RCM TECHNOLOGIES, INC. Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made byRCM 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 life sciences, information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the effects of the COVID-19 pandemic; (iii) the Company's ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iv) the Company's ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (v) the Company's relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (vi) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vii) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (viii) 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; (ix) the Company's ability to obtain financing on satisfactory terms; (x) the reliance of the Company upon the continued service of its executive officers; (xi) the Company's ability to remain competitive in the markets that it serves; (xii) the Company's ability to maintain its unemployment insurance premiums and workers compensation premiums; (xiii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiv) the Company's ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xvi) the Company's ability to remain in compliance with federal and state wage and hour laws and regulations; (xvii) uncertainties in predictions as to the future need for the Company's services; (xviii) uncertainties relating to the allocation of costs and expenses to each of the Company's operating segments; (ixx) 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; (xx) the results of, and costs relating to, any interactions with shareholders of the Companywho 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 (xxi) 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. 29
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COVID-19 Considerations
In March 2020 , the World Health Organization declared the outbreak of a novel
coronavirus (COVID-19) as a pandemic, which continues to present various health,
business and other challenges throughout the United States . As a result, we have
closed or reduced many of our office locations, with much of our workforce
working from home. The duration and ultimate magnitude of the disruption remains
uncertain. While the Company has not seen any long-term negative impact from
COVID-19, the pandemic may negatively impact our business, results of
operations, and financial position in the future.
It is difficult to assess both the current and future impact from COVID-19 to
the Specialty Health Care segment, due to the high degree of uncertainty around
COVID-19 and the duration and extent of the pandemic, especially as it may
impact schools where many of our personnel work. While the Specialty Health Care
segment has a small number of billable professionals performing services from
home, in particular, through its telehealth services offerings, most of its
billable staff works at client locations. The majority of the Specialty Health
Care segment's services are historically delivered at schools and health care
facilities. The Company believes that demand for much of its services is very
high as a result of COVID-19. However, health care professionals, such as nurses
and doctors, are scarce and difficult to recruit. Also, the Company believes
that any major changes in the pandemic, such as a new variant, could adversely
impact revenue. For example, if the Specialty Health Care segment's school
clients were to return to virtual learning as we experienced in 2020 and
portions of 2021, the Specialty Health Care segment could experience a material
decline in revenue. Conversely, the Specialty Health Care clients' demand for
the Company's services may decline in the event the pandemic fully transitions
to an endemic.
The Company's priorities during the COVID-19 pandemic are protecting the health
and safety of our employees and, especially in the healthcare segment, deploying
our resources, including the talents of our employees, to help the communities
we serve meet and overcome the current challenges. Our ability to continue to
operate without any significant negative operational impact from the COVID-19
pandemic will in part depend on our ability to protect our employees and our
supply chain. The Company has endeavored to follow the recommended actions of
government and health authorities to protect our employees, with particular
measures in place for those working in our customer facilities.
While our revenue, gross profit and operating income were negatively impacted in
fiscal 2020 on a consolidated basis and, for certain business lines, in fiscal
2021, we have maintained the consistency of our operations, to a substantial
degree, from the onset of the COVID-19 pandemic. We intend to continue to adhere
to our employee safety measures as we seek to ensure that any disruptions to our
operations remain as limited as possible during the pandemic. However, the
uncertainty resulting from the pandemic could result in an unforeseen disruption
to our workforce and supply chain (for example, an inability of a key supplier
or transportation supplier to source and transport materials) that could
negatively impact our operations. Any material changes to labor rates for the
Company's workforce may have a material negative impact to revenue, gross profit
and operating income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Overview
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on 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 life sciences, 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. The Company recognizes revenue on these
deliverables at the time the client accepts and approves the deliverables.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Overview (Continued)
Costs of services consist primarily of salaries and compensation-related
expenses for billable consultants 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.
Critical Accounting Policies and Use of Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The preparation of financial statements in conformity withU.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 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 awards, insurance liabilities, accounting for income taxes and accrued bonuses. A summary of our significant accounting policies is included in our Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year endedJanuary 1, 2022 . Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedJanuary 1, 2022 .
