December 28, 2019 and December 29, 2018 there were letters of credit outstanding
for $1.6 million. At December 28, 2019, the Company had availability for additional borrowings under the Revolving Credit Facility of $8.6 million.
Dividends
All restricted share units contain a dividend equivalent provision entitling holders to dividends paid between the restricted stock unit grant date and ultimate share distribution date. Total accrued dividends as of
December 28, 2019 were $40,000 and are eligible to be paid in fiscal 2020. Dividends on any forfeited restricted share units will be forfeited.
While the Company, at this time, has no plans to issue any future dividends, any future payment of dividends will depend upon, among other things, the Company’s earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions, and other factors that the Board of Directors deems relevant. The Revolving Credit Facility (as discussed above) prohibits the payment of any dividends or distributions on account of the Company’s
capital stock without the prior consent of the majority of the Company’s lenders.
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future
acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from
time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the
results of operations.
The Company’s business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition
candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. As the size of the Company and its financial resources increase however,
acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as
to the Company’s future acquisition and expansion opportunities or how such opportunities will be financed.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Commitments and Contingencies (Continued)
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer
started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of December 28, 2019 and December 29, 2018, the total amount of outstanding
receivables from this customer on these disputed projects was $14.1 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has
asserted counter-claims. While the total amount of asserted counter-claims is unknown as of December 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are
retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce
the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will
conclude prior to reporting its first quarter of fiscal 2020 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a
portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company utilizes SAP software for its financial reporting and accounting system which was implemented in 1999 and has not undergone significant upgrades since its initial implementation. The Company believes that
it will become necessary to upgrade or replace its SAP financial reporting and accounting system at some point in the future and anticipates a comprehensive review of the system may take place during fiscal 2020. The Company has not determined when
this contemplated replacement may be necessary. The Company estimates this upgrade or replacement of their financial reporting and accounting system will cost between $0.5 million and $1.0 million. These estimates are subject to material change.
The Company’s current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the
normal course of business for at least the next 12 months.
The Company leases office facilities and various equipment under non-cancelable leases expiring at various dates through May 2024. Certain leases are subject to escalation clauses based upon changes in various
factors.
Maturities of lease liabilities are as follows:
|
Fiscal Year Ending
|
Operating Leases
|
Finance
Leases
|
||
|
2020
|
$2,334
|
$322
|
||
|
2021
|
1,760
|
169
|
||
|
2022
|
1,301
|
23
|
||
|
2023
|
886
|
-
|
||
|
Thereafter
|
186
|
-
|
||
|
Total lease payments
|
6,467
|
514
|
||
|
Less: imputed interest
|
(412
|
)
|
(10
|
)
|
|
Total
|
$6,055
|
$504
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Future Contingent Payments
As of December 28, 2019, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective October 1, 2017, the Company acquired all of
the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018 the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company
estimates future contingent payments at December 28, 2019 as follows:
|
Fiscal Year Ending
|
Total
|
|
January 2, 2021
|
$344
|
|
January 1, 2022
|
1,438
|
|
December 31, 2022
|
1,276
|
|
Estimated future contingent consideration payments
|
$3,058
|
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions after
December 28, 2019 are capped at a cumulative maximum of $6.3 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of December 28, 2019.
During the fifty-two week period ended December 28, 2019, the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3) with changes in
fair value recorded in other (expense) income, net.
Significant employment agreements are as follows:
Executive Severance Agreements
The Company is a party to an Executive Severance Agreement (the “Executive Severance Agreement”) with
each of
Bradley S
.
Vizi, the Company
'
s Executive Chairman and President
(
dated as of June 1,
2018), and Kevin Miller,
the Company’s Chief Financial Officer (dated as of February 28, 2014, as
amended)
which sets forth the terms and conditions of certain payments to be made by the Company to executive in the event that, while employed by the Company, (a) the Executive
experiences a
termination of employment unrelated to a “Change in Control” (as defined therein) or (b) there occurs a Change in Control and
either (i) the Executive
’s
employment is terminated
for a reason related to
the Change in Control or (ii) in the case of Mr. Miller, Mr. Miller remains continuously employed with the Company for three months
following
the Change in Control.
Under the terms of the Executive Severance Agreement, if either (a)
the Executive
is involuntarily terminated by the Company for any reason other
than “Cause” (as defined therein), “Disability” (as defined therein) or death, or (b)
the Executive
resigns for “Good Reason” (as defined therein), and, in each case, the termination is not a
“Termination Related to a Change in Control” (as defined below),
the Executive
will receive the following severance payments: (i) an amount equal to 1.5 times the sum of (a)
the
Executive
’s annual base salary as in effect immediately prior to the termination date (before taking into account any reduction that constitutes Good Reason) (“Annual Base Salary”) and (b) the highest annual bonus paid to
the Executive
in any of the three fiscal years immediately preceding his termination date (“Bonus”), to be paid in installments over the twelve month period following
the
Executive
’s termination date; and (ii) for a period of eighteen months following
the Executive
’
s termination date, a monthly payment
equal to the monthly COBRA premium that
the Executive
is required to pay to continue medical, vision, and dental coverage, for himself and, where applicable, his spouse and eligible dependents.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Future Contingent Payments (Continued)
Executive Severance Agreements (Continued)
Notwithstanding the above, if
the Executive
has a termination as described above and can reasonably demonstrate that such termination would constitute a Termination
Related to a Change in Control, and a Change in Control occurs within 120 days following
the Executive
’s termination date,
the Executive
will be
entitled to receive the payments set forth below for a Termination Related to a Change in Control, less any amounts already paid to
the Executive
, upon consummation of the Change in Control.
Under the terms of the Executive Severance Agreement, if a Change in Control occurs and
(a) the Executive
experiences a Termination Related to a
Change in Control on account of (i) an involuntary termination by the Company for any reason other than Cause, death, or Disability, (ii) an involuntary termination by the Company within twelve months
(for Mr. Vizi) or three
months (for Mr. Miller)
following a Change in Control on account of Disability or death, or (iii) a resignation by the Executive with Good Reason
; or (b) in the
case of Mr. Miller, a resignation by Mr. Miller, with or without Good Reason, which results in a termination date that is the last day of the three month period following a Change in Control, then the Executive
will receive
the following severance payments: (1) a lump sum payment equal to two times the sum of
the Executive
’s (a) Annual Base Salary and (b) Bonus; and (2) a lump sum payment equal to twenty-four multiplied
by the monthly COBRA premium cost, as in effect immediately prior to
the Executive
’s termination date, for
the Executive
to continue medical, dental and
vision coverage, as applicable, in such Company plans for himself and, if applicable, his spouse and eligible dependents. Upon the occurrence of a Change in Control, the Company shall establish an irrevocable rabbi trust and contribute to the rabbi
trust the applicable amounts due under the Executive Severance Agreements.
Mr. Miller’s Executive Severance Agreement provides that if Mr. Miller remains continuously employed for three months following a Change in Control and is employed by the Company on the last day
of such specified period, Mr. Miller will receive a lump sum payment equal to two times the sum of his (a) Annual Base Salary and (b) Bonus (the “Change in Control Payment”). If Mr. Miller receives the Change in Control Payment, he will not be
eligible to receive any severance payments under his Executive Severance Agreement.
Mr. Petraglia and Mr. Saks, along with several other members of the Company’s senior management (not including Mr. Vizi), are covered by our Change in Control Plan for Selected Executive Management (the “CIC Plan”).
Off-Balance Sheet Arrangements
None.
Impact of Inflation
Consulting, staffing, and project services are generally priced based on mark-ups on prevailing rates of pay, and as a result are able to generally maintain their relationship to direct labor costs. Permanent
placement services are priced as a function of salary levels of the job candidates.
The Company’s business is labor intensive; therefore, the Company has a high exposure to increasing health care benefit costs. The Company attempts to compensate for these escalating costs in its business cost models
and customer pricing by passing along some of these increased health care benefit costs to its customers and employees, however, the Company has not been able to pass on all increases. The Company is continuing to review its options to further
control these costs, which the Company does not believe are representative of general inflationary trends. Otherwise, inflation has not been a meaningful factor in the Company’s operations.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
|
RESULTS OF OPERATIONS (CONTINUED)
|
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326).
The new standard amends guidance on reporting credit losses for assets held at
amortized cost basis and available-for-sale debt securities. In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842),
which amends the effective date of the original pronouncement for smaller
reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes
financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740)
, which enhances and simplifies various aspects of the income tax accounting guidance, including
requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for
public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
|
ITEM 7A.
|
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 the 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 December 28, 2019, the Company’s investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its
exposure to interest rate changes. Based on the Company’s variable-rate line of credit balances during the fifty-two week period ended December 28, 2019, if the interest rate on the Company’s variable-rate line of credit (using an incremental
borrowing rate) during the period had been 1.0% higher, the Company’s interest expense on an annualized basis would have increased by $0.4 million. The Company does not expect any material loss with respect to its investment portfolio.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements, together with the report of the Company’s Independent Registered Public Accounting Firm, begins on page F-1.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
|
|
FINANCIAL DISCLOSURE
|
None.
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure
controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 28, 2019 based upon criteria in Internal Control-Integrated Framework issued and updated in fiscal
2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that the company’s internal control over financial reporting was effective as of December 28, 2019, based on the
criteria in Internal Control-Integrated Framework issued by COSO.
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.
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
|
PART III
|
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by Item 10 shall be included in the 2020 Proxy Statement and is incorporated herein by reference.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The information required by Item 11 shall be included in the 2020 Proxy Statement and is incorporated herein by reference.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
|
AND RELATED STOCKHOLDER MATTERS
|
Except as set forth below, the information required by Item 12 shall be included in the 2020 Proxy Statement and is incorporated herein by reference.
The table below presents certain information concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the
Company’s shareholders.
|
Plan category
|
Number of securities to
be potentially issued
upon realization of
restricted stock units
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
issuance under equity
compensation plans,
excluding securities
reflected in column (a)
|
|
(a)
|
(b)
|
(c)
|
|
|
391,725
(1)
|
N/A
|
268,326
|
|
|
Equity compensation plans not approved by
security holders
|
____________________
|
____________________
|
____________________
|
|
Total
|
391,725
(1)
|
N/A
|
268,326
|
(1)
Includes time-based stock units of 151,725 and performance-based restricted stock units of 240,000, none of which have an exercise price.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
|
|
INDEPENDENCE
|
The information required by Item 13 shall be included in the 2020 Proxy Statement and is incorporated herein by reference.
