RCM TECHNOLOGIES INC

The Company is exposed to various asserted claims as of April 3, 2021, where the Company believes it has a probability of loss. As of April 3, 2021, the Company has accrued $1.8 million for asserted claims of $2.0 million.  Additionally, the Company is exposed to other asserted claims whereby an amount of loss has not been declared, and the Company can’t 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. Included in the April 3. 2021 accrual of $1.8 million, the Company has reserved $1.7 million for the settlement of a class-action suit in California that alleges the Company did not properly pay its travel nurses overtime wages. While the Company believes it did not violate any overtime wage laws, it nevertheless decided to settle this class action lawsuit in December 2020.  The Company expects to pay the $1.7 million settlement sometime during the third quarter of fiscal 2021.

Engineering revenues of $14.5 million for the thirteen weeks ended April 3, 2021 increased 2.1%, or $0.3 million, compared to the comparable prior year period.  The increase was comprised of the following: an increase in Aerospace revenue of $1.1 million, a decrease in the Canadian Power Systems Group revenue of $0.7 million, a decrease in Energy Services revenue of $0.8 million, and an increase in Industrial Processing revenue of $0.7 million.  The increase in Aerospace revenue was primarily due to a new outsourcing engagement with one of the Company’s major customers that is anticipated to become a multi-year contract. The decreases in the Canadian Power Systems and Energy Services revenue were primarily due to spending decreases with several major customers and the impact of COVID-19. The increase in Industrial Processing revenue was primarily due to spending increases with several major customers seeking to upgrade their ethanol related production capability. Gross profit decreased by 19.0%, or $0.8 million, as compared to the comparable prior year period. Gross profit decreased primarily because of the decrease in gross profit margin. Gross profit margin of 22.2% for the current period decreased from 27.9% for the comparable prior year period. The decrease in gross margin was primarily due to decreased revenue from the Canadian Power Systems and Energy Services groups, as lower revenue has negatively impacted utilization of the Engineering segment’s billable consultants.  Additionally, the new Aerospace contract will garner a lower gross margin than the Engineering segment typically experiences. The Engineering segment’s SGA expense of $3.1 million decreased by $0.3 million due to concerted effort to reduce SGA expense and gain efficiency on current SGA expenses. The Engineering segment experienced an operating loss of $0.1 million for the thirteen week period ended April 3, 2021, as compared to a $7.8 million operating loss for the comparable prior year period. The primary reason for the operating loss in the comparable prior year period was the $8.0 million write-off of receivables and professional fees incurred related to a discrete arbitration.

Specialty Health Care revenue of $21.1 million for the thirteen week period ended April 3, 2021 decreased 4.8%, or $1.1 million, as compared to the comparable prior year period.  The decrease in revenue was primarily driven by school closures related to COVID-19 (see below). The Specialty Health Care segment’s gross profit increased by 14.9%, or $0.6 million, to $5.0 million for the thirteen week period ended April 3, 2021, as compared to $4.4 million for the prior year period. The increase in gross profit was driven by higher gross profit margin. Gross profit margin for the thirteen week period ended April 3, 2021 increased to 23.8% as compared to 19.8% for the comparable prior year period. The increase in gross profit margin was primarily due to an increase in non-school revenue at a higher gross margin and a decrease in severance paid to billable personnel in the current period. Specialty Health Care experienced operating income of $0.9 million for the thirteen week period ended April 3, 2021, as compared to an operating loss of $0.1 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to gross profit, and also a decrease in SGA expense. SGA expense decreased by $0.3 million to $4.1 million, as compared to $4.4 million in the comparable prior year period. The decrease in SGA expense was primarily due to a concerted effort to reduce SGA expense in response to the impact of COVID-19 on school services revenue, and a desire to gain greater efficiency from SGA expense.

Information Technology revenue of $8.9 million for the thirteen week period ended April 3, 2021 increased 3.1%, or $0.2 million, as compared to $8.7 million for the comparable prior year period. The increase in Information Technology was primarily driven by the Life Sciences practice. The Company believes that the Life Sciences industry has not seen a negative impact from COVID-19. Gross profit of $2.6 million for the thirteen week period ended April 3, 2021 increased 4.2%, or $0.1 million, as compared to $2.5 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenue, but partially increased by an increase in gross profit margin.  The Information Technology gross profit margin for the thirteen week period ended April 3, 2021 was 29.1% as compared to 28.8% 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. SGA expense decreased by $0.5 million to $1.9 million, as compared to $2.4 million in the comparable prior year period. The decrease in SGA expense was a driven by a concerted effort to reduce SGA expense after the uncertainty around the COVID-19 crisis. The Information Technology segment experienced operating income of $0.6 million as compared to $0.1 million of operating income for the comparable prior year period.  The increase in operating income was primarily due to the increase in revenue and gross profit, and also the decrease in SGA expense.

Financing activities provided $9.3 million of cash for the thirteen week period ended April 3, 2021 as compared to using cash of $1.9 million in the comparable prior year period.  The Company conducted net borrowings under its line of credit of $10.1 million during the thirteen week period ended April 3, 2021 as compared to $2.0 million in the comparable prior year period.  The primary reasons for net borrowings during the thirteen week period ended April 3, 2021 were the increase of $9.1 million in accounts receivable and the repurchase of common stock for $0.9 million.  The Company generated cash of $0.2 million and $0.1 million from sales of shares from its equity plans for the current period and the comparable prior year period, respectively.  The Company did not pay contingent consideration during the periods presented.