Recently Issued Accounting Pronouncements
A discussion of the recently issued accounting pronouncements is set forth in
Note 12, New Accounting Standards, in the unaudited condensed consolidated
financial statements included in Part I, Item I of this Quarterly Report on Form
10-Q and is incorporated herein by reference.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The
pace of customer capital spending programs, new product launches and similar
activities have a direct impact on the need for engineering, life sciences and
information technology services. When the U.S. , Canadian or global economies
decline, the Company's operating performance could be adversely impacted. In
addition, global events such as the ongoing COVID-19 pandemic also have a
substantial impact on our operations and financial results. 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, general economic declines 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Thirteen Weeks Ended
A summary of operating results for the thirteen weeks ended
July 2, 2022 July 3, 2021
Amount % of Revenue Amount % of Revenue
Revenue $ 74,346 100.0 $ 48,933 100.0
Cost of services 52,663 70.8 36,667 74.9
Gross profit 21,683 29.2 12,266 25.1
Selling, general and administrative 13,264 18.1 10,055 20.5
Depreciation and amortization of property
and equipment 225 0.3 259 0.6
Amortization of acquired intangible
assets - 0.0 9 0.0
Operating costs and expenses 13,489 18.4 10,323 21.1
Operating income 8,194 11.2 1,943 4.0
Other (income) expense, net (28 ) 0.0 201 0.4
Income before income taxes 8,222 11.2 1,742 3.6
Income tax expense 2,208 3.0 486 1.0
Net income $ 6,014 8.2 $ 1,256 2.6
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to
Revenue. Revenue increased 51.9%, or$25.4 million , for the thirteen weeks endedJuly 2, 2022 as compared to the thirteen weeks endedJuly 3, 2021 (the "comparable prior-year period"). Revenue increased$4.0 million in the Engineering segment,$20.5 million in the Specialty Health Care segment and$0.9 million in the Life Sciences and Information Technology segment. See more detailed disclosure by segment in our Segment Discussion. Cost of Services and Gross Profit. Cost of services increased 43.6%, or$16.0 million , for the thirteen weeks endedJuly 2, 2022 as compared to the comparable prior-year period. Cost of services increased primarily due to the increase in revenue. Cost of services as a percentage of revenue for the thirteen weeks endedJuly 2, 2022 andJuly 3, 2021 was 70.8% and 74.9%, 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$13.3 million for the thirteen weeks endedJuly 2, 2022 as compared to$10.1 million for the comparable prior-year period. As a percentage of revenue, SGA expenses were 18.1% for the thirteen weeks endedJuly 2, 2022 and 20.5% for the comparable prior-year period. See Segment Discussion for further information on SGA expense changes. 34
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Thirteen Weeks Ended July 2, 2022 Compared to Thirteen Weeks Ended July 3, 2021
(Continued)
Other Expense (Income). Other expense (income) 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 (income), decreased by
$0.1 million as compared to the comparable prior year period, primarily due to a
decrease in interest expense, net. Interest expense decreased primarily due to
decreased borrowing, and also due to a decreased average borrowing rate under
the Company's line of credit.
Income Tax Expense (Benefit). The Company recognized $2.2 million of income tax
expense for the thirteen weeks ended July 2, 2022 , as compared to $0.5 million
of income tax benefit for the comparable prior-year period. The consolidated
effective income tax rate for the current period was 26.9% as compared to 27.5%
for the comparable prior-year period. The projected fiscal 2022 income tax
rates as of July 2, 2022 , were approximately 27.2%, 23.6% and 16.4% 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. The effective income tax rate can also
be impacted by discrete permanent differences affecting any period presented.
Differences between the effective tax rate and the applicable U.S. federal
statutory rate may arise, primarily from the effect of state and local income
taxes, share-based compensation, and potential tax credits available to the
Company. The actual 2022 effective tax rate may vary from the estimate depending
on the actual operating income earned in various jurisdictions, the potential
availability of tax credits, and the exercise of stock options and vesting of
share-based awards.
Segment Discussion
Engineering
Engineering revenues of $20.9 million for the thirteen weeks ended July 2, 2022
increased 23.5%, or $4.0 million , compared to the comparable prior-year
period. The increase in revenue was comprised of the following: increases in
Aerospace revenue of $4.3 million , Industrial Processing revenue of $1.4
million , and Energy Services revenue of $0.4 million , offset by a decrease in
revenue resulting from the sale of the Canadian Power Systems Group of $2.1
million discussed below. The increase in Aerospace revenue was primarily due to
a new outsourcing engagement with one of the Company's long-time customers and
the Company's entrance into the burgeoning rocket industry. The increase in
Industrial Processing revenue was primarily due to spending increases by several
major customers seeking to upgrade their ethanol related production capability.