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by Item 14 shall be included in the 2020 Proxy Statement and is incorporated herein by reference.
|
PART IV
|
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
1. and 2. Financial Statement Schedules
-- See “Index to Financial Statements and Schedules” on F-1.
|
||
|
3.
See Item (b) below.
|
|||
|
(b)
|
Exhibits
|
||
|
+
|
Asset Purchase Agreement, dated November 8, 2018, by and among RCM Technologies (USA), Inc., Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC, as Sellers, certain members of Sellers, and,
solely for purposes of being bound by the Parent Guarantee (as defined therein) in such agreement, RCM Technologies, Inc.; incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 15, 2018.
|
||
|
Articles of Incorporation, as amended; incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 1994, filed with the Securities and Exchange
Commission on January 4, 1995.
|
|||
|
Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated February 6, 1996, filed with the Securities and Exchange Commission on
January 29, 1996.
|
|||
|
Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit B to the Registrant’s Proxy Statement, dated February 6, 1996, filed with the Securities and Exchange Commission on
January 29, 1996.
|
|||
|
Amended and Restated Bylaws; incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 23, 2014 (the “January 2014
8-K”).
|
|||
|
Description of Common Stock. (Filed herewith)
|
|||
|
*
|
RCM Technologies, Inc. 2000 Employee Stock Incentive Plan, dated January 6, 2000; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated March 3, 2000, filed with the Securities and
Exchange Commission on February 28, 2000.
|
||
|
*
|
The RCM Technologies, Inc. 2007 Omnibus Equity Compensation Plan; incorporated by reference to Annex A to the Registrant’s Proxy Statement, dated April 20, 2007, filed with the Securities and Exchange
Commission on April 19, 2007.
|
||
|
*
|
Executive Severance Agreement between RCM Technologies, Inc. and Kevin Miller dated December 27, 2012; incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated December 27,
2012, filed with the Securities and Exchange Commission on December 28, 2012.
|
||
|
*
|
Amendment No. 1 to Executive Severance Agreement between RCM Technologies, Inc. and Kevin Miller dated December 26, 2017; incorporated by reference to Exhibit 10(x) to the Registrant’s Annual Report on Form
10-K for this fiscal year ended December 29, 2018, filed with the Securities and Exchange Commission on March 8, 2018.
|
||
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
|
|
(b)
|
Exhibits (Continued)
|
||
|
*
|
RCM Technologies, Inc. Amended and Restated 2014 Omnibus Equity Compensation Plan; incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement for the 2016 Annual Meeting filed with
the Securities and Exchange Commission on October 28, 2016.
|
||
|
*
|
Form of Stock Unit Agreement; incorporated by reference to Exhibit 99.2 to the December 2014 8-K.
|
||
|
*
|
RCM Technologies, Inc. Change in Control Plan for Selected Executive Management (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 12,
2015 and incorporated herein by reference).
|
||
|
*
|
Amendment 2015-3 to the RCM Technologies, Inc. 2001 Employee Stock Purchase Plan; incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting filed with the
Securities and Exchange Commission on October 30, 2015.
|
||
|
*
|
Amendment 2018-4 to the RCM Technologies, Inc. 2001 Employee Stock Purchase Plan; incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 18, 2018.
|
||
|
*
|
Executive Severance Agreement, dated as of June 1, 2018, by and between the Company and Bradley S. Vizi; incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 7, 2018.
|
||
|
Third Amended & Restated Loan and Security Agreement, dated as of August 9, 2018, by and among the Company and all of its subsidiaries, Citizens Bank of Pennsylvania, a Pennsylvania state chartered bank, in
its capacity as administrative agent and arranger, and Citizens Bank of Pennsylvania, as lender; incorporated by reference to Exhibit 10(d) to the Registrant’s Quarterly Report on Form 10-Q for this fiscal quarter ended June 30, 2018, filed
with the Securities and Exchange Commission on August 14, 2018.
|
|||
|
First Amendment to Third Amended and Restated Loan Agreement, dated as of August 9, 2018, by and among the Company and all of its subsidiaries, and Citizens Bank, N.A., a national banking association (as
successor by merger to Citizens Bank of Pennsylvania), in its capacities as lender and as administrative agent and arranger; incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 22, 2019.
|
|||
|
Subsidiaries of the Registrant. (Filed herewith)
|
|||
|
Consent of Macias, Gini & O’Connell, LLP. (Filed herewith)
|
|||
|
Consent of EisnerAmper LLP. (Filed herewith)
|
|||
|
Certifications of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (Filed herewith)
|
|||
|
Certifications of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (Filed herewith)
|
|||
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
|
|
(b)
|
Exhibits (Continued)
|
||
|
Certifications 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.) (Furnished herewith)
|
|||
|
Certifications 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.) (Furnished herewith)
|
|||
|
101.INS
|
XBRL Instance Document (Filed herewith)
|
||
|
101.SCH
|
XBRL Taxonomy Extension Schema Document (Filed herewith)
|
||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document (Filed herewith)
|
||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document (Filed herewith)
|
||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Documents (Filed herewith)
|
||
|
101.DEF
|
XBRL Taxonomy Definition Linkbase Document (Filed herewith)
|
||
|
*
|
Constitutes a management contract or compensatory plan or arrangement.
|
||
|
+
|
The Registrant will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
|
||
|
ITEM 16.
|
FORM 10-K SUMMARY
|
None.
|
SIGNATURES
|
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|||
|
By:
|
/s/ Bradley S. Vizi
|
||
|
Bradley S. Vizi
|
|||
|
Executive Chairman and President
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Kevin D. Miller
|
|
|
Kevin D. Miller
|
|||
|
Chief Financial Officer, Treasurer and Secretary
|
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Date: March 5, 2020
|
By:
|
/s/ Bradley S. Vizi
|
|
|
Bradley S. Vizi
|
|||
|
Executive Chairman and President
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Kevin D. Miller
|
|
|
Kevin D. Miller
|
|||
|
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Roger H. Ballou
|
|
|
Roger H. Ballou
|
|||
|
Director
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Richard A. Genovese
|
|
|
Richard A. Genovese
|
|||
|
Director
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Swarna Kakodkar
|
|
|
Swarna Kakodkar
|
|||
|
Director
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ Leon Kopyt
|
|
|
Leon Kopyt
|
|||
|
Founder and Chairman Emeritus
|
|||
|
Date: March 5, 2020
|
By:
|
/s/ S. Gary Snodgrass
|
|
|
S. Gary Snodgrass
|
|||
|
Director
|
|
RCM TECHNOLOGIES, INC.
|
|
FORM 10-K
|
|
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
|
|
Page
|
|
|
Consolidated Balance Sheets, December 28, 2019 and December 29, 2018
|
F-2
|
|
Consolidated Statements of Income, Fiscal Years Ended December 28, 2019 and
December 29, 2018
|
F-3
|
|
Consolidated Statements of Comprehensive Income, Fiscal Years Ended
December 28, 2019 and December 29, 2018
|
F-4
|
|
Consolidated Statements of Changes in Stockholders’ Equity, Fiscal Years Ended
December 28, 2019 and December 29, 2018
|
F-5
|
|
Consolidated Statements of Cash Flows, Fiscal Years Ended December 28, 2019
and December 29, 2018
|
F-6
|
|
Notes to Consolidated Financial Statements
|
F-7
|
|
Report of Independent Registered Public Accounting Firm
|
F-38
|
|
Schedule II
|
F-40
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 2019 and December 29, 2018
(Amounts in thousands, except share and per share amounts, unless otherwise indicated)
|
|
December 28,
|
December 29,
|
|||||
|
2019
|
2018
|
|||||
|
Current assets:
|
||||||
|
Cash and cash equivalents
|
$1,847
|
$482
|
||||
|
Accounts receivable, net
|
59,760
|
52,335
|
||||
|
Transit accounts receivable
|
4,906
|
2,569
|
||||
|
Prepaid expenses and other current assets
|
4,144
|
3,425
|
||||
|
Total current assets
|
70,657
|
58,811
|
||||
|
Property and equipment, net
|
2,717
|
3,485
|
||||
|
Other assets:
|
||||||
|
Deposits
|
209
|
214
|
||||
|
Goodwill
|
16,354
|
17,532
|
||||
|
Operating right of use asset
|
5,820
|
-
|
||||
|
Intangible assets, net
|
416
|
743
|
||||
|
Deferred tax assets, net, domestic
|
-
|
725
|
||||
|
Total other assets
|
22,799
|
19,214
|
||||
|
Total assets
|
$96,173
|
$81,510
|
||||
|
Current liabilities:
|
|||||||
|
Accounts payable and accrued expenses
|
$6,220
|
$9,969
|
|||||
|
Transit accounts payable
|
4,552
|
2,506
|
|||||
|
Accrued payroll and related costs
|
7,713
|
9,028
|
|||||
|
Finance lease payable
|
315
|
-
|
|||||
|
Income taxes payable
|
130
|
97
|
|||||
|
Operating right of use liability
|
2,134
|
-
|
|||||
|
Liability for contingent consideration from acquisitions
|
344
|
1,588
|
|||||
|
Total current liabilities
|
21,408
|
23,188
|
|||||
|
Deferred tax liability, foreign
|
382
|
398
|
|||||
|
Deferred tax liability, net, domestic
|
395
|
-
|
|||||
|
Finance lease payable
|
189
|
-
|
|||||
|
Liability for contingent consideration from acquisitions
|
2,714
|
3,185
|
|||||
|
Operating right of use liability
|
3,921
|
-
|
|||||
|
Borrowings under line of credit
|
34,761
|
27,540
|
|||||
|
Total liabilities
|
63,770
|
54,311
|
|||||
|
Commitments and contingencies (note 16)
|
|||||||
|
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;
|
|||||||
|
15,826,891 shares issued and 13,003,719 shares outstanding at
December 28, 2019 and 15,578,345 shares issued and 12,755,173 shares outstanding at December 29, 2018
|
791
|
778
|
|||||
|
Additional paid-in capital
|
108,452
|
107,326
|
|||||
|
Accumulated other comprehensive loss
|
(2,748
|
)
|
(2,755
|
)
|
|||
|
Accumulated deficit
|
(59,105
|
)
|
(63,163
|
)
|
|||
|
Treasury stock (2,823,172 shares at December 28, 2019 and
at December 29, 2018) at cost
|
(14,987
|
)
|
(14,987
|
)
|
|||
|
Stockholders’ equity
|
32,403
|
27,199
|
|||||
|
Total liabilities and stockholders’ equity
|
$96,173
|
$81,510
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except per share amounts, unless otherwise indicated)
|
|
December 28,
2019
|
December 29,
2018
|
||||
