UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 95-1480559
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
Common Stock, $0.05 par value, 10,571,761 shares
outstanding as of May 9, 2002.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (Unaudited)
and December 31, 2001 (Audited) 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended March 31, 2002 and 2001 5
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Three-Month Period Ended March 31, 2002 6
Unaudited Consolidated Statements of Cash Flows for the Three-
Month Periods Ended March 31, 2002 and 2001 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 18
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
ASSETS
March 31, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $ 3,865,807 $ 2,289,743
Accounts receivable, net of allowance for doubtful accounts
of $1,678,000 (March 31, 2002) and $1,795,000
(December 31, 2001), respectively 36,386,707 41,174,828
Income tax refund receivable 3,856,751 6,810,093
Prepaid expenses and other current assets 2,120,623 2,968,612
Deferred tax assets 5,678,604 5,600,000
--------------- ---------------
Total current assets 51,908,492 58,843,276
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 10,350,823 11,131,750
Less: accumulated depreciation and amortization 3,672,858 4,282,985
--------------- ---------------
6,677,965 6,848,765
--------------- ---------------
Other assets
Deposits 180,017 175,691
Intangible assets, net of accumulated amortization
of $10,674,200 (March 31, 2002) and $10,669,000
(December 31, 2001), respectively 63,148,230 62,619,400
---------- ----------
Deferred tax assets 1,474,307 2,668,813
--------------- ---------------
64,802,554 65,463,904
--------------- ---------------
Total assets $123,389,011 $131,155,945
============ ============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
March 31, 2002 and December 31, 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Current liabilities
Note payable $24,900,000 $31,500,000
Accounts payable and accrued expenses 6,286,403 8,653,876
Accrued payroll 6,471,018 5,137,336
Payroll and withheld taxes 333,194 375,784
Income taxes payable 2,199,149
--------------- ---------------
Total current liabilities 37,990,615 47,866,145
--------------- ---------------
Shareholders' 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;
10,571,761 shares issued and outstanding 528,588 528,588
Accumulated other comprehensive loss ( 520,274) ( 484,283)
Additional paid-in capital 93,746,569 93,746,569
Accumulated deficit ( 8,356,487) ( 10,501,074)
--------------- ---------------
85,398,396 83,289,800
--------------- ---------------
Total liabilities and shareholders' equity $123,389,011 $131,155,945
=============== ===============
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2002 and 2001
(Unaudited)
2002 2001
---------------- ---------------
Revenues $ 45,109,628 $ 64,653,787
Cost of services 32,599,962 46,581,870
---------------- ---------------
Gross profit 12,509,666 18,071,917
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 8,496,230 12,443,828
Depreciation 302,315 235,460
Amortization 5,181 2,043,490
---------------- ---------------
8,803,726 14,722,778
---------------- ---------------
Operating income 3,705,940 3,349,139
---------------- ---------------
Other expenses
Interest expense, net of interest income 267,953 741,821
Gain on foreign currency transactions ( 2,940) ( 4,061)
---------------- ---------------
265,013 737,760
--------------- --------------
Income before income taxes 3,440,927 2,611,379
Income taxes 1,296,340 1,460,435
---------------- ---------------
Net income 2,144,587 1,150,944
Other comprehensive loss
Foreign currency translation adjustment ( 35,991) ( 71,233)
---------------- ---------------
Comprehensive income $ 2,108,596 $ 1,079,711
================ ===============
Basic earnings per share $.20 $.11
==== ====
Weighted average number of common
shares outstanding 10,571,761 10,499,651
========== ==========
Diluted earnings per share $.20 $.11
==== ====
Weighted average number of common
and common equivalent shares outstanding 10,813,265 10,638,305
========== ==========
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2002
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Loss Capital Earnings Total
Shares Amount
Balance, January 1, 2002 10,571,761 $528,588 ($484,283) $93,746,569 ($10,501,074) $83,289,800
Translation adjustment ( 35,991) ( 35,991)
Net income 2,144,587 2,144,587
---------- -------- ---------- ----------- ------------- -----------
Balance, March 31, 2002 10,571,761 $528,588 ($520,274) $93,746,569 ($8,356,487) $85,398,396
========== ======== ========== =========== =========== ==========
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
2002 2001
--------------- --------------
Cash flows from operating activities:
Net income $ 2,144,587 $1,150,944