Gross profit increased by 37.3%, or $1.5 million , as compared to the comparable
prior-year period. Gross profit increased because of the increase in revenue and
an increase in gross profit margin. Gross profit margin of 26.4% for the current
period increased from 23.7% for the comparable prior-year period. The increase
in gross profit margin was due to three factors: 1) decreased revenue from the
Canadian Power Systems Group , as the prior-year gross profit margin was dilutive
at 23.4%; 2) improved project execution across all three of the Engineering
business lines; and 3) a concerted effort to improve gross profit margin through
better managing utilization and focusing on higher gross profit margin
opportunities. The Engineering segment's SGA expense of $4.1 million increased
by $0.5 million due to investment in new personnel to reposition and generate
future growth. The Engineering segment experienced operating income of $1.3
million for the thirteen weeks ended July 2, 2022 , as compared to $0.2 million
for the comparable prior-year period.
On July 30, 2021 , the Company sold the principal assets and certain liabilities
of its Pickering and Kincardine offices, located in Ontario, Canada . These two
offices were often referred to as the Canadian Power Systems business and
principally provided engineering services to two major nuclear power providers
in Canada . The two Canadian Power Systems offices were part of a reporting unit
within the Company's Engineering segment. The Company will continue to offer
other engineering services in Canada and similar services in the United States .
For the thirteen weeks ended July 3, 2021 , these two offices generated revenue
of $2.1 million .
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Thirteen Weeks Ended
Segment Discussion (Continued)
Specialty Health Care Specialty Health Care revenue of$43.5 million for the thirteen weeks endedJuly 2, 2022 increased 89.4%, or$20.5 million , as compared to the comparable prior-year period. The increase in revenue was driven by both the Company's school and non-school clients. Revenue from school clients for the thirteen weeks endedJuly 2, 2022 was$32.3 million as compared to$15.1 million for the comparable prior-year period. Revenue from non-school clients for the thirteen weeks endedJuly 2, 2022 was$11.2 million as compared to$7.8 million for the comparable prior-year period. Revenue increases were due to the reopening ofSpecialty Health Care School clients and unprecedented demand for health care professionals across all types of clients served. The Specialty Health Care segment's gross profit increased by 130.4%, or$7.3 million , to$12.9 million for the thirteen weeks endedJuly 2, 2022 , as compared to$5.6 million for the prior-year period. The increase in gross profit was primarily driven by the increase in revenue, but also a higher gross profit margin. Gross profit margin for the thirteen weeks endedJuly 2, 2022 increased to 29.6% as compared to 24.4% for the comparable prior-year period. The increase in gross profit margin was primarily due to more normalized revenue and the high demand for certain services. Specialty Health Care experienced operating income of$5.6 million for the thirteen weeks endedJuly 2, 2022 , as compared to$1.1 million for the comparable prior-year period. The primary reason for the increase in operating income was the increase to gross profit, offset by an increase in SGA expense. SGA expense increased by$2.8 million to$7.2 million , as compared to$4.4 million in the comparable prior-year period. The increase in SGA expense was primarily due to increasing our workforce to help meet increased demand.