|
Revenues
|
$191,100
|
$200,352
|
|||
|
Cost of services
|
142,508
|
151,042
|
|||
|
Gross profit
|
48,592
|
49,310
|
|||
|
Operating costs and expenses
|
|||||
|
Selling, general and administrative
|
40,390
|
40,386
|
|||
|
Depreciation and amortization of property and equipment
|
1,261
|
1,442
|
|||
|
Amortization of acquired intangible assets
|
327
|
125
|
|||
|
Severance, professional fees and other charges
|
-
|
1,571
|
|||
|
Tax credit professional fees
|
47
|
371
|
|||
|
Operating costs and expenses
|
42,025
|
43,895
|
|||
|
Operating income
|
6,567
|
5,415
|
|||
|
Other (expense) income
|
|||||
|
Interest expense and other, net
|
(1,695
|
)
|
(1,367
|
)
|
|
|
Imputed interest on contingent consideration
|
(61
|
)
|
(104
|
)
|
|
|
Gain (loss) on foreign currency transactions
|
11
|
(36
|
)
|
||
|
Other expense, net
|
(1,745
|
)
|
(1,507
|
)
|
|
|
Income before income taxes
|
4,822
|
3,908
|
|||
|
Income tax expense
|
764
|
1,193
|
|||
|
Net income
|
$4,058
|
$2,715
|
|||
|
Basic and diluted net income per share
|
$0.31
|
$0.22
|
|||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands unless otherwise indicated)
|
|
December 28,
|
December 29,
|
|||
|
2019
|
2018
|
|||
|
Net income
|
$4,058
|
$2,715
|
||
|
Other comprehensive income (loss)
|
7
|
(360
|
)
|
|
|
Total comprehensive income
|
$4,065
|
$2,355
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Amounts in thousands, except share amounts, unless otherwise indicated)
|
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated
Deficit
|
Treasury Stock
|
Total
|
|||||||||||
|
Issued
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
|
Balance, December 30, 2017
|
15,017,522
|
$751
|
$104,540
|
($2,395
|
)
|
($65,878
|
)
|
2,823,172
|
($14,987
|
)
|
$22,031
|
|||||
|
Issuance of stock under
employee stock purchase plan
|
90,877
|
4
|
381
|
-
|
-
|
-
|
-
|
385
|
||||||||
|
Translation adjustment
|
-
|
-
|
-
|
(360
|
)
|
-
|
-
|
-
|
(360
|
)
|
||||||
|
Issuance of stock upon vesting
of restricted share units
|
29,195
|
1
|
(1
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Share based compensation expense
|
-
|
-
|
544
|
-
|
-
|
-
|
-
|
544
|
||||||||
|
Accrued dividends forfeited
|
-
|
-
|
6
|
-
|
-
|
-
|
-
|
6
|
||||||||
|
Common stock issued for acquisition
|
440,751
|
22
|
1,856
|
-
|
-
|
-
|
-
|
1,878
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
2,715
|
-
|
-
|
2,715
|
||||||||
|
Balance, December 29, 2018
|
15,578,345
|
$778
|
$107,326
|
($2,755
|
)
|
($63,163
|
)
|
2,823,172
|
($14,987
|
)
|
$27,199
|
|||||
|
Issuance of stock under
employee stock purchase plan
|
118,526
|
6
|
315
|
-
|
-
|
-
|
-
|
321
|
||||||||
|
Translation adjustment
|
-
|
-
|
-
|
7
|
-
|
-
|
-
|
7
|
||||||||
|
Issuance of stock upon vesting
of restricted share units
|
130,020
|
7
|
(7
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Share based compensation expense
|
-
|
-
|
806
|
-
|
-
|
-
|
-
|
806
|
||||||||
|
Accrued dividends forfeited
|
-
|
-
|
12
|
-
|
-
|
-
|
-
|
12
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
$4,058
|
-
|
-
|
$4,058
|
||||||||
|
Balance, December 28, 2019
|
15,826,891
|
$791
|
$108,452
|
($2,748
|
)
|
($59,105
|
)
|
2,823,172
|
($14,987
|
)
|
$32,403
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands unless otherwise indicated)
|
|
December 28,
2019
|
December 29,
2018
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$4,058
|
$2,715
|
||||||
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
||||||||
|
Depreciation and amortization
|
1,588
|
1,567
|
||||||
|
Changes in contingent consideration
|
61
|
47
|
||||||
|
Share-based compensation expense
|
806
|
544
|
||||||
|
Provision for losses on accounts receivable
|
322
|
1,106
|
||||||
|
Deferred income tax (benefit) expense
|
1,104
|
1,430
|
||||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable
|
(7,626
|
)
|
(7,681
|
)
|
||||
|
Transit accounts receivable
|
(2,311
|
)
|
392
|
|||||
|
Prepaid expenses and other current assets
|
(645
|
)
|
(170
|
)
|
||||
|
Accounts payable and accrued expenses
|
(3,085
|
)
|
1,021
|
|||||
|
Transit accounts payable
|
2,018
|
(2,108
|
)
|
|||||
|
Accrued payroll and related costs
|
(1,342
|
)
|
1,335
|
|||||
|
Right of use assets and liabilities
|
236
|
-
|
||||||
|
Income taxes payable
|
38
|
(262
|
)
|
|||||
|
Total adjustments
|
(8,836
|
)
|
(2,779
|
)
|
||||
|
Net cash used in operating activities
|
(4,778
|
)
|
(64
|
)
|
||||
|
Cash flows from investing activities:
|
||||||||
|
Property and equipment acquired
|
(367
|
)
|
(1,518
|
)
|
||||
|
Decrease in deposits
|
4
|
1
|
||||||
|
Cash payments for business acquired
|
-
|
(1,066
|
)
|
|||||
|
Net cash used in investing activities
|
(363
|
)
|
(2,583
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Borrowings under line of credit
|
95,554
|
90,329
|
||||||
|
Repayments under line of credit
|
(88,332
|
)
|
(90,068
|
)
|
||||
|
Issuance of stock for employee stock purchase plan
|
321
|
385
|
||||||
|
Payments of finance lease obligations
|
(318
|
)
|
-
|
|||||
|
Contingent consideration paid
|
(598
|
)
|
(300
|
)
|
||||
|
Net cash provided by financing activities
|
6,627
|
346
|
||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(121
|
)
|
(68
|
)
|
||||
|
Increase (decrease) in cash and cash equivalents
|
1,365
|
(2,369
|
)
|
|||||
|
Cash and cash equivalents at beginning of period
|
482
|
2,851
|
||||||
|
Cash and cash equivalents at end of period
|
$1,847
|
$482
|
||||||
|
Supplemental cash flow information:
|
||||||||
|
Cash paid for:
|
||||||||
|
Interest
|
$1,657
|
$1,160
|
||||||
|
Income taxes
|
$290
|
$350
|
||||||
|
Non-cash investing activities:
|
||||||||
|
Contingent consideration relating to acquisitions
|
$ -
|
$2,935
|
||||||
|
Value of shares issued pursuant to acquisition
|
$ -
|
$1,878
|
||||||
|
Net liabilities assumed pursuant to acquisition
|
$ -
|
$750
|
||||||
|
Non-cash financing activities:
|
||||||||
|
Dividend forfeited on unvested restricted share units
|
$ 12
|
$ 6
|
||||||
|
Vesting of restricted share units
|
$436
|
$109
|
||||||
|
Equipment purchases under finance leases
|
$126
|
$ -
|
||||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies, Inc. (the “Company” or “RCM”) is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the
adaptation and deployment of advanced engineering and information technology services. Additionally, the Company provides specialty health care staffing services through its Specialty Health Care Services group. RCM’s offices are primarily located
in major metropolitan centers throughout North America.
The consolidated financial statements are comprised of the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market instruments and certificates of deposits to be cash equivalents if the securities mature within 90 days from the date of acquisition.
These investments are carried at cost, which approximates fair value. The Company’s cash balances are maintained in accounts held by major banks and financial institutions. The majority of these balances may exceed federally insured amounts. The
Company held $56 and $32 of cash and cash equivalents in Canadian banks as of December 28, 2019 and December 29, 2018, respectively, which was held principally in Canadian dollars. The Company held $129 and $61 of cash and cash equivalents in
Serbian banks as of December 28, 2019 and December 29, 2018, respectively, which was held in various currencies.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, and transit accounts payable
and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest rate. The Company does not have derivative products in place to manage risks related to foreign
currency fluctuations for its foreign operations or for interest rate changes.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required.
Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company
determines its 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 previously written off are credited to bad debt expense.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Accrued and Unbilled Accounts Receivable and Work-in-Process
Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-process primarily represents revenues earned under
contracts which the Company is contractually precluded from invoicing until future dates as project milestones are realized. See Note 4 for further details.
Transit Receivables and Transit Payables
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. In certain circumstances, the Company
may acquire equipment as a purchasing agent for the client for a fee. Pursuant to these agreements, the Company: a) may engage subcontractors to provide construction or other services or contracts with manufacturers on behalf of the Company’s
clients to procure equipment or fixtures; b) typically earns a fixed percentage of the total project value or a negotiated mark-up on subcontractor or procurement charges as a fee; and c) assumes no ownership or risks of inventory. In such
situations, the Company acts as an agent under the provisions of FASB ASC 606 “Revenue from Contracts with Customers” and therefore recognizing revenue on a “net-basis.” The Company records revenue on a “net” basis on relevant engineering and
construction management projects, which require subcontractor/procurement costs or transit costs. In those situations, the Company charges the client a negotiated fee, which is reported as net revenue when earned.
Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the
end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to
the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The Company’s transit accounts payable usually exceeds the Company’s transit accounts
receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business.
The transit accounts receivable was $4.9 million and related transit accounts payable was $4.6 million, for a net receivable of $0.3 million, as of December 28, 2019. The transit accounts receivable
was $2.6 million and related transit accounts payable was $2.5 million, for a net receivable of $0.1 million, as of December 29, 2018.
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.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
The Company’s intangible assets have been generated through acquisitions. The Company maintains responsibility for valuing and determining the useful life of intangible assets. As a general rule,
the Company amortizes restricted covenants over four years and customer relationships over six years. However, circumstances may dictate other amortization terms as determined by the Company and assisted by their third party advisors.