--------------- --------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 307,496 2,278,950
Provision for losses on accounts receivable ( 117,000) 179,000
Changes in assets and liabilities:
Accounts receivable 4,905,121 6,847,842
Income tax refund receivable 2,953,342 3,442,906
Deferred tax asset 1,115,902 ( 70,687)
Prepaid expenses and other current assets 847,989 648,030
Accounts payable and accrued expenses ( 2,367,473) 1,305,700
Accrued payroll 1,333,682 1,646,209
Payroll and withheld taxes ( 42,590) ( 1,279,442)
Income taxes payable ( 2,199,149) ( 817,228)
--------------- --------------
Total adjustments 6,737,320 14,181,280
--------------- --------------
Net cash provided by operating activities 8,881,907 15,332,224
--------------- --------------
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001 - (Continued)
(Unaudited)
2002 2001
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ( 131,512) ( $ 383,338)
(Increase) decrease in deposits ( 4,326) 11,227
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 534,012) ( 2,285,602)
--------------- --------------
Net cash used in investing activities ( 669,850) ( 2,657,713)
--------------- --------------
Cash flows from financing activities:
Repayments of note payable ( 6,600,000) ( 7,400,000)
--------------- --------------
Net cash used in financing activities ( 6,600,000) ( 7,400,000)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents ( 35,993) ( 71,233)
--------------- --------------
Increase in cash and cash equivalents 1,576,064 5,203,278
Cash and cash equivalents at beginning of period 2,289,743 3,170,658
--------------- --------------
Cash and cash equivalents at end of period $ 3,865,807 $8,373,936
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $258,667 $ 595,870
Income taxes (refund) ( $1,681,660) ( $ 929,056)
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 2001. Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The information reflects all
normal and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company,
and its results of operations for the interim periods set forth herein. The
results for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
2. Goodwill
The net assets of businesses acquired, which are accounted for as
purchases, have been reflected at their fair values at dates of
acquisition. The excess of acquisition costs over such net assets
(goodwill) is reflected in the consolidated balance sheets as Intangible
Assets. Goodwill, net of amortization, at March 31, 2002 and December 31,
2001 was $63,148,000 and $62,619,000, respectively, and was amortized on a
straight-line method over twenty years through December 31, 2001.
Amortization expense for the three months ended March 31, 2002 and 2001 was
$5,200 and $2,043,000, respectively.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS 142. Major provisions of these Statements and their effective dates
for the Company are as follows: (1) all business combinations initiated
after June 30, 2001 must use the purchase method of accounting. The pooling
of interest method of accounting is prohibited except for transactions
initiated before July 1, 2001, (2) intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability, (3)
goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
is no longer subject to amortization, (4) effective January 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator, (5) all
acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting. The adoption of SFAS No. 142 had
a significant impact on the results of operations of the Company for the
three months ended March 31, 2002 by eliminating amortization of goodwill.
3. Note Payable
The Company and its subsidiaries entered into an agreement with Citizens
Bank (successor to Mellon Bank N.A.), administrative agent for a syndicate
of banks, which provides for a $75.0 million Revolving Credit Facility (the
"Revolving Credit Facility"). The Revolving Credit Facility was amended on
October 10, 2001. Borrowings under the Revolving Credit Facility bear
interest at one of two alternative rates, as selected by the Company. These
alternatives are: LIBOR (London Interbank Offered Rate), plus applicable
margin, or the agent bank's prime rate.
9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Note Payable - (Continued)
Borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of all of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends. The Revolving Credit Facility expires
August 2002. Management of the Company has commenced negotiations for
renewal or replacement of the Revolving Credit Facility. The weighted
average interest rates for the three months ended March 31, 2002 and 2001
were 3.72% and 7.27%, respectively. The amounts outstanding under the
Revolving Credit Facility at March 31, 2002 and December 31, 2001 were
$24.9 million and $31.5 million, respectively.
4. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Three Months
Ended March 31,
------------------------------
2002 2001
-------------- -------------
Interest expense ($288,344) ($851,045)
Interest income 20,391 109,224
-------------- -------------
($267,953) ($741,821)
============== =============
5. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes
standards for companies to report information about operating segments,
geographic areas and major customers. The adoption of SFAS 131 has no
effect on the Company's consolidated financial position, consolidated
results of operations or liquidity.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Three Months Ended Information Professional Commercial
March 31, 2002 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $28,989 $10,894 $5,227 $45,110
Operating expenses 25,868 10,087 5,142 41,097
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 3,121 807 85 4,013
Depreciation 195 90 17 302
Goodwill amortization 4 1 5
--------------- ------------- -------------- ------------- -------------
Operating income $2,922 $ 716 $ 68 $ 3,706
=============== ============= ============== ============= =============
Total assets $85,494 $11,214 $5,427 $20,854 $123,389
Capital expenditures $ 132 $ 132
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. Segment Information - (Continued)
Three Months Ended
Information Professional Commercial
March 31, 2001 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $48,574 $9,921 $6,159 $64,654
Operating expenses 43,781 9,321 5,924 59,026
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 4,793 600 235 5,628
Depreciation 178 48 10 236
Goodwill amortization 1,874 161 8 2,043
--------------- ------------- -------------- ------------- -------------
Operating income $ 2,741 $ 391 $ 217 $ 3,349
=============== ============= ============== ============= =============
Total assets $135,876 $11,894 $5,384 $16,595 $169,749
Capital expenditures $ 158 $ 225 $ 383
<FN>
(1) EBITDA consists of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
</FN>
6. Contingencies
The Company has received claims and notices of possible claims from various
persons from whom the Company acquired stock or assets in four separate
acquisitions that occurred during 1998 and 1999. Such claims and possible
claims are not related. These claims and possible claims relate to
allegations of wrongful termination and failure of the Company to pay
deferred consideration under the relevant acquisition agreements. In the
opinion of management, the Company has meritorious defenses to such claims
and does not believe that the resolution of such claims should have a
material adverse effect on the Company, its financial position, its results
of operations or its cash flows.
In 1998, two former officers filed suit against the Company alleging
wrongful termination of their employment, wrongful failure to make
severance payments and wrongful conduct by the Company in connection with
the grant and non-vestiture of Stock Options to the plaintiffs. The
complaint also alleged that the Company wrongfully limited the number of
shares of Company stock that could be sold by the plaintiffs under a
Registration Rights Agreement and made various other claims. The
plaintiffs' complaint sought damages of approximately $480,000 and further
sought additional unliquidated damages. The claims relating to wrongful
termination of employment and wrongful conduct by the Company in connection
with the grant of Stock Options to the plaintiffs have been resolved in
binding arbitration. With respect to the Company's alleged wrongful
limiting of the number of shares the plaintiffs could sell and one
plaintiff's claim of entitlement to severance pay of $240,000, the Company
is awaiting completion of discovery and the fixing of a trial date. The
Company is also awaiting the court's ruling on its motion for summary
judgment in its favor with respect to the plaintiffs' claims concerning the
non-vestiture of their stock options. Substantial damages are being sought
on the share-selling limitation and stock option claims; however, the
alleged damages are subject to significant reduction by reason of their
speculative nature and for having been avoidable losses. Management
believes the suit is without merit and will continue to defend the claims
vigorously.
