RCM TECHNOLOGIES INC filed 10-Q on Friday, May 10

RCM TECHNOLOGIES INC revealed 10-Q form on Friday, May 10.

Property and equipment are stated at cost and are depreciated on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives.  The annual rates are 20% for computer hardware and software as well as furniture and office equipment.  Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term.

Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing.  These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations.  The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn.  Unused line fees are recorded as interest expense.  The effective weighted average interest rate, including unused line fees, for the thirteen week period ended March 30, 2019 was 4.7%.

The Company implemented the 2001 Employee Stock Purchase Plan (the ‘Purchase Plan’) with shareholder approval, effective January 1, 2001.  Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period.  The purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to 10% of qualified compensation.

The Company recognized $0.3 million of income tax benefit for the thirteen week period ended March 30, 2019, as compared to an income tax expense of $0.4 million for the comparable prior year period.  The Company recognized a tax benefit of $0.6 million due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 27.4% as compared to 25.6% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of March 30, 2019 were approximately 28.1%, 26.5% and 15.1% 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 consolidated effective income tax rate for the thirteen week period ended March 30, 2019 was higher than the comparable prior year period was primarily due to the reduction in the rate of Serbian pretax income to consolidated pretax income. The comparable prior year period estimated income tax rates were 27.9%, 26.5% and 14.8% in the United States, Canada and Serbia, respectively, and yielded a consolidated effective income tax rate of approximately 25.6% for the thirteen week period ended March 31, 2018.

Revenues.  Revenues increased 1.5%, or $0.8 million, for the thirteen week period ended March 30, 2019 as compared to the thirteen week period ended March 31, 2018 (the ‘comparable prior year period’).  Revenues decreased $2.3 million in the Engineering segment, increased $1.5 million in the Specialty Health Care segment and increased $1.6 million in the Information Technology segment.  Effective September 30, 2018, the Company’s Engineering segment acquired the business operations of Thermal Kinetics Engineering and affiliate (together, ‘TKE’). This new business unit generated $2.6 million in revenues for the thirteen week period ended March 30, 2019.  See Segment Discussion for further information on revenue changes.

The Company has material operations in Canada, primarily from the Company’s Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the ‘Exchange Rate’). For the thirteen week period ended March 30, 2019, the Company generated total revenues from its Canadian clients of $4.6 million in U.S. dollars at an Exchange Rate of 75.1% as compared to $7.6 million in U.S. dollars at an Exchange Rate of 79.0% for the comparable prior year period.

Cost of Services and Gross Profit.  Cost of services increased 2.1%, or $0.8 million, for the thirteen week period ended March 30, 2019 as compared to the comparable prior year period. Cost of services increased due to the increase in revenues.  Cost of services as a percentage of revenues for the thirteen week periods ended March 30, 2019 and March 31, 2018 was 75.7% 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 $10.5 million for the thirteen week period ended March 30, 2019 as compared to $10.4 million for the comparable prior year period.  As a percentage of revenues, SGA expenses were 20.3% for the thirteen week period ended March 30, 2019 and 20.5% for the comparable prior year period.   See Segment Discussion for further information on SGA expense changes.

Income Tax Expense.  The Company recognized $0.3 million of income tax benefit for the thirteen week period ended March 30, 2019, as compared to an income tax expense of $0.4 million for the comparable prior year period.  The Company recognized a tax benefit of $0.6 million due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 27.4% as compared to 25.6% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of March 30, 2019 were approximately 28.1%, 26.5% and 15.1% 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 consolidated effective income tax rate for the thirteen week period ended March 30, 2019 was higher than the comparable prior year period was primarily due to the reduction in the rate of Serbian pretax income to consolidated pretax income.