Canadian Sales Tax
The Company is required to charge and collect sales tax for all Canadian clients and remits invoiced sales tax monthly to the Canadian taxing authorities whether collected or not. The Company does
not collect the sales tax from its clients until they have paid their respective invoices. The Company includes uncollected Canadian sales tax invoiced to clients in its prepaid and other current assets.
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with FASB ASC 350 “
Intangibles - Goodwill and Other.”
The Company
tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount.
The Company has three reporting units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability
of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” effective December 29, 2018 which has eliminated Step 2 from the goodwill impairment test. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
The Company did not record a goodwill impairment charge in fiscal years ended December 28, 2019 and December 29, 2018. There can be no assurance that future indicators of impairment and tests of
goodwill impairment will not result in an impairment charge.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Long-Lived and Intangible Assets
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any,
are reported at the lower of the carrying amount or fair value less cost to sell. The Company’s intangible assets consist of customer relationships and non-compete agreements.
Software
In accordance with FASB ASC 350-40 “Accounting for Internal Use Software,” certain costs related to the development or purchase of internal-use software are capitalized and amortized over the
estimated useful life of the software. During the fiscal years ended December 28, 2019 and December 29, 2018, the Company capitalized approximately $139 and $1,150, respectively, for software costs. The net balance after accumulated depreciation
for all software costs capitalized as of December 28, 2019 and December 29, 2018 was $1,726 and $2,255, respectively.
Income Taxes
The Company makes judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and interpretations affect the provision
for income taxes, deferred tax assets and liabilities and the valuation allowance. The Company evaluated the deferred tax assets and determined on the basis of objective factors that the net assets will be realized through future years’ taxable
income. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required. The Company did not have any valuation allowance as of December 28, 2019 or December 29, 2018.
The Company accounts for income taxes in accordance with FASB ACS 740 “Income Taxes” (FASB ASC 740) which requires an asset and liability approach of accounting for income taxes. FASB ASC 740
requires assessment of the likelihood of realizing benefits associated with deferred tax assets for purposes of determining whether a valuation allowance is needed for such deferred tax assets. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Tax Cuts and Jobs Act, which was enacted in December 2017, includes a number of changes to existing United States tax laws,
most notably the reduction of the United States corporate income tax rate from up to 35% to 21%, beginning in 2018. The Company measures its deferred tax assets and liabilities using the tax rates that the Company believes will apply in the years in
which the temporary differences are expected to be recovered or paid. As a result, the Company remeasured its deferred tax assets and deferred tax liabilities to reflect the reduction in the United States corporate income tax rate, resulting in a
$1.0 million decrease in the Company’s income tax benefit (or increase in income tax expense) for the fiscal year ended December 29, 2018. The Company and its wholly owned United States subsidiaries file a consolidated federal income tax return. The
Company also files tax returns in Canada, Puerto Rico and Serbia.
The Company also follows the provisions of FASB ASC 740 which 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. The Company’s policy is to record interest and penalty, if any, as interest expense.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606,
Revenue
from Contracts with Customers
. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange
for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the
performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the
Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenues disaggregated by revenue source for the fifty-two week periods ended December 28, 2019 and December 29, 2018:
|
December 28,
2019
|
December 29,
2018
|
||
|
Engineering:
|
|||
|
Time and Material
|
$55,195
|
$71,639
|
|
|
Fixed Fee
|
12,678
|
14,424
|
|
|
Permanent Placement Services
|
-
|
15
|
|
|
Total Engineering
|
$67,873
|
$86,078
|
|
|
Specialty Health Care:
|
|||
|
Time and Material
|
$88,057
|
$82,153
|
|
|
Permanent Placement Services
|
1,291
|
1,510
|
|
|
Total Specialty Health Care
|
$89,348
|
$83,663
|
|
|
Information Technology:
|
|||
|
Time and Material
|
$33,384
|
$30,361
|
|
|
Permanent Placement Services
|
495
|
250
|
|
|
Total Information Technology
|
$33,879
|
$30,611
|
|
|
$191,100
|
$200,352
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Time and Material
The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both time and material and fixed fee
work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at
contracted rates.
Fixed fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements
with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee
project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis,
revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on
these contracts are incurred. On an infrequent basis, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other
instances, revenue is billed and recorded based upon contractual rates per hour. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some
contracts also limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable, the work is not complete and the
revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. 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. Permanent placement revenue was $1.8 million for both the fiscal years ended December
28, 2019 and December 29, 2018.
The deferred revenue balance as of December 28, 2019 was $0.4 million, as compared to $0.2 million as of December 29, 2018. These amounts are included in accounts payable and accrued expense in the
accompanying consolidated balance sheets at that date. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this
is an infrequent occurrence. For the fifty-two week periods ended December 28, 2019 and December 29, 2018, the Company recognized revenue of $0.2 million and $0.6 million, respectively, that was included in deferred revenue at the beginning of the
reporting period.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Transit Receivables and Transit Payables
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the
Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is
typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount
simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account
payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds
the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $4.9 million and related transit accounts payable was
$4.6 million, for a net receivable of $0.3 million, as of December 28, 2019. The transit accounts receivable was $2.6 million and related transit accounts payable was $2.5 million, for a net receivable of $0.1 million, as of December 29, 2018.
Concentration
During the fiscal year ended December 28, 2019, New York City Board of Education and Hawaii Department of Education represented 17.6% and 11.1% of the Company’s revenues, respectively. No other
client accounted for 10% or more of total revenues during the year. As of December 28, 2019, the following clients represented more than 10.0% of the Company’s accounts receivable, net: New York Power Authority was 24.6%, New York City Board of
Education was 17.6% and Hawaii Department of Education was 12.7%. As of December 28, 2019, New York Power Authority total accounts receivable balance (including transit accounts receivable) was 27.3% of the total of accounts receivable, net and
transit accounts receivable. No other customer accounted for 10% or more of the Company’s accounts receivable, net or total accounts receivable balance (including transit accounts receivable). The Company’s five, ten and twenty largest customers
accounted for approximately 43.5%, 57.0% and 69.2%, respectively, of the Company’s revenues for the fiscal year ended December 28, 2019.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Concentration (Continued)
During the fiscal year ended December 29, 2018, New York City Board of Education represented 13.0% of the Company’s revenues. No other client accounted for 10% or more of total revenues during the
year. As of December 29, 2018, the following clients represented more than 10.0% of the Company’s accounts receivable, net: New York Power Authority was 22.7% and New York City Board of Education was 16.0%. As of December 29, 2018, New York Power
Authority total accounts receivable balance (including transit accounts receivable) was 23.3% of the total of accounts receivable, net and transit accounts receivable. No other customer accounted for 10% or more of the Company’s accounts receivable,
net or total accounts receivable balance (including transit accounts receivable). The Company’s five, ten and twenty largest customers accounted for approximately 40.9%, 54.6% and 67.4%, respectively, of the Company’s revenues for the fiscal year
ended December 29, 2018.
Foreign Currency Translation
The functional currency of the Company’s Canadian and Serbian subsidiaries is the local currency. Assets and liabilities are translated at period-end exchange rates. Income and expense items are
translated at weighted average rates of exchange prevailing during the year. Any translation adjustments are included in the accumulated other comprehensive income account in stockholders’ equity. Transactions executed in different currencies
resulting in exchange adjustments are translated at spot rates and resulting foreign exchange transaction gains and losses are included in the results of operations.
Comprehensive Income
Comprehensive income consists of net income and foreign currency translation adjustments.
Per Share Data
Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average
number of common shares plus dilutive potential common shares outstanding during the period. Potential dilutive common shares consist of stock options and other stock-based awards under the Company’s stock compensation plans, when their impact is
dilutive. Because of the Company’s capital structure, all reported earnings pertain to common shareholders and no other adjustments are necessary.
Share - Based Compensation
The Company recognizes share-based compensation over the vesting period of an award based on fair value at the grant date determined using the Black-Scholes option pricing model. Certain assumptions
are used to determine the fair value of stock-based payment awards on the date of grant and require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in
the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and methodologies used to
calculate estimated fair value of stock-based compensation when share-based awards are granted. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and
thereby materially impact our fair value determination. See Note 11 for additional share-based compensation information.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Share - Based Compensation (Continued)
Restricted share units are recognized at their fair value. The amount of compensation cost is measured on the grant date fair value of the equity instrument issued. The compensation cost of the
restricted share units is recognized over the vesting period of the restricted share units on a straight-line basis. Restricted share units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the
vesting period become due and payable after the vesting period assuming the grantee’s restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on
the accompanying consolidated balance sheet. Dividends for restricted share units that ultimately do not vest are forfeited.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was $855 and $671 for the fiscal years ended December 28, 2019 and December 29, 2018, respectively.
Fair Value Measurements
The Company values its financial assets and liabilities based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy was established that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in
which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as
considers counterparty credit risk in its assessment of fair value.
Reclassification
Certain prior year amounts have been reclassified to conform with the current year presentation. These classifications had no effect on the previously reported results of operations.
|
2.
|
FISCAL YEAR
|
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. Both of the fiscal years ended December 28, 2019 (fiscal 2019) and December 29, 2018
(fiscal 2018) were 52-week reporting years.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
|
3.
|
USE OF ESTIMATES AND UNCERTAINTIES
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenue and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Company uses estimates to calculate an allowance for doubtful accounts on its accounts receivables, adequacy of reserves, goodwill impairment, if any, equity compensation, the tax rate applied
and the valuation of certain assets and liability accounts. These estimates can be significant to the operating results and financial position of the Company.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company’s costs related to this risk participation are
estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company’s services, adverse litigation and
claims and the hiring, training and retention of key employees.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, and transit accounts payable
and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest rate. The Company does not have derivative products in place to manage risks related to foreign
currency fluctuations for its foreign operations or for interest rate changes.
The Company re-measures the fair value of the contingent consideration at each reporting period and any change in the fair value from either the passage of time or events occurring after the
acquisition date, is recorded in earnings in the accompanying consolidated statement of income.
| 4. |
ACCOUNTS RECEIVABLE, TRANSIT ACCOUNTS RECEIVABLE AND TRANSIT ACCOUNTS PAYABLE
|
The Company’s accounts receivable are comprised as follows:
|
December 28, 2019
|
December 29,
2018
|
|||
|
Billed
|
$29,214
|
$32,323
|
||
|
Accrued and unbilled
|
13,824
|
10,383
|
||
|
Work-in-progress
|
4,352
|
2,252
|
||
|
Accounts receivable subject to arbitration
|
14,095
|
8,820
|
||
|
Allowance for sales discounts and doubtful accounts
|
(1,725
|
)
|
(1,443
|
)
|
|
Accounts receivable, net
|
$59,760
|
$52,335
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
| 4. |
ACCOUNTS RECEIVABLE, TRANSIT ACCOUNTS RECEIVABLE AND TRANSIT ACCOUNTS PAYABLE (CONTINUED)
|
Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenue earned under
contracts which the Company contractually invoices at future dates.