Life Sciences and Information Technology
Life Sciences and Information Technology revenue of$10.0 million for the thirteen weeks endedJuly 2, 2022 increased 10.2%, or$0.9 million , as compared to$9.1 million for the comparable prior-year period. The increase in Life Sciences and Information Technology revenue was primarily driven by the Company's Life Sciences practice. The Company believes that the Life Sciences industry has not seen a negative impact from COVID-19. Gross profit of$3.3 million for the thirteen weeks endedJuly 2, 2022 increased 23.7%, or$0.6 million , as compared to$2.7 million for the comparable prior-year period. The increase in gross profit was primarily due to the increase in revenue, as well as an increase in gross profit margin. The Life Sciences and Information Technology gross profit margin for the thirteen weeks endedJuly 2, 2022 was 33.0% as compared to 29.4% for the comparable prior-year period. The Company attributes the gross profit margin increase to higher revenue from its Life Sciences practice and a concerted effort to increase gross profit margin through its managed service offerings. SGA expense decreased by a negligible amount as compared to$2.0 million in the comparable prior-year period. The Life Sciences and Information Technology segment experienced operating income of$1.3 million as compared to$0.7 million for the comparable prior-year period. The increase in operating income was primarily due to the increase in revenue and gross profit. 36
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Twenty-Six Weeks Ended
A summary of operating results for the twenty-six weeks ended
July 2, 2022 July 3, 2021
Amount % of Revenue Amount % of Revenue
Revenue $ 156,307 100.0 $ 93,482 100.0
Cost of services 111,204 71.1 70,366 75.3
Gross profit 45,103 28.9 23,116 24.7
Selling, general and administrative 27,411 17.7 19,184 20.5
Depreciation and amortization of property
and equipment 463 0.3 525 0.6
Amortization of acquired intangible
assets - 0.0 89 0.1
Operating costs and expenses 27,874 18.0 19,798 21.2
Operating income 17,229 11.1 3,318 3.5
Other expense, net 24 0.0 213 0.2
Income before income taxes 17,205 11.1 3,105 3.3
Income tax expense 4,671 3.0 842 0.9
Net income $ 12,534 8.1 $ 2,263 2.4
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to
Revenue. Revenue increased 67.2%, or$62.8 million , for the twenty-six weeks endedJuly 2, 2022 as compared to the twenty-six weeks endedJuly 3, 2021 (the "comparable prior-year period"). Revenue increased$9.4 million in the Engineering segment,$51.5 million in the Specialty Health Care segment and$1.9 million in the Life Sciences and Information Technology segment. See more detailed disclosure by segment in our Segment Discussion. Cost of Services and Gross Profit. Cost of services increased 58.0%, or$40.8 million , for the twenty-six weeks endedJuly 2, 2022 as compared to the comparable prior-year period. Cost of services increased primarily due to the increase in revenue. Cost of services as a percentage of revenue for the twenty-six weeks endedJuly 2, 2022 andJuly 3, 2021 was 71.1% and 75.3%, 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$27.4 million for the twenty-six weeks endedJuly 2, 2022 as compared to$19.2 million for the comparable prior-year period. As a percentage of revenue, SGA expenses were 17.7% for the twenty-six weeks endedJuly 2, 2022 and 20.5% for the comparable prior-year period. See Segment Discussion for further information on SGA expense changes. 37
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Twenty-Six Weeks Ended July 2, 2022 Compared to Twenty-Six Weeks Ended July 3,
2021 (Continued)
Other Expense (Income). Other expense (income) 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 (income), decreased by
$0.1 million as compared to the comparable prior year period, primarily due to a
decrease in interest expense, net. Interest expense decreased primarily due to
decreased borrowing, and also due to a decreased average borrowing rate under
the Company's line of credit.
Income Tax Expense (Benefit). The Company recognized $4.7 million of income tax
expense for the twenty-six weeks ended July 2, 2022 , as compared to $0.8 million
of income tax benefit for the comparable prior-year period. The consolidated
effective income tax rate for the current period was 27.1% as compared to 26.9%
for the comparable prior-year period. The projected fiscal 2022 income tax
rates as of July 2, 2022 , were approximately 27.5%, 23.6% and 15.6% 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. The effective income tax rate can also
be impacted by discrete permanent differences affecting any period presented.
Differences between the effective tax rate and the applicable U.S. federal
statutory rate may arise, primarily from the effect of state and local income
taxes, share-based compensation, and potential tax credits available to the
Company. The actual 2022 effective tax rate may vary from the estimate depending
on the actual operating income earned in various jurisdictions, the potential
availability of tax credits, and the exercise of stock options and vesting of
share-based awards.
Segment Discussion
Engineering
Engineering revenues of $40.8 million for the twenty-six weeks ended July 2,
2022 increased 29.9%, or $9.4 million , compared to the comparable prior-year
period. The increase in revenue was comprised of the following: increases in
Aerospace revenue of $8.4 million , Industrial Processing revenue of $4.0
million , and Energy Services revenue of $1.4 million , offset by a decrease in
revenue resulting from the sale of the Canadian Power Systems Group of $4.4
million . The increase in Aerospace revenue was primarily due to a new
outsourcing engagement with one of the Company's long-time customers and the
Company's entrance into the burgeoning rocket industry. The increase in
Industrial Processing revenue was primarily due to spending increases by several
major customers seeking to upgrade their ethanol related production capability.