11
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON
AND RESULTS OF OPERATIONS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other Company reports and public
filings are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that such forward-looking
statements, which may be identified by words such as "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions which include, among others, statements regarding the Company's
intentions as to changes to its product offerings, its concentration or higher
margin service areas, its pursuit of strategic alliances, partnerships, clients
and acquisitions, the increased use of the SAP platform and the increased
propensity of clients to outsource IT functions, are only predictions and are
subject to risks and uncertainties that could cause the Company's actual results
and financial position to differ materially. Such risks and uncertainties
include, without limitation: (i) unemployment and general economic conditions
associated with the provision of information technology and engineering services
and solutions and placement of temporary staffing personnel; (ii) the Company's
ability to continue to attract, train and retain personnel qualified to meet the
requirements of its clients; (iii) the Company's ability to identify appropriate
acquisition candidates, complete such acquisitions and successfully integrate
acquired businesses; (iv) uncertainties regarding pro forma financial
information and the underlying assumptions relating to acquisitions and acquired
businesses; (v) uncertainties regarding amounts of deferred consideration and
earnout payments to become payable to former shareholders of acquired
businesses; (vi) possible adverse effects on the market price of the Company's
Common Stock due to the resale into the market of significant amounts of Common
Stock; (vii) the potential adverse effect a 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 which it serves; (xi) the Company's ability to
maintain its unemployment insurance premiums and workers compensation premiums;
(xii) the risk of claims being made against the Company associated with
providing temporary staffing services; (xiii) the Company's ability to manage
significant amounts of information, and periodically expand and upgrade its
information processing capabilities; (xiv) the Company's ability to remain in
compliance with federal and state wage and hour laws and regulations; (xv)
predictions as to the future need for the Company's services; (xvi)
uncertainties relating to the allocation of costs and expenses to each of the
Company's operating segments; and (xvii) other economic, competitive and
governmental factors affecting the Company's operations, markets, products and
services. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the results of any revision of
these forward-looking statements to reflect these ends or circumstances after
the date they are made or to reflect the occurrence of unanticipated events.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the performance of its customers through the
adaptation and deployment of advanced information technology and engineering
services. RCM is an innovative leader in the design, development and delivery of
these services to various industries. RCM's offices are located throughout North
America, including many major metropolitan centers. The Company provides a
diversified and extensive range of service offerings and deliverables. Its
portfolio of Information Technology services includes e-Business, Enterprise
Management, Enterprise Application Integration and Supply Chain. RCM's
Engineering services focus on Engineering Design, Technical Support, and Project
Management and Implementation. The Company's Commercial services business unit
provides Healthcare contract professionals as well as Clerical and Light
Industrial temporary personnel. The Company provides its services to clients in
banking and finance, healthcare, insurance, aerospace, pharmaceutical,
telecommunications, utility, technology, manufacturing and distribution and
government sectors. The Company believes that the breadth of services fosters
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 branch offices located
in selected regions throughout North America. The Company has executed a
regional strategy to better leverage its consulting services offering. The
Company has also implemented a reorganization of its Solutions practices to
centralize management oversight and to expand the sales and marketing of those
services.
Many of the Company's clients are facing challenging economic times. This is
creating uncertainty in their ability to pursue technology projects, which had
previously been considered a competitive imperative. Many clients are laying off
their own permanent staff and reducing the demand for consulting services in
attempts to maintain profitability. This has had a direct impact on RCM's
revenues.
Management believes that most companies have recognized the importance of the
Internet and information management technologies to competing in today's
business climate. However, the uncertain economic environment has curtailed many
companies' motivation for rapid adoption of many technological enhancements. The
process of designing, developing and implementing software solutions has become
increasingly complex. Management believes that Companies today are focused on
return on investment analysis in prioritizing the initiatives they undertake.
This has had the effect of delaying or totally negating the spending on many
emerging new solutions, which management formally anticipated.
Nonetheless, IT managers must integrate and manage computing environments
consisting of multiple computing platforms, operating systems, databases and
networking protocols, and must implement packaged software applications to
support existing business objectives. Companies also need to continually keep
pace with new developments, which often render existing equipment and internal
skills obsolete. Consequently, business drivers cause IT managers to support
increasingly complex systems and applications of significant strategic value,
while working under budgetary, personnel and expertise constraints. This has
given rise to increasing demand for outsourcing. Clients are increasingly
evaluating the potential for outsourcing business critical applications and
entire business functions. The Company is positioned to take advantage of this
accelerating trend.
The Company presently realizes revenues from client engagements that range from
the placement of contract and temporary technical consultants to project
assignments that entail the delivery of end-to-end solutions. These services are
primarily provided to the client at hourly rates that are established for each
of the Company's consultants based upon their skill level, experience and the
type of work performed. The Company also provides project management and
consulting work which are billed either by an agreed upon fixed fee or hourly
rates, or a combination of both. The billing rates and profit margins for
project management and solutions work are higher than those for professional
consulting services. The Company has an ongoing effort to expand its sales of
higher margin solution and project management services.
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview (Continued)
The majority of the Company's services are provided under purchase orders.
Contracts are utilized on more of the complex assignments where the engagements
are for longer terms or where precise documentation on the nature and scope of
the assignment is necessary. Contracts, although they normally relate to
longer-term and more complex engagements, generally do not obligate the customer
to purchase a minimum level of services and are generally terminable by the
customer on 60 to 90 days' notice. Revenues are recognized when services are
provided.