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the
Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is
typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount
simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account
payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds
the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $4.9 million and related transit accounts payable was
$4.6 million, for a net receivable of $0.3 million, as of December 28, 2019. The transit accounts receivable was $2.6 million and related transit accounts payable was $2.5 million, for a net receivable of $0.1 million, as of December 29, 2018.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings
with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of December 28, 2019 and December 29, 2018, the total amount of
outstanding receivables from this customer on these disputed projects was $14.1 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the
customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of December 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these
counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a
strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this
arbitration will conclude prior to reporting its first quarter of fiscal 2020 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have
to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
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.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
5.
PROPERTY AND EQUIPMENT
(CONTINUED)
Property and equipment are comprised of the following:
|
December 28, 2019
|
December 29, 2018
|
|||
|
Equipment and furniture
|
$319
|
$600
|
||
|
Computers and systems
|
5,628
|
7,200
|
||
|
Leasehold improvements
|
308
|
743
|
||
|
6,255
|
8,543
|
|||
|
Less: accumulated depreciation and amortization
|
3,538
|
5,058
|
||
|
Property and equipment, net
|
$2,717
|
$3,485
|
The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $2,781 and $947 during the fiscal years ended December 28,
2019 and December 29, 2018, respectively. For the fiscal years ended December 28, 2019 and December 29, 2018, depreciation and amortization expense for property and equipment was $1,261 and $1,442, respectively.
6.
ACQUISITIONS
The purchase method of accounting in accordance with FASB ASC 805, “Business Combination,” was applied for all acquisitions. This requires the cost of an acquisition to be allocated to the tangible
and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisitions is attributable to expected
sales synergies from combining the operations of the acquired business with those of the Company.
Future Contingent Payments
As of December 28, 2019, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective October 1, 2017, the
Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC
(together, “TKE”). The Company estimates future contingent payments at December 28, 2019 as follows:
|
Fiscal Year Ending
|
Total
|
|
January 2, 2021
|
$344
|
|
January 1, 2022
|
1,438
|
|
December 31, 2022
|
1,276
|
|
Estimated future contingent consideration payments
|
$3,058
|
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active
acquisitions after December 28, 2019 are capped at a cumulative maximum of $6.3 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of
December 28, 2019. During the fifty-two week period ended December 28, 2019, the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3)
with changes in fair value recorded in other (expense) income, net.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
6.
ACQUISITIONS (CONTINUED)
For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The
Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future
earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured
quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of comprehensive income. During the measurement period, which may be up to one year from the acquisition
date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of comprehensive income.
The Company paid contingent consideration of $0.6 million and $0.3 million during the fifty-two week periods ended December 28, 2019 and December 29, 2018, respectively.
The changes in the liability for contingent consideration from acquisitions for the fifty-two week periods ended December 28, 2019 and December 29, 2018 are as follows:
|
Balance as of December 30, 2017
|
$2,091
|
||
|
Contingent payments made
|
(300
|
)
|
|
|
Increase to contingent payment estimates
|
2,935
|
||
|
Other changes in contingent payments
|
47
|
||
|
Balance as of December 29, 2018
|
$4,773
|
||
|
Contingent payments made
|
(598
|
)
|
|
|
Reduction in final purchase price recorded
|
(1,178
|
)
|
|
|
Other changes in contingent consideration
|
61
|
||
|
Balance as of December 28, 2019
|
$3,058
|
TKE
Effective September 30, 2018, the Company acquired the business operations of Thermal Kinetics Engineering, PLLC, a New York professional limited liability company and Thermal Kinetics Systems, LLC,
a New York limited liability company (together, “TKE”). TKE is an established Buffalo-based engineering company providing full service process equipment supply, engineering, development and design services for construction and industrial customers.
TKE provides engineering services on construction and industrial processes. TKE engineers and builds optimal thermal integrations and unique separations approaches for industrial processes and equipment, with clients primarily in the chemical, oil
and gas, renewable fuels, pharmaceutical, and industrial manufacturing industries. TKE will complement and expand the Company’s services offerings, providing a stronger depth of experienced engineering resources and capabilities. The Company
estimated the contingent consideration to be paid to TKE as of the acquisition date and indicated such estimate resulted in a preliminary purchase price and allocation. Those estimates were highly dependent on uncertain estimates. The Company has
finalized the purchase price by reducing its original estimate of contingent consideration by $1.2 million. The final estimated fair value of assets acquired and liabilities assumed is as follows:
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
6.
ACQUISITIONS (CONTINUED)
|
Cash
|
$1,066
|
|
Common stock of the Company
|
1,878
|
|
Contingent consideration, at fair value
|
1,757
|
|
Total consideration
|
$4,701
|
The shareholders of TKE are eligible to receive post-closing contingent consideration upon the business exceeding certain base levels of operating income, potentially earned over three years. The
amount recorded for the contingent consideration represents the acquisition date fair value of expected consideration to be paid based on TKE’s forecasted operating income during the three year period. Expected consideration was valued based on
different possible scenarios for projected operating income. Each case was assigned a probability which was used to calculate an estimate of the forecasted future payments. Then a discount rate was applied to these forecasted future payments to
determine the acquisition date fair value to be recorded. At the time of the acquisition, the book and tax basis of assets and liabilities acquired are the same. The acquisition has been accounted for under the purchase method of accounting. The
total purchase price has been allocated as follows:
|
Fixed assets
|
$12
|
|
|
Restricted covenants
|
50
|
|
|
Customer relationships
|
720
|
|
|
Goodwill
|
4,669
|
|
|
Less: net liabilities assumed
|
(750
|
)
|
|
Total consideration
|
$4,701
|
The results of operations of TKE have been included in the consolidated statement of operations as of the effective date of acquisition. The following revenue and operating loss of TKE are included
in the Company’s consolidated results of operations:
|
|
Year Ended
|
|
Year Ended
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
Revenues
|
$4,469
|
|
$2,575
|
|
|
Operating income
|
($55
|
)
|
$463
|
The following table represents the pro forma revenue and earnings for the year ended December 29, 2018:
|
Year Ended
December 29, 2018
|
||||
|
|
Historical
|
|
Pro Forma Combined
(Unaudited)
|
|
|
Revenues
|
$200,352
|
$205,732
|
||
|
Operating income
|
$5,415
|
$6,333
|
||
|
Diluted net income per share
|
$0.22
|
$0.26
|
||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
6.
ACQUISITIONS (CONTINUED)
The combined pro forma revenue and operating income for the fiscal year ended December 29, 2018 was prepared as though the TKE Acquisition had occurred as of January 1, 2018. The pro forma results do
not include any anticipated cost synergies or other effects of the planned integration of TKE. This summary is not necessarily indicative of what the results of operations would have been had the TKE Acquisition occurred during such period, nor does
it purport to represent results of operations for any future periods.
7.
GOODWILL
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company is required to assess the carrying value of its
reporting units that contain goodwill at least on an annual basis. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of
the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. The Company formally assesses these qualitative factors, and if
necessary, conducts its annual goodwill impairment test as of the last day of the Company’s fiscal December each year or if indicators of impairment exist.
The changes in the carrying amount of goodwill for the fifty-two week periods ended December 28, 2019 and December 29, 2018 are as follows:
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Total
|
||||||
|
Balance as of December 30, 2017
|
$7,249
|
$2,398
|
$2,038
|
$11,685
|
|||||
|
Goodwill recorded, TKE acquisition
|
5,847
|
-
|
-
|
5,847
|
|||||
|
Balance as of December 29, 2018
|
$13,096
|
$2,398
|
$2,038
|
$17,532
|
|||||
|
Adjustment to final TKE purchase price
|
(1,178
|
)
|
-
|
-
|
(1,178
|
)
|
|||
|
Balance as of December 28, 2019
|
$11,918
|
$2,398
|
$2,038
|
$16,354
|
8.
INTANGIBLE ASSETS
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any,
are reported at the lower of the carrying amount or fair value less cost to sell. The Company’s intangible assets consist of customer relationships and non-compete agreements. During all periods presented, the Company determined that no impairment
of intangible assets exists.
All of the Company’s intangible assets are associated with the Engineering segment. Intangible assets other than goodwill are amortized over their useful lives. Intangible assets are carried at
cost, less accumulated amortization.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
8.
INTANGIBLE ASSETS (CONTINUED)
Details of intangible assets by class at December 28, 2019 and December 29, 2018:
|
December 28,
2019
|
December 29,
2018 |
||
|
Restricted covenants
|
$28
|
$51
|
|
|
Customer relationships
|
388
|
692
|
|
|
Total intangible assets
|
$416
|
$743
|
Amortization of acquired intangible assets for the fifty-two week periods ended December 28, 2019 and December 29, 2018 was $327 and $125, respectively.
Estimated future amortization expense, by fiscal years, for these intangibles assets are as follows:
|
2020
|
$321
|
|
2021
|
95
|
|
Total
|
$416
|
| 9. |
LINE OF CREDIT
|
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility
provides for a $45.0 million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London
Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving
Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the fifty-two week periods ended December 28, 2019 and December 29, 2018 were 4.4%
and 4.0%, respectively.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit
Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of December 28, 2019, the Company was in compliance with all covenants contained
in the Revolving Credit Facility.
Borrowings under the line of credit as of December 28, 2019 and December 29, 2018 were $34.8 million and $27.5 million, respectively. At December 28, 2019 and December 29, 2018 there were letters of
credit outstanding for $1.6 million. At December 28, 2019, the Company had availability for additional borrowings under the Revolving Credit Facility of $8.6 million.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
10. PER SHARE DATA
The Company uses the treasury stock method to calculate the weighted-average shares used for diluted earnings per share. The number of common shares used to calculate basic and diluted earnings per
share for the fiscal years ended December 28, 2019 and December 29, 2018 was determined as follows:
|
Fiscal Years Ended
|
|||
|
December 28, 2019
|
December 29,
2018
|
||
|
Basic weighted average shares outstanding
|
12,913,912
|
12,326,847
|
|
|
Dilutive effect of outstanding restricted share units
|
58,241
|
30,744
|
|
|
Weighted average dilutive shares outstanding
|
12,972,153
|
12,357,591
|
|
Unissued shares of common stock were reserved for the following purposes:
|
December 28,
2019
|
December 29,
2018
|
||
|
Time-based restricted stock units outstanding
|
151,725
|
147,372
|
|
|
Performance-based restricted stock units outstanding
|
240,000
|
200,000
|
|
|
Future grants of options or shares
|
268,326
|
442,699
|
|
|
Shares reserved for employee stock purchase plan
|
267,877
|
386,403
|
|
|
Total
|
927,928
|
1,176,474
|
For the years ended December 28, 2019 and December 29, 2018, there were no anti-dilutive shares not included in the calculation of common stock equivalents.