Gross profit increased by 48.8%, or $3.5 million , as compared to the comparable
prior-year period. Gross profit increased because of the increase in revenue and
an increase in gross profit margin. Gross profit margin of 26.3% for the current
period increased from 23.0% for the comparable prior-year period. The increase
in gross profit margin was due to three factors: 1) decreased revenue from the
Canadian Power Systems Group , as the prior-year gross profit margin was dilutive
at 21.9%; 2) improved project execution across all three of the Engineering
business lines; and 3) a concerted effort to improve gross profit margin through
better managing utilization and focusing on higher gross profit margin
opportunities. The Engineering segment's SGA expense of $8.2 million increased
by $1.5 million due to investment in new personnel to reposition and generate
future growth. The Engineering segment experienced operating income of $2.3
million for the twenty-six weeks ended July 2, 2022 , as compared to $0.1 million
for the comparable prior-year period.
For the twenty-six weeks ended
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Twenty-Six Weeks Ended
Segment Discussion (Continued)
Specialty Health Care Specialty Health Care revenue of$95.6 million for the twenty-six weeks endedJuly 2, 2022 increased 117.0%, or$51.5 million , as compared to the comparable prior-year period. The increase in revenue was driven by both the Company's school and non-school clients. Revenue from school clients for the twenty-six weeks endedJuly 2, 2022 was$73.8 million as compared to$29.1 million for the comparable prior-year period. Revenue from non-school clients for the twenty-six weeks endedJuly 2, 2022 was$21.8 million as compared to$14.9 million for the comparable prior-year period. Revenue increases were due to the reopening ofSpecialty Health Care School clients and unprecedented demand for health care professionals across all types of clients served. The Specialty Health Care segment's gross profit increased by 162.3%, or$17.3 million , to$27.9 million for the twenty-six weeks endedJuly 2, 2022 , as compared to$10.6 million for the prior-year period. The increase in gross profit was primarily driven by the increase in revenue, but also a higher gross profit margin. Gross profit margin for the twenty-six weeks endedJuly 2, 2022 increased to 29.2% as compared to 24.1% for the comparable prior-year period. The increase in gross profit margin was primarily due to more normalized revenue and the high demand for certain services. Specialty Health Care experienced operating income of$12.5 million for the twenty-six weeks endedJuly 2, 2022 , 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 gross profit, offset by an increase in SGA expense. SGA expense increased by$6.6 million to$15.1 million , as compared to$8.5 million in the comparable prior-year period. The increase in SGA expense was primarily due to increasing our workforce to help meet increased demand.
Life Sciences and Information Technology
Life Sciences and Information Technology revenue of$19.9 million for the twenty-six weeks endedJuly 2, 2022 increased 10.3%, or$1.9 million , as compared to$18.0 million for the comparable prior-year period. The increase in Life Sciences and Information Technology revenue was primarily driven by the Company's Life Sciences practice. The Company believes that the Life Sciences industry has not seen a negative impact from COVID-19. Gross profit of$6.5 million for the twenty-six weeks endedJuly 2, 2022 increased 22.9%, or$1.2 million , as compared to$5.3 million for the comparable prior-year period. The increase in gross profit was primarily due to the increase in revenue, as well as an increase in gross profit margin. The Life Sciences and Information Technology gross profit margin for the twenty-six weeks endedJuly 2, 2022 was 32.6% as compared to 29.3% for the comparable prior-year period. The Company attributes the gross profit margin increase to higher revenue from its Life Sciences practice and a concerted effort to increase gross profit margin through its managed service offerings. SGA expense increased by$0.1 million to$4.0 million , as compared to$3.9 million in the comparable prior-year period. The increase in SGA expense was a driven by increased expenditures in sales and recruiting. The Life Sciences and Information Technology segment experienced operating income of$2.4 million as compared to$1.3 million for the comparable prior-year period. The increase in operating income was primarily due to the increase in revenue and gross profit. 39
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Twenty-Six Weeks Ended
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's Condensed Consolidated Statements of Cash Flows (in thousands):
Twenty-Six Weeks Ended
July 2, July 3,
2022 2021
Cash provided by (used in):
Operating activities $ 20,755 $ 6,321
Investing activities $ (453 ) $ (182 )
Financing activities $ (17,175 ) $ (5,424 )
Operating Activities
Operating activities provided $20.8 million of cash for the twenty-six weeks
ended July 2, 2022 as compared to $6.3 million in the comparable prior-year
period. The major components of cash provided by operating activities in the
twenty-six weeks ended July 2, 2022 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, accrued expenses and accrued payroll and
related costs, and deferred revenue.