Engineering revenues of $19.1 million for the thirteen week period ended March 30, 2019 decreased 11.0%, or $2.3 million, as compared to the comparable prior year period.  The decrease was due to a decrease of $2.1 million from the Company’s Canadian Power Systems Group, a decrease of $1.9 million from the Company’s Energy Services Group, and a decrease of $1.0 million from the Company’s Aerospace Group, offset by a $2.6 million increase from the TKE acquisition.  The Company attributes these revenue declines to decreased spending on the part of its Canadian Power Systems and Aerospace clients, increased competition from other vendors to its Canadian Power Systems clients, and timing of large projects from the Company’s Energy Services clients. Gross profit decreased 17.5%, or $1.0 million, as compared to the comparable prior year period. Gross profit decreased because of the decrease in revenue and decrease in gross margin. Gross margin of 24.7% for the current period decreased from 26.6% for the comparable prior year period. The gross margin decrease was primarily due to lower utilization on the component of the Company’s consultant base that is fixed. The Engineering segment operating income decreased by $0.7 million to $0.6 million for the thirteen week period ended March 30, 2019, as compared to $1.3 million for the comparable prior year period. The decrease in operating income was primarily due to the decreases in revenues, gross profit and gross margin, offset by a decrease of $0.3 million to SGA expense. The decrease in SGA expense was primarily due to a lower allocation of corporate-generated SGA expense relative to the Company’s other two segments.

Specialty Health Care revenues of $24.2 million for the thirteen week period ended March 30, 2019 increased 6.8%, or $1.5 million, as compared to the comparable prior year period.  The primary drivers of the increase in the revenues for the Specialty Health Care segment were increases of $2.0 million from the New York City office, $0.9 million from the Honolulu office, and $0.2 million from the HIM practice, offset primarily by decreases in revenue of $1.1 million from the travel nursing staffing group, $0.3 million from the Chicago office, and $0.2 million from the Permanent Placement Group.  The primary reason for revenue increases in New York City and Hawaii was the incremental addition of paraprofessionals billed on school contracts. The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment’s gross profit increased by 7.4%, or $0.4 million, to $5.6 million for the thirteen week period ended March 30, 2019 as compared to $5.2 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenue. Gross profit margin for the thirteen week period ended March 30, 2019 increased slightly to 23.3% as compared to 23.2% for the comparable prior year period. Specialty Health Care experienced operating income of $1.1 million for the thirteen week period ended March 30, 2019 as compared to $0.7 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to revenue and gross profit.  SGA expense increased by a small amount, primarily due to the need to increase SGA infrastructure expense in order to support the increased activity levels associated with higher revenues and a higher allocation of corporate-generated SGA expense.

Information Technology revenues of $8.4 million for the thirteen week period ended March 30, 2019 increased 23.8%, or $1.6 million, as compared to $6.8 million for the comparable prior year period. The Company experienced increases to revenue from all its Information Technology business lines. The Company attributes these increases to investments in management and sales personnel. Gross profit of $2.2 million for the thirteen week period ended March 30, 2019 increased 35.4%, or $0.6 million, as compared to $1.6 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenues and also impacted by an increase in gross profit margin.  The Information Technology gross profit margin for the thirteen week period ended March 30, 2019 was 26.1% as compared to 23.8% for the comparable prior year period.  The Company attributes the gross margin increase to a focus on higher margin services and improved utilization of its consultants. The Information Technology segment experienced negligible operating income in the current period as compared to an operating loss of $0.2 million for the comparable prior year period.  The improvement in operating performance was primarily driven by the increase in revenue and gross profit, offset by an increase of $0.3 million in SGA expense. The increase in SGA expense was primarily due to increases to investments in management and sales personnel and a higher allocation of corporate-generated SGA expense.

Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing.  These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations.  The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn.  Unused line fees are recorded as interest expense.  The effective weighted average interest rate, including unused line fees, for the thirteen week period ended March 30, 2019 was 4.7%.

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and debt instruments, which primarily consist of the Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio.  The Company places its investments in instruments that meet high credit quality standards.  The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk.  As of March 30, 2019, the Company’s investments consisted of cash and money market funds.  The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes.  Based on the Company’s variable-rate line of credit balances during the thirteen week period ended March 30, 2019, if the interest rate on the Company’s variable-rate line of credit (using an incremental borrowing rate) during the period had been 1.0% higher, the Company’s interest expense on an annualized basis would have increased by $0.3 million.  The Company does not expect any material loss with respect to its investment portfolio.

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