11.
SHARE BASED COMPENSATION
At December 28, 2019, the Company had two share-based employee compensation plans. The Company measures the fair value of share-based awards, if and when granted, based on the Black-Scholes method
and using the closing market price of the Company’s common stock on the date of grant. Awards vest over periods ranging from one to three years and expire within 10 years of issuance. Share-based compensation expense related to time-based awards is
amortized in accordance with applicable vesting periods using the straight-line method. The Company expenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to
vest. Performance-based share awards that are likely to vest are also expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest, or
in the case of a reversal when they are later determined to be unlikely to vest.
Share-based compensation expense of $806 and $544 was recognized for the fiscal years ended December 28, 2019 and December 29, 2018, respectively. Share based compensation for the fiscal year ended
December 28, 2019 included estimated expense of $228 for performance-based awards, and did not include any expense associated with performance-based awards for the fiscal year ended December 29, 2018.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
11.
SHARE BASED COMPENSATION
(CONTINUED)
As of December 28, 2019, the Company had $0.3 million of total unrecognized compensation cost related to all time-based non-vested share-based awards and performance-based restricted stock units
outstanding and deemed as likely to vest. The Company expects to recognize this expense over approximately two years. These amounts do not include a) performance-based restricted stock units deemed unlikely to vest, b) the cost of any additional
share-based awards granted in future periods or c) the impact of any potential changes in the Company’s forfeiture rate.
2014 Omnibus Equity Compensation Plan (the 2014 Plan)
The 2014 Plan, approved by the Company’s shareholders in December 2014, provides for the issuance of up to 625,000 shares of the Company’s common stock to officers, non-employee directors, employees
of the Company and its subsidiaries or consultants and advisors utilized by the Company. In fiscal 2016, the Company amended and restated the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for
issuance under the Plan by an additional 500,000 shares so that the total number of shares of stock reserved for issuance under the Plan is 1,125,000 shares. The expiration date of the Plan is December 1, 2026. The Compensation Committee of the
Board of Directors determines the vesting period at the time of grant.
As of December 28, 2019, under the 2014 Plan, 151,725 time-based and 240,000 performance-based restricted share units were outstanding and 268,326 shares were available for awards thereunder.
Employee Stock Purchase Plan
The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001. Under the Purchase Plan, employees meeting certain specific
employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The
purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to 10% of qualified compensation, subject to maximum purchases in any one fiscal year of 3,000 shares.
In fiscal 2018, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional
300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,400,000 shares.
The Company has two offering periods in the Purchase Plan coinciding with the Company’s first two fiscal quarters and the last two fiscal quarters. During the fiscal years ended December 28, 2019
and December 29, 2018, there were 118,526 and 90,877 shares issued under the Purchase Plan for net proceeds of $321 and $385, respectively. As of December 28, 2019, there were 267,877 shares available for issuance under the Purchase Plan.
Compensation expense, representing the discount to the quoted market price, for the Purchase Plan for the fiscal years ended December 28, 2019 and December 29, 2018 was $91 and $103, respectively.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
11.
SHARE BASED COMPENSATION
(CONTINUED)
Time-Based Restricted Stock Units
From time-to-time the Company issues time-based restricted stock units. These time-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by
the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and
accrued expenses on the accompanying consolidated balance sheet. Dividends for time-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has issued time-based restricted stock units only under its 2007 Omnibus Equity Compensation Plan and the 2014 Plan. The 2007 Plan has expired and there are no time-based
restricted stock units outstanding thereunder. The following summarizes the activity in the time-based restricted stock units under the 2014 Plan during the fifty-two week period ended December 28, 2019:
|
Number of
Time-Based
Restricted
Stock Units
|
Weighted
Average
Grant Date Fair
Value per Share
|
||
|
Outstanding non-vested at December 29, 2018
|
147,372
|
$4.46
|
|
|
Granted
|
99,225
|
$3.02
|
|
|
Vested
|
(82,872
|
)
|
$4.04
|
|
Forfeited or expired
|
(12,000
|
)
|
$5.84
|
|
Outstanding non-vested at December 28, 2019
|
151,725
|
$3.64
|
Based on the closing price of the Company’s common stock of $2.87 per share on December 27, 2019 (the last trading day prior to December 28, 2019), the intrinsic value of the time-based non-vested
restricted stock units at December 28, 2019 was approximately $0.4 million. As of December 28, 2019, there was approximately $0.3 million of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be
recognized over the vesting period of the restricted stock units.
Performance-Based Restricted Stock Units
From time-to-time the Company issues performance-based restricted stock units to its executives. Performance-based restricted stock units are typically vested based on certain multi-year performance
metrics as determined by the Board of Directors Compensation Committee. These performance-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become
due and payable after the vesting period on any stock units that actually vest, if any. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated
balance sheet. As of December 28, 2019, there were no accrued dividends. Dividends for performance-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has issued performance-based restricted stock units only under the 2014 Plan. The following summarizes the activity in the performance-based restricted stock units during the
fifty-two week period ended December 28, 2019:
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
11.
SHARE BASED COMPENSATION
(CONTINUED)
Performance-Based Restricted Stock Units (Continued)
|
Number of
Performance-Based
Restricted
Stock Units
|
Weighted
Average
Grant Date Fair
Value per Share
|
||
|
Outstanding non-vested at December 29, 2018
|
200,000
|
$4.94
|
|
|
Granted
|
167,148
|
$4.35
|
|
|
Vested
|
(47,148
|
)
|
$3.68
|
|
Forfeited or expired
|
(80,000
|
)
|
$4.85
|
|
Outstanding non-vested at December 28, 2019
|
240,000
|
$4.81
|
As of December 28, 2019, the Company considers the metrics related to 200,000 of the performance-based restricted stock units unlikely to be achieved, thus no performance condition is probable of
achievement and no compensation cost has been recognized on these performance-based restricted stock units. As of December 28, 2019, the Company considers the metrics related to 40,000 of the performance-based restricted stock units likely to be
achieved, and therefore $175 of compensation cost has been recognized on these likely to vest performance-based restricted stock units during the fiscal year 2019. The Company will reassess at each reporting date whether achievement of any
performance condition is probable and would begin recognizing additional compensation cost if and when achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year
performance becomes probable and recognize the remaining compensation cost over the remaining requisite service period. If at a later measurement date the Company determines that performance-based restricted stock units deemed as likely to vest are
deemed as unlikely to vest, the expense recognized will be reversed. As of December 28, 2019, there was approximately $0.8 million of total unrecognized compensation cost related to performance-based restricted stock units deemed likely to vest.
|
Number of Restricted
Stock Units
|
Weighted Average
Grant Date Fair
Value per Share
|
|||
|
Outstanding non-vested at December 30, 2017
|
487,034
|
$5.24
|
||
|
Granted – time-based vesting
|
95,372
|
$4.05
|
||
|
Granted – performance-based vesting
|
240,000
|
$5.33
|
||
|
Vested
|
(29,195
|
)
|
$6.85
|
|
|
Forfeited or expired
|
(445,839
|
)
|
$5.32
|
|
|
Outstanding non-vested at December 29, 2018
|
347,372
|
$4.74
|
||
|
Granted – time-based vesting
|
99,225
|
$3.02
|
||
|
Granted – performance-based vesting
|
167,148
|
$4.35
|
||
|
Vested
|
(130,020
|
)
|
$3.91
|
|
|
Forfeited or expired
|
(92,000
|
)
|
$4.98
|
|
|
Outstanding non-vested at December 28, 2019
|
391,725
|
$4.36
|
Based on the closing price of the Company’s common stock of $2.87 per share on December 27, 2019, the intrinsic value of the non-vested time-based restricted share units at December 28, 2019 was $0.4
million. This amount does not include any intrinsic value that may be associated with the performance-based restricted share units that are deemed unlikely to vest.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
| 12. |
TREASURY STOCK TRANSACTIONS
|
For both the fifty-two week periods ended December 28, 2019 and December 29, 2018, the Company did not have an active stock purchase program and therefore did not purchase any treasury shares.
| 13. |
NEW ACCOUNTING STANDARDS
|
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326).
The new standard amends guidance on reporting credit losses
for assets held at amortized cost basis and available-for-sale debt securities. In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to
SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842),
which amends the effective date of the original
pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way
the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740)
, which enhances and simplifies various aspects of the income tax accounting guidance,
including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective
for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
14.
SEGMENT INFORMATION
The Company follows “Disclosures about Segments of an Enterprise and Related Information,” which establishes standards for companies to report information about operating segments, geographic areas
and major customers. The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 to these Consolidated Financial Statements.)
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:
|
Fiscal Year Ended
December 28, 2019
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$67,873
|
$89,348
|
$33,879
|
$ -
|
$191,100
|
|||||
|
Cost of services
|
49,395
|
68,464
|
24,649
|
-
|
142,508
|
|||||
|
Gross profit
|
18,478
|
20,884
|
9,230
|
-
|
48,592
|
|||||
|
Selling, general and administrative
|
13,648
|
17,643
|
9,099
|
-
|
40,390
|
|||||
|
Depreciation and amortization of
property and equipment
|
841
|
336
|
84
|
-
|
1,261
|
|||||
|
Amortization of acquired intangible assets
|
327
|
-
|
-
|
-
|
327
|
|||||
|
Tax credit professional fees
|
-
|
-
|
-
|
47
|
47
|
|||||
|
Operating income (loss)
|
$3,662
|
$2,905
|
$47
|
($47
|
)
|
$6,567
|
||||
|
Total assets as of December 28, 2019
|
$52,342
|
$29,781
|
$8,178
|
$5,872
|
$96,173
|
|||||
|
Capital expenditures
|
$82
|
$121
|
$69
|
$95
|
$367
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
14.