For the twenty-six weeks ended July 2, 2022 , the Company experienced net income
of $12.5 million as compared to $2.3 million for the comparable prior-year
period. A decrease in accounts receivables in the twenty-six weeks ended July
2, 2022 provided $3.6 million of cash as compared to using $0.9 million in the
comparable prior-year period. The Company primarily attributes this decrease in
accounts receivables for the twenty-six weeks ended July 2, 2022 to a concerted
effort to gain efficiencies from its invoice processing and collection of cash
in its Specialty Health Care segment.
While highly variable, the Company's transit accounts payable typically 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 payable of $0.9 million as of July 2, 2022 and a net payable of $1.1
million as of January 1, 2022 , using $0.2 million of cash during the twenty-six
weeks ended July 2, 2022 . The net of transit accounts payable and transit
accounts receivable was a net payable of $2.3 million as of July 3, 2021 and a
net payable of $2.4 million as of January 2, 2021 , using $0.1 million of cash
during the twenty-six weeks ended July 3, 2021 .
Prepaid expenses and other current assets provided cash of $0.4 million for the
twenty-six weeks ended July 2, 2022 as compared to $2.0 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. Since certain expenses are paid before a fiscal year
concludes and are amortized over the next fiscal year, prepaid expenses and
other current assets generally tend to increase at the end of a fiscal year and
decrease during the first half.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
A decrease in accounts payable and accrued expenses used cash of
Changes in accrued payroll and related costs provided cash of$3.0 million for the twenty-six weeks endedJuly 2, 2022 as compared to using cash of$0.2 million for the comparable prior-year period. There are four 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 twenty-six weeks in a fiscal quarter, which means that the Company normally has a major payroll on the last business day of every other quarter; 3) the timing of various payroll related payments varies in the normal course of business; and 4) 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 twenty-six weeks endedJuly 2, 2022 was paid onJuly 1, 2022 . During fiscal 2020, the Company deferred$3.3 million of employer payroll taxes under the CARES Act. Half of these deferred payroll taxes were paid inDecember 2021 and the remaining portion must be paid inDecember 2022 . Historically, the Company has experienced small deferred revenue balances that have been included in accounts payable and accrued expenses. During the second half of fiscal 2021, the Company' Industrial Processing group secured several contracts with significant front-loaded payments, thereby generating larger deferred revenue balances than typically generated. The Company's deferred revenue balance as ofJuly 2, 2022 was$2.2 million , as compared to$3.4 million as ofJanuary 1, 2022 , using cash from operations of$1.2 million for the twenty-six weeks endedJuly 2, 2022 . Investing Activities Investing activities used$0.5 million of cash for the twenty-six weeks endedJuly 2, 2022 and$0.1 million of cash for the comparable prior-year period. Investing activities used$0.4 million for the purchase of property and equipment in the current period as compared to$0.1 million in the comparable prior-year period. Financing Activities Financing activities used$17.2 million of cash for the twenty-six weeks endedJuly 2, 2022 as compared to$5.2 million in the comparable prior-year period. The Company made net payments under its line of credit of$14.2 million during the twenty-six weeks endedJuly 2, 2022 as compared to net payments of$2.2 million in the comparable prior-year period. The Company used$2.8 million to repurchase shares of its common stock in the current period as compared to$2.6 million in the comparable prior-year period. The Company generated cash of$0.1 million from sales of shares from its equity plans for the current period and$0.1 million for the comparable prior-year period. 41
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
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. At the option ofCitizens Bank , LIBOR can be replaced with SOFR (Secured Overnight Financing Rate). The LIBOR alternative is being phased out in 2022. Citizens Bank has not indicated when this switch will occur, but in any event, the Company does not believe there will be any material impact on its borrowing rate. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the twenty-six weeks endedJuly 2, 2022 andJuly 3, 2021 were 1.9% and 2.2%, 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 the Company's ability to borrow in order to pay dividends. As ofJuly 2, 2022 , the Company was in compliance with all covenants contained in the Revolving Credit Facility (as amended). The Company believes that it will maintain compliance with its financial covenants for the foreseeable future. Borrowings under the line of credit as ofJuly 2, 2022 andJanuary 1, 2022 were zero and$14.2 million , respectively. At bothJuly 2, 2022 andJanuary 1, 2022 there were letters of credit outstanding for$1.9 million . AtJuly 2, 2022 andJanuary 1, 2022 , the Company had availability for additional borrowings under the Revolving Credit Facility of$43.1 million and$28.9 million , respectively. In addition to borrowings and sales of shares from its equity plans, the Company may raise capital through sales of shares of common stock under its at the market issuance program (the "ATM Program") established under itsMay 2021 At Market Issuance Sales Agreement withB. Riley Securities, Inc. , as the agent (the "Agent"). The ATM Program allows the Company to offer and sell shares of the common stock having an aggregate sales price of up to$17.9 million from time to time through the Agent. The Company may also decide to increase the value of shares available to sell if the Company's stock price increases. To date, the Company has not sold any shares under the ATM Program.
Current Liquidity and Revolving Credit Facility
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, and meet the other general cash needs of our business. Our liquidity is impacted by general economic, financial, competitive, and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay our expenses, principally labor-costs, and other related expenditures. We generally satisfy our liquidity needs through cash provided by operations and, when necessary, our revolving line of credit fromCitizens Bank . The Company believes it has a great deal of flexibility to reduce its costs if it becomes necessary. The Company believes that it can satisfy its liquidity needs for at least the next twelve months. 42
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Current Liquidity and Revolving Credit Facility (Continued)
The Company's liquidity and capital resources as ofJuly 2, 2022 , included accounts receivable and total current asset balances of$45.3 million and$51.5 million , respectively. Current liabilities were$33.3 million as ofJuly 2, 2022 and were exceeded by total current assets by$18.2 million . The Company experiences volatility in its daily cash flow and, at times, relies on the revolving line of credit to provide daily liquidity for the Company's financial operations. As ofJuly 2, 2022 , the Company was in compliance with all financial covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations. The Company's business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company's future acquisition and expansion opportunities or how such opportunities will be financed. The Company is exposed to various asserted claims as ofJuly 2, 2022 , where the Company believes it has a probability of loss. Additionally, the Company is exposed to other asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As ofJuly 2, 2022 , the Company has accrued$2.6 million for asserted claims. InApril 2022 , a client of the Company'sIndustrial Processing Group alleged that a system partially designed by the Company is not operating as intended, and that the Company is responsible. The Company is attempting to find a mutually agreeable solution but has not determined if it has any liability. In the event of liability, the Company believes its damages are contractually limited to$3.3 million . Since the Company has not determined that a loss is probable, the Company has not accrued any liability for this project. 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 is implementing an upgrade of its current system during fiscal 2022. The Company estimates this upgrade or replacement of its financial reporting and accounting system will cost between$0.5 million and$1.0 million . These estimates are subject to material change. 43
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Future Contingent Payments 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
Maturities of lease liabilities are as follows:
Finance
Fiscal Year Operating Leases Leases
2022 (After July 2, 2022) $ 677 $ 168
2023 1,228 337
2024 531 168
2025 267 -
2026 182 -
Thereafter 123 -
Total lease payments 3,008 673
Less: imputed interest (113 ) (6 )
Total $ 2,895 $ 667
As of July 2, 2022 , the Company had one active acquisition agreement whereby
additional contingent consideration may be earned by the former shareholders:
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 July 2, 2022 as follows:
Fiscal Year Ending Total
December 31, 2022 $ -
December 30, 2023 300
December 29, 2024 304
Estimated future contingent consideration payments
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 afterJuly 2, 2022 are capped at a cumulative maximum of$0.6 million . The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as ofJuly 2, 2022 . During the twenty-six weeks endedJuly 2, 2022 , the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net. 44
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