Costs of services consist primarily of salaries and compensation-related
expenses for billable consultants, including payroll taxes, employee benefits
and insurances. 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
acquisition program and corporate marketing, administrative and reporting
responsibilities. The Company records these expenses when incurred. Depreciation
relates primarily to the fixed assets of the Company. Amortization in 2001
relates principally to the goodwill resulting from the Company's acquisitions.
These acquisitions have been accounted for under the purchase method of
accounting for financial reporting purposes and have created goodwill. See
Footnote 2 to financial statements.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
A summary of operating results for the three months ended March 31, 2002 and
2001 is as follows (in thousands, except for earnings per share data):
2002 2001
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
Revenues $ 45,110 100.0% $ 64,654 100.0 %
Cost of services 32,600 72.3 46,582 72.0
-------- ---- --------- ----
Gross profit 12,510 27.7 18,072 28.0
-------- ---- --------- ----
Selling, general and administrative 8,496 18.8 12,444 19.2
Depreciation 302 .7 235 .4
-------- ------ --------- ------
8,798 19.5 12,679 19.6
-------- ---- --------- ----
Income before other expense (income),
income taxes, and amortization of
intangibles 3,711 8.2 5,393 8.4
Other expense ( 265 ) .6 ( 738) ( 1.2 )
------- ---- -------- ---
Income before income taxes
and amortization of intangibles 3,447 7.6 4,655 7.2
Income taxes 1,299 2.8 1,856 2.9
-------- --- --------- ---
Income before amortization of intangibles 2,148 4.8 2,799 4.3
Amortization of intangibles,
net of income tax benefits 3 1,648 2.5
-------- --- --------- ---
Net income $ 2,145 4.8% $ 1,151 1.8 %
======== === ========= ===
2002 2001
---------- ---------
Earnings per share:
Basic:
Income before amortization of intangibles $.20 $.26
Amortization of intangibles .15
---- -----
Net income $.20 $.11
==== ====
Diluted:
Income before amortization of intangibles $.20 $.26
Amortization of intangibles .15
---- -----
Net income $.20 $.11
==== ====
Revenues. Revenues decreased 30.2%, or $19.5 million, for the three months ended
March 31, 2002 as compared to the same period in the prior year (the "comparable
prior year period"). Revenue decline was primarily attributable to continued
softness in the Information Technology ("IT") sector. Management attributes this
softness to overall economic conditions as well as hesitancy by customers to
launch new capital spending programs.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 31, 2002 Compared to
Three Months Ended March 31, 2001 - (Continued)
Cost of Services. Cost of services decreased 30.0%, or $14.0 million, for the
three months ended March 31, 2002 as compared to the comparable prior year
period. This decrease was primarily due to a decrease in salaries and
compensation associated with decreased revenues experienced during the three
months ended March 31, 2002. Cost of services as a percentage of revenues
increased to 72.3% for the three months ended March 31, 2002 from 72.0% for the
comparable prior year period. This increase was primarily attributable to an
increase of the Company's revenues being derived from Professional Engineering
services which have historically had lower gross profit margins.
Selling, General and Administrative. Selling, general and administrative
expenses ("SGA") decreased 31.7%, or $3.9 million, for the three months ended
March 31, 2002 as compared to the comparable prior year period. This decrease
was primarily attributable to a reduction in revenues and a corresponding
reduction in the related variable costs and cost cutting initiatives. SGA
expenses as a percentage of revenues was 18.8% for the three months ended March
31, 2002 as compared to 19.2% for the comparable prior year period.
Depreciation. Depreciation increased 28.5%, or $67,000, for the three months
ended March 31, 2002 as compared to the comparable prior year period. This
increase was primarily due to the depreciation and amortization of
infrastructure and leasehold improvements incurred since March 31, 2001.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the three months ended March 31, 2002, actual interest
expense of $288,000 was offset by $20,400 of interest income, which was earned
from investments in interest bearing deposits. Interest expense, net decreased
$474,000 for the three months ended March 31, 2002 as compared to the comparable
prior year period. This decrease was primarily due to the increased cash derived
from operating activities, which was used to reduce interest bearing debt by
$6.6 million during the three months ended March 31, 2002.