SEGMENT INFORMATION
(CONTINUED)
|
Fiscal Year Ended
December 29, 2018
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$86,078
|
$83,663
|
$30,611
|
$ -
|
$200,352
|
|||||
|
Cost of services
|
63,488
|
64,860
|
22,694
|
-
|
151,042
|
|||||
|
Gross profit
|
22,590
|
18,803
|
7,917
|
-
|
49,310
|
|||||
|
Selling, general and administrative
|
16,073
|
16,500
|
7,813
|
-
|
40,386
|
|||||
|
Depreciation and amortization of
property and equipment
|
961
|
383
|
98
|
-
|
1,442
|
|||||
|
Amortization of acquired intangibles
|
125
|
-
|
-
|
-
|
125
|
|||||
|
Severance, professional fees
and other charges
|
-
|
-
|
-
|
1,571
|
1,571
|
|||||
|
Tax credit professional fees
|
-
|
-
|
-
|
371
|
371
|
|||||
|
Operating income (loss)
|
$5,431
|
$1,920
|
$6
|
($1,942
|
)
|
$5,415
|
||||
|
Total assets as of December 29, 2018
|
$47,837
|
$21,636
|
$7,577
|
$4,460
|
$81,510
|
|||||
|
Capital expenditures
|
$930
|
$222
|
$120
|
$246
|
$1,518
|
The Company derives a majority of its revenue from offices in the United States. Revenues reported for each operating segment are all from external customers. The Company is domiciled in the United
States and its segments operate in the United States, Canada, Puerto Rico and Serbia. Revenues by geographic area for the fiscal years ended December 28, 2019 and December 29, 2018 are as follows:
|
Fiscal Year Ended
|
|||||
|
December 28,
|
December 29,
|
||||
|
2019
|
2018
|
||||
|
Revenues
|
|||||
|
United States
|
$166,750
|
$165,965
|
|||
|
Canada
|
16,822
|
27,869
|
|||
|
Puerto Rico
|
4,942
|
4,460
|
|||
|
Serbia
|
2,586
|
2,058
|
|||
|
$191,100
|
$200,352
|
||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
14.
SEGMENT INFORMATION
(CONTINUED)
Total assets by geographic area as of the reported periods are as follows:
|
Fiscal Year Ended
|
|||||
|
December 28,
|
December 29,
|
||||
|
2019
|
2018
|
||||
|
Total Assets
|
|||||
|
United States
|
$75,724
|
$61,417
|
|||
|
Canada
|
13,770
|
14,230
|
|||
|
Puerto Rico
|
2,066
|
1,954
|
|||
|
Serbia
|
4,613
|
3,909
|
|||
|
$96,173
|
$81,510
|
||||
15.
INCOME TAXES
Generally, the Company’s relative income or loss generated in each of its jurisdictions can materially impact the consolidated effective income tax rate of the Company, particularly the ratio of
Canadian and Serbian pretax income, versus United States pretax income. The consolidated effective income tax rate for fiscal 2019 was 15.8% as compared to 30.5% for the comparable prior year period. The Company’s United States Federal statutory
tax rate for the fifty-two week period ended December 29, 2018 and the comparable prior year period, before any adjustments, was 21.0%. The income tax provisions reconciled to the tax computed at the United States Federal statutory rate for both
fiscal 2019 and 2018 are as follows:
|
December 28,
2019
|
December 29,
2018
|
|||
|
Federal statutory rate
|
21.0
|
%
|
21.0
|
%
|
|
Tax expense on taxable (loss)
income at federal statutory rate
|
$1,013
|
$821
|
||
|
State and Puerto Rico income taxes,
net of Federal income tax benefit
|
305
|
91
|
||
|
Prior year United States R&D tax credits in current year
|
(668
|
)
|
(341
|
)
|
|
Permanent differences
|
77
|
49
|
||
|
Foreign income tax rates
|
(101
|
)
|
(173
|
)
|
|
Adjustments to NOL and repatriation taxes
|
154
|
730
|
||
|
Other
|
(16
|
)
|
16
|
|
|
Total income tax expense
|
$764
|
$1,193
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
15.
INCOME TAXES (CONTINUED)
The Company experienced the following significant adjustments for the 2019 fiscal year that impacted its net income tax expense of $0.8 million: prior year United States R&D tax credits of $0.7
million recognized in fiscal 2019, and expense from changes to its United States net operating loss carryforward and repatriation taxes of $0.2 million.
The Company experienced several adjustments for the 2018 fiscal year that impacted its net income tax expense of $1.2 million, including 1) prior year United States 179D deductions generated an
income tax benefit of $0.3 million; 2) foreign income tax differences generated an income tax benefit of $0.2 million; and 3) changes to United States and Canadian net operating loss carryforward generated expense of $0.7 million, primarily from
changes in 2018 as a result of new information upon completing the 2017 United States Federal tax return.
The components of income tax expense are as follows:
|
Fiscal Years Ended
|
|||||
|
December 28,
2019
|
December 29,
2018
|
||||
|
Current
|
|||||
|
Federal
|
($688
|
)
|
($198
|
)
|
|
|
State and local
|
181
|
51
|
|||
|
Foreign
|
166
|
(90
|
)
|
||
|
(341
|
)
|
(237
|
)
|
||
|
Deferred
|
|||||
|
Federal
|
892
|
1,399
|
|||
|
State
|
229
|
64
|
|||
|
Foreign
|
(16
|
)
|
(33
|
)
|
|
|
1,105
|
1,430
|
||||
|
Total
|
$764
|
$1,193
|
|||
The Company completed its analysis of the Tax Cut and Jobs Act (“TCJA”) in fiscal 2018 and recorded a charge of $0.7 million due to the utilization of net operating loss carryforwards upon the filing
of its 2017 federal income tax return.
The components of earnings before income taxes by United States and foreign jurisdictions were as follows:
|
Fiscal Years Ended
|
||||
|
December 28,
2019
|
December 29,
2018
|
|||
|
United States
|
$3,626
|
$3,671
|
||
|
Foreign Jurisdictions
|
1,196
|
237
|
||
|
$4,822
|
$3,908
|
|||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
15.
INCOME TAXES (CONTINUED)
A reconciliation of the unrecognized tax benefits for the year December 28, 2019:
|
Unrecognized Tax Benefits
|
||
|
Balance as of December 29, 2018
|
$628
|
|
|
Charges for current year tax positions
|
(628
|
)
|
|
Reserves for current year tax position
|
-
|
|
|
Balance as of December 28, 2019
|
$ -
|
The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes and records such amounts to interest expense. The Company recorded no
expense for penalties or interest in the fiscal years ended December 28, 2019 and December 29, 2018.
At December 28, 2019 and December 29, 2018, deferred tax assets and liabilities consist of the following:
|
December 28,
2019
|
December 29,
2018
|
|||
|
Deferred tax assets:
|
||||
|
Allowance for doubtful accounts
|
$432
|
$388
|
||
|
Federal and state net operating loss carryforward
|
330
|
1,253
|
||
|
Reserves and accruals
|
255
|
343
|
||
|
Other
|
185
|
125
|
||
|
Total deferred tax assets
|
1,202
|
2,109
|
||
|
Deferred tax liabilities:
|
||||
|
Acquisition amortization, net
|
(569
|
)
|
(403
|
)
|
|
Prepaid expense deferral
|
(701
|
)
|
(600
|
)
|
|
Bonus depreciation to be reversed
|
(327
|
)
|
(381
|
)
|
|
Canada deferred tax liability, net
|
(382
|
)
|
(398
|
)
|
|
Total deferred tax liabilities
|
(1,979
|
)
|
(1,782
|
)
|
|
Total deferred tax (liabilities) asset, net
|
($777
|
)
|
$327
|
The Company has gross net operating losses of $0.1 million and $5.0 million to be applied to the net income of future Federal and State tax returns,
respectively. The Federal net operating loss will expire in 2037. The Company conducts business in many states. Net operating losses in these states expire at differing periods but the majority of these expire in 2037.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
15.
INCOME TAXES (CONTINUED)
The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated United States Federal
income tax return and file in various states. The Company’s federal income tax returns have been examined through 2012. The Internal Revenue Service is currently examining fiscal tax years 2013, 2015, 2016 and 2017. The State of New Jersey is
currently examining fiscal tax years 2009 through 2012. Except for New Jersey and other limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2015. The Company is no longer subject
to audit in Canada for the tax years prior to tax year 2015. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2009.
|
16.
|
CONTINGENCIES
|
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. As such, the Company is required to assess the likelihood of any
adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for
these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. Once established, a provision may change in the future due to new developments or changes in circumstances and could
increase or decrease the Company’s earnings in the period that the changes are made. Asserted claims in these matters sought approximately $10.3 million in damages (as further described below) as of December 28, 2019. As of December 28, 2019, the
Company did not have an accrual for any such liabilities.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings
with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of December 28, 2019 and December 29, 2018, the total amount of
outstanding receivables from this customer on these disputed projects was $14.1 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the
customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of December 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these
counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a
strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this
arbitration will conclude prior to reporting its first quarter of fiscal 2020 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have
to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
17.
RETIREMENT PLANS
Profit Sharing Plans
The Company maintains a 401(k) profit sharing plan for the benefit of eligible employees in the United States and other similar plans in Canada, Puerto Rico and Serbia (the “Retirement Plans”). The
401(k) plan includes a cash or deferred arrangement pursuant to Section 401(k) of the Internal Revenue Code sponsored by the Company to provide eligible employees an opportunity to defer compensation and have such deferred amounts contributed to the
401(k) plan on a pre-tax basis, subject to certain limitations. The Company, at the discretion of the Board of Directors, may make contributions of cash to match deferrals of compensation by participants in the Retirement Plans. Contributions to
the Retirement Plans charged to operations by the Company for the fiscal years ended December 28, 2019 and December 29, 2018 were $296 and $418, respectively.
18.
COMMITMENTS
Executive Severance Agreements
The Company is a party to Executive Severance Agreement (the “Executive Severance Agreement”) each of Bradley S. Vizi, the Company's Executive Chairman and President (dated as of June 1, 2018), and
Kevin Miller, the Company’s Chief Financial Officer (dated as of February 28, 2014, as amended), which set forth the terms and conditions of certain payments to be made by the Company to the executive in the event, while employed by the Company, such
executive experiences (a) a termination of employment unrelated to a “Change in Control” (as defined therein) or (b) there occurs a Change in Control and either (i) the executive’s employment is terminated for a reason related to the Change in
Control or (ii) in the case of Mr. Miller, the executive remains continuously employed with the Company for a period of three months following the Change in Control. Each Executive Severance Agreement also provide for certain payments, if either (a)
the executive is involuntarily terminated by the Company for any reason other than “Cause” (as defined therein), “Disability” (as defined therein) or death, or (b) the executive resigns for “Good Reason” (as defined therein), and, in each case, the
termination is not a “Termination Related to a Change in Control” (as defined therein).
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
, which
requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from
leases. The accounting applied by a lessor is largely unchanged from that applied under the prior standard. After the issuance of Topic 842, the FASB clarified the guidance through several ASUS; hereinafter the collection of lease guidance is
referred to as “ASC 842”.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
18.
COMMITMENTS (CONTINUED)
Leases (Continued)
On December 30, 2018, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods
beginning December 30, 2018 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840,
Leases
.
The standard had a material impact on the Company’s Consolidated Condensed Balance Sheet but did not have a significant impact on the Company’s consolidated net earnings and cash flows. The most significant impact was the recognition of ROU assets
and lease liabilities for operating leases, while the accounting for finance leases remained substantially unchanged. For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients to not
reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Consequently, financial information will
not be updated, and the disclosures required under the new standard will not be provided for dates before December 30, 2018.
As a result of the cumulative impact of adopting ASC 842, the Company recorded operating lease ROU assets of $3.9 million and operating lease liabilities of $4.1 million as of December 30, 2018,
primarily related to real estate and office equipment leases, based on the present value of the future lease payments on the date of adoption.
The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term
and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Amounts
recognized as ROU assets related to finance leases are included in property and equipment, net, on the accompanying consolidated balance sheets. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments
.
The ROU asset also consists of any lease incentives received. The lease
terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a
straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company has lease agreements
which require payments for lease and non-lease components. The Company has elected to account for these as a single lease component with the exception of its real estate leases.
The components of lease expense were as follows:
|
Fifty-Two Week
Period Ended
December 28, 2019
|
||
|
Operating lease cost
|
$2,314
|
|
|
Amortization of ROU assets
|
$305
|
|
|
Interest on lease liabilities
|
8
|
|
|
Total finance lease cost
|
$313
|
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
18.
COMMITMENTS (CONTINUED)
Leases (Continued)
Supplemental Cash Flow information related to leases was as follows:
|
Fifty-Two Week
Period Ended
December 28, 2019
|
||
|
Cash paid for amounts included in the measurement of lease liabilities
|
||
|
Operating cash flows from operating leases
|
$2,290
|
|
|
Operating cash flows from finance leases
|
8
|
|
|
Financing cash flows from finance leases
|
310
|
|
|
Right of use assets obtained in exchange for lease obligations
|
||
|
Operating leases
|
7,894
|
|
|
Finance leases
|
126
|
|
Supplemental Balance Sheet information as of December 28, 2019 related to leases was as follows:
|
Operating leases
|
|
||
|
Operating lease right of use assets
|
$5,820
|
||
|
Other current liabilities
|
($2,134
|
)
|
|
|
Operating lease liabilities
|
(3,921
|
)
|
|
|
Total operating lease liabilities
|
($6,055
|
)
|
|
|
Finance leases
|
|||
|
Property and equipment - (ROU assets)
|
$985
|
||
|
Accumulated depreciation
|
(475
|
)
|
|
|
Property and equipment, net
|
$510
|
||
|
Other current liabilities
|
($315
|
)
|
|
|
Other long term liabilities
|
(189
|
)
|
|
|
Total finance lease liabilities
|
($504
|
)
|
|
|
Weighted average remaining lease term
|
|||
|
Operating leases
|
2.54 Years
|
||
|
Finance leases
|
1.62 Years
|
||
|
Weighted average discount rate
|
|||
|
Operating leases
|
4.11
|
%
|
|
|
Finance leases
|
1.78
|
%
|
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
18.
COMMITMENTS (CONTINUED)
Leases (Continued)
Maturities of lease liabilities are as follows:
|
Fiscal Year Ending
|
Operating
Leases
|
Finance
Leases
|
||
|
2020
|
$2,334
|
$322
|
||
|
2021
|
1,760
|
169
|
||
|
2022
|
1,301
|
23
|
||
|
2023
|
886
|
-
|
||
|
Thereafter
|
186
|
-
|
||
|
Total lease payments
|
6,467
|
514
|
||
|
Less: imputed interest
|
(412
|
)
|
(10
|
)
|
|
Total
|
$6,055
|
$504
|
The Company, from time to time, subleases space to other tenants at various office locations under lease agreements. During the fiscal years ended December 28, 2019 and December 29, 2018, payments
of approximately $8 and $78, respectively, were received under these leasing arrangements. The Company offsets these payments against its expense for reporting purposes.
Rent expense was $2,777 for the fiscal year ended December 29, 2018, which was recorded on a straight-line basis over the term of the lease in accordance with ASC 840,
Leases
. Future minimum lease payments under non-cancellable leases as of December 31, 2018 as presented in accordance with ASC 840 were as follows:
|
Fiscal Years
|
Amount
|
|
2019
|
$2,485
|
|
2020
|
1,921
|
|
2021
|
1,406
|
|
2022
|
1,108
|
|
2023
|
782
|
|
2024
|
158
|
|
Total
|
$7,860
|
19.
RELATED PARTY TRANSACTIONS
There have been no related party transactions during the time periods presented.
20.
SEVERANCE, PROFESSIONAL FEES
AND OTHER CHARGES
The Company did not incur severance, professional fees and other charges for the fifty-two week period ended December 28, 2019. The Company recorded $1.6 million in severance, professional fees and
other charges for the fifty-two week period ended December 29, 2018. These charges include severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling
approximately $0.9 million. The additional charges of $0.7 million incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing lawsuit with a competitor of the Company, professional fees associated with
the acquisition of Thermal Kinetics and search fees associated with hiring a senior executive.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
To the Board of Directors and Stockholders of
RCM Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RCM Technologies, Inc. and Subsidiaries (the “Company") as of December 28, 2019, and the related consolidated statement of income,
comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes and the financial statement schedule identified in Item 15 (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 28, 2019, and the consolidated results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 18 to the consolidated financial statements, effective December 30, 2018, the Company changed its method of accounting for leases in fiscal year 2019 due to the adoption of
Financial Accounting Statement Board Accounting Standards Codification 782, “Leases”.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Macias, Gini & O’Connell LLP
We have served as the Company’s auditor since 2019.
Macias, Gini & O’Connell, LLP
Newport Beach, California
March 5, 2020
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
The Board of Directors and Stockholders of
RCM Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of RCM Technologies, Inc. and Subsidiaries (a Nevada corporation) (the “Company") as of December 29, 2018, and the
related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes and financial statement schedule identified in Item 15 (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 29, 2018, and the consolidated results of their operations and their cash
flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the United States federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We served as the Company’s auditor from 2010 to 2018.
/s/ EisnerAmper LLP
EISNERAMPER LLP
Iselin, New Jersey
March 11, 2019
|
SCHEDULE II
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Fiscal Years Ended December 28, 2019 and December 29, 2018
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|||
|
Description
|
Balance at
Beginning
of Period
|
Charged to
Costs and
Expenses
|
Deduction
|
Balance at
End of
Period
|
|||
|
Fiscal Year Ended December 28, 2019
|
|||||||
|
Allowance for doubtful
accounts on trade receivables
|
$1,443
|
322
|
(40
|
)
|
$1,725
|
||
|
Provision for contingencies for
legal matters
|
$ -
|
-
|
-
|
$ -
|
|||
|
Fiscal Year Ended December 29, 2018
|
|||||||
|
Allowance for doubtful
accounts on trade receivables
|
$967
|
1,106
|
(630
|
)
|
$1,443
|
||
|
Provision for contingencies for
legal matters
|
$125
|
-
|
125
|
$ -
|
SUBSIDIARIES OF THE REGISTRANT
Cataract, Inc.
PSR Engineering Solutions d.o.o. Beograd (Voždovac)
RCM Technologies Canada Corp.
RCM Technologies (USA), Inc.
RCM Technologies Netherlands B.V.
RCMT Delaware, Inc.
RCMT Europe Holdings, Inc.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of RCM Technologies, Inc. and Subsidiaries on Form S-8 (No. 333-222151, 333-200826, No. 333-165482, No. 333-145904, No.
333-61306, No. 333-80590, No. 333-48089, No. 333-52206 and No. 333-52480) of our report dated March 5, 2020, on our audit of the consolidated financial statements and financial statement schedule as of December 28, 2019, and for the year then ended,
which report is included in this Annual Report on Form 10-K.
/s/ Macias, Gini & O’Connell LLP
Macias, Gini & O’Connell LLP
Newport Beach, California
March 5, 2020
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of RCM Technologies, Inc. and Subsidiaries on Form S-8 (No. 333-222151, 333-200826,
No. 333-165482, No. 333-145904, No. 333-61306, No. 333-80590, No. 333-48089, No. 333-52206 and No. 333-52480) of our report dated March 11, 2019, on our audit of the consolidated financial statements and financial statement schedule as of December
29, 2018, and for the year then ended, which report is included in this Annual Report on Form 10-K.
/s/ EisnerAmper LLP
EISNERAMPER LLP
Iselin, New Jersey
March 5, 2020
CERTIFICATION REQUIRED BY
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Bradley S. Vizi, certify that:
1.
I have reviewed this annual report on Form 10-K of RCM Technologies, Inc. (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this annual report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(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: March 5, 2020
|
/s/
|
Bradley S. Vizi
|
|
Bradley S. Vizi
Executive Chairman and President
|
CERTIFICATION REQUIRED BY
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Kevin D. Miller, certify that:
1.
I have reviewed this annual report on Form 10-K of RCM Technologies, Inc. (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this annual report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(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: March 5, 2020
|
/s/
|
Kevin D. Miller
|
|
Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
|
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the “Company”) for the fiscal year ended December 28, 2019, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Bradley S. Vizi, Executive Chairman and President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended (15 U.S.C. section 78m (a)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
/s/
|
Bradley S. Vizi
|
|
Bradley S. Vizi
Executive Chairman and President
March 5, 2020
|
A signed original of this written statement required by Section 906 has been provided to RCM Technologies, Inc. and will be retained by RCM Technologies, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the “Company”) for the fiscal year ended December 28, 2019, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Kevin D. Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended (15 U.S.C. section 78m (a)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
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/s/
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Kevin D. Miller
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Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
March 5, 2020
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1. Business (continued)Item 1A. Risk FactorsItem 1A. Risk Factors (continued)Item 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related StockholderItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition andItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations (continued)Item 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting andItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related Transactions, and DirectorItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 15. Exhibits and Financial Statement Schedules (continued)Item 16. Form 10-k Summary