Income Tax. Income tax expense decreased 30.1%, or $558,000, for the three
months ended March 31, 2002 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
three months ended March 31, 2002 compared to the comparable prior year period.
Amortization of Intangibles. Amortization of intangibles for the three months
ended March 31, 2002 and 2001 was net of income tax benefit of $2,000 and
$395,000, respectively. Amortization of intangibles decreased 99.8%, or $1.6
million for the three months ended March 31, 2002 as compared to the comparable
prior year period. On July 20, 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill
and Intangible Assets. SFAS is effective for all fiscal periods beginning after
December 15, 2001. In accordance with SFAS 142, for the three months ended March
31, 2002, all previously recognized goodwill and intangible assets with
indefinite lives was no longer subject to amortization.
Liquidity and Capital Resources
Operating activities provided $8.9 million of cash for the three months ended
March 31, 2002 as compared to $15.3 million for the comparable period. The
decrease in cash provided by operating activities was primarily attributable to
decreases in accounts receivable, income tax refund receivable, deferred tax
assets, prepaid expenses and other current assets and an increase in accrued
payroll, which was partially offset by decreases in accounts payable and accrued
expenses, payroll and withheld taxes and income taxes payable.
Investing activities used $670,000 for the three months ended March 31, 2002 as
compared to $2.7 million for the comparable period. The reduction in the use of
cash for the three months ended March 31, 2002 as compared to the comparable
period was primarily attributable to a reduction in acquisition and deferred
consideration payments.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
Financing activities consisting of debt payments of $6.6 million for the three
months ended March 31, 2002 as compared to payments of $7.4 million for the
comparable period.
The Company and its subsidiaries entered into an agreement with Citizens Bank
(successor to Mellon Bank N.A.), administrative agent for a syndicate of banks,
which provides for a $75.0 million Revolving Credit Facility (the "Revolving
Credit Facility"). The Revolving Credit Facility was amended on October 10,
2001. Borrowings under the Revolving Credit Facility bear interest at one of two
alternative rates, as selected by the Company. These alternatives are: LIBOR
(London Interbank Offered Rate), plus applicable margin, or the agent bank's
prime rate.
Borrowings under the Revolving Credit Facility are collateralized by all of the
assets of the Company and its subsidiaries and a pledge of all of the stock of
its subsidiaries. The Revolving Credit Facility also contains various financial
and non-financial covenants, such as restrictions on the Company's ability to
pay dividends. The Revolving Credit Facility expires August 2002. Management of
the Company has commenced negotiations for renewal or replacement of the
Revolving Credit Facility. The weighted average interest rates for the three
months ended March 31, 2002 and 2001 were 3.72% and 7.27%, respectively. The
amounts outstanding under the Revolving Credit Facility at March 31, 2002 and
December 31, 2001 were $24.9 million and $31.5 million, respectively.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any future acquisitions will be
derived from one or more of the Revolving Credit Facility, funds generated
through operations, or future financing transactions.
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. Should the
size of the Company and its financial resources increase, acquisition
opportunities requiring significant commitments of capital may arise. In order
to pursue such opportunities, the Company may be required to incur debt or issue
potentially dilutive securities in the future. No assurance can be given as to
the Company's future acquisition and expansion opportunities or how such
opportunities will be financed.
The Company does not currently have material commitments for capital
expenditures and does not anticipate entering into any such commitments during
the next twelve months. The Company's current commitments consist primarily of
lease obligations for office space. The Company believes that its capital
resources are sufficient to meet its present obligations and those to be
incurred in the normal course of business for the next 12 months. Although, the
Company currently believes that it has sufficient capital resources to meet its
anticipated working capital and capital expenditures beyond the next 12 months,
unanticipated events and opportunities may make it necessary for the Company to
increase its current credit facility or establish new credit facilities or raise
capital in public and/or private transactions in order to meet its capital
requirements.
The Company is involved in several litigation matters. See Note 6 to the
Financial Statements. Should a significant number of such matters be resolved
against the Company, the Company will need to devote capital it anticipates
using for other purposes to such litigation matters, which could result in an
increased need for capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's exposure to market risk
since its Annual Report on Form 10-K for the year ended December 31, 2001.
17
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: May 9, 2002 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
18