RCM Technologies(RCMT) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the company's unaudited interim financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Current Assets | $72,974 | $59,017 | +$13,957 | | Total Assets | $101,214 | $87,964 | +$13,250 | | Total Current Liabilities | $67,307 | $40,424 | +$26,883 | | Total Liabilities | $79,835 | $56,002 | +$23,833 | | Total Stockholders' Equity | $21,379 | $31,962 | -$10,583 | Unaudited Condensed Consolidated Statements of Operations Statements of Operations (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :--------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Revenue | $58,049 | $58,152 | -$103 | -0.18% | | Gross Profit | $17,281 | $17,358 | -$77 | -0.44% | | Operating Income | $4,331 | $4,760 | -$429 | -9.01% | | Net Income | $3,756 | $3,518 | +$238 | +6.77% | | Basic Net EPS | $0.47 | $0.35 | +$0.12 | +34.29% | | Diluted Net EPS | $0.46 | $0.33 | +$0.13 | +39.39% | Statements of Operations (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :--------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Revenue | $192,209 | $214,459 | -$22,250 | -10.37% | | Gross Profit | $55,065 | $62,461 | -$7,396 | -11.84% | | Operating Income | $15,786 | $21,989 | -$6,203 | -28.21% | | Net Income | $11,576 | $16,052 | -$4,476 | -27.88% | | Basic Net EPS | $1.37 | $1.58 | -$0.21 | -13.29% | | Diluted Net EPS | $1.33 | $1.52 | -$0.19 | -12.50% | Unaudited Condensed Consolidated Statements of Comprehensive Income Comprehensive Income (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :--------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Net Income | $11,576 | $16,052 | -$4,476 | -27.88% | | Other comprehensive income | $5 | -$442 | +$447 | N/A | | Comprehensive Income | $11,581 | $15,610 | -$4,029 | -25.81% | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' Equity Changes (December 31, 2022 to September 30, 2023) | Metric | Dec 31, 2022 (in thousands) | Sep 30, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity | $31,962 | $21,379 | -$10,583 | | Treasury Stock (Amount) | -$43,820 | -$68,269 | -$24,449 | | Treasury Stock (Shares) | 8,002,649 | 9,760,809 | +1,758,160 | - Key activities impacting equity for the thirty-nine weeks ended September 30, 2023, include $24.4 million used for treasury stock purchases, $11.6 million from net income, $0.7 million from employee stock purchase plan issuances, and $1.5 million from equity compensation expense[16] Unaudited Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | | Net cash provided by operating activities | $27,548 | $20,741 | +$6,807 | | Net cash used in investing activities | -$480 | -$453 | -$27 | | Net cash used in financing activities | -$26,558 | -$19,468 | -$7,090 | | Increase in cash and cash equivalents | $315 | $526 | -$211 | | Cash and cash equivalents at end of period | $654 | $761 | -$107 | - For the thirty-nine weeks ended September 30, 2023, net cash provided by operating activities was $27.5 million, significantly influenced by a $22.4 million cash inflow from the net of transit accounts payable and receivable, while $24.4 million was used for common stock repurchases in financing activities[20] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation - The interim financial statements are unaudited and prepared in accordance with SEC rules for Form 10-Q, condensing or omitting certain GAAP disclosures[21] - The Company follows a 52/53 week fiscal reporting calendar, with fiscal 2023 and 2022 being 52-week years[23] Note 2. Use of Estimates and Uncertainties - Financial statement preparation requires management estimates for items such as allowance for doubtful accounts, litigation, medical claims, goodwill impairment, equity compensation, and tax rates[24][25] - The Company is exposed to various factors including economic performance, competition, demand for services, litigation, and retention of key employees[27] Note 3. Revenue Recognition - Revenue is recognized when performance obligations are satisfied by transferring services to customers, reflecting the expected consideration[30] - The Company's revenue sources include consulting and project solution services (Engineering, Life Sciences, IT) and staffing/placement services (Healthcare), primarily on a time and materials basis[32][34] Revenue Disaggregation (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment/Type | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $24,895 | $27,997 | -$3,102 | -11.08% | | Engineering | $22,452 | $20,922 | +$1,530 | +7.31% | | Life Sciences and Information Technology | $10,702 | $9,233 | +$1,469 | +15.91% | | Total Revenue | $58,049 | $58,152 | -$103 | -0.18% | Revenue Disaggregation (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment/Type | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $99,553 | $123,638 | -$24,085 | -19.48% | | Engineering | $61,956 | $61,726 | +$230 | +0.37% | | Life Sciences and Information Technology | $30,700 | $29,095 | +$1,605 | +5.52% | | Total Revenue | $192,209 | $214,459 | -$22,250 | -10.37% | - One customer in the Specialty Health Care segment accounted for 16.2% of consolidated revenue for the thirty-nine weeks ended September 30, 2023[39] Note 4. Accounts Receivable, Transit Accounts Receivable and Transit Accounts Payable Accounts Receivable, Net (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Billed | $37,632 | $40,256 | -$2,624 | | Unbilled | $15,769 | $6,615 | +$9,154 | | Work-in-progress | $5,158 | $4,991 | +$167 | | Allowance for sales discounts and doubtful accounts | -$1,100 | -$1,100 | $0 | | Accounts receivable, net | $57,459 | $50,762 | +$6,697 | - Transit accounts receivable was $9.5 million and transit accounts payable was $38.4 million, resulting in a net payable of $28.9 million as of September 30, 2023[42] Note 5. Property and Equipment Property and Equipment, Net (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Cost | $4,305 | $4,630 | -$325 | | Less: accumulated depreciation and amortization | $2,084 | $2,532 | -$448 | | Property and equipment, net | $2,221 | $2,098 | +$123 | - Depreciation and amortization expense for property and equipment for the thirty-nine weeks ended September 30, 2023, was $756 thousand, up from $729 thousand in the prior-year period[45] Note 6. Acquisitions and Divestitures - The Company has two acquisition agreements with potential future contingent consideration payments, totaling an estimated $1.971 million as of September 30, 2023[46][173] - Contingent consideration paid during the thirty-nine weeks ended September 30, 2023, was $0.3 million, including $0.1 million of the Company's common stock[50] Note 7. Goodwill - Goodwill balance remained unchanged at $22.147 million as of September 30, 2023, and December 31, 2022[52] - No indicators of goodwill impairment were identified during the thirty-nine weeks ended September 30, 2023[51] Note 8. Line of Credit - The Company entered into a Fourth Amended and Restated Loan Agreement on April 24, 2023, providing a $45.0 million revolving credit facility expiring on April 24, 2026[53][54] - Borrowings under the line of credit were $6.7 million as of September 30, 2023, down from $8.8 million at December 31, 2022, with $36.3 million available for additional borrowings[58] - The effective weighted average interest rate for the thirty-nine weeks ended September 30, 2023, was 6.4%, significantly up from 2.7% in the prior-year period[56] - The Company was in compliance with all covenants contained in the Revolving Credit Facility as of September 30, 2023[57] Note 9. Per Share Data Weighted Average Shares Outstanding (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 | Oct 1, 2022 | Change | YoY Change (%) | | :-------------------------------- | :----------- | :---------- | :------- | :------------- | | Basic weighted average shares outstanding | 7,919,752 | 10,154,505 | -2,234,753 | -22.01% | | Diluted weighted average shares outstanding | 8,196,330 | 10,522,158 | -2,325,828 | -22.10% | Weighted Average Shares Outstanding (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 | Oct 1, 2022 | Change | YoY Change (%) | | :-------------------------------- | :----------- | :---------- | :------- | :------------- | | Basic weighted average shares outstanding | 8,469,501 | 10,172,765 | -1,703,264 | -16.74% | | Diluted weighted average shares outstanding | 8,730,998 | 10,566,816 | -1,835,818 | -17.37% | - Total unissued shares of common stock reserved for various purposes decreased from 1,754,852 at December 31, 2022, to 1,389,820 at September 30, 2023[61] Note 10. Share-Based Compensation - Share-based compensation expense for the thirty-nine weeks ended September 30, 2023, was $1,450 thousand, up from $1,130 thousand in the prior-year period[64] - As of September 30, 2023, total unrecognized compensation cost was $3.4 million, primarily related to time-based awards ($3.2 million) expected to be recognized through fiscal 2027[65] - Under the Employee Stock Purchase Plan, 297,730 shares were available for issuance as of September 30, 2023[69] - Under the 2014 Omnibus Equity Compensation Plan, 383,961 time-based shares and 100,000 performance-based restricted stock awards were outstanding, with 608,129 shares available for future awards as of September 30, 2023[73] Note 11. Treasury Stock Transactions - The Board authorized a new $25.0 million share repurchase program on April 25, 2023, succeeding a prior program[80] - During the thirty-nine weeks ended September 30, 2023, the Company repurchased 1,758,160 shares at an average price of $13.80 per share, totaling $24.4 million[82] - As of September 30, 2023, $14.3 million remained available for future treasury stock purchases under the new program[82] Note 12. New Accounting Standards and Updates - The Company adopted ASU 2016-13 (Credit Losses) in Q1 2023 with no material impact[84] - The Company is evaluating ASU No. 2020-04 (Reference Rate Reform) and ASU No. 2022-06 (Deferral of sunset date for Topic 848), which defers the LIBOR transition sunset date to December 31, 2024[85] Note 13. Segment Information Segment Revenue (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $24,895 | $27,997 | -$3,102 | -11.08% | | Engineering | $22,452 | $20,922 | +$1,530 | +7.31% | | Life Sciences and IT | $10,702 | $9,233 | +$1,469 | +15.91% | | Total Revenue | $58,049 | $58,152 | -$103 | -0.18% | Segment Operating Income (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $1,392 | $2,949 | -$1,557 | -52.80% | | Engineering | $1,157 | $880 | +$277 | +31.48% | | Life Sciences and IT | $1,782 | $931 | +$851 | +91.41% | | Total Operating Income | $4,331 | $4,760 | -$429 | -9.01% | Segment Revenue (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $99,553 | $123,638 | -$24,085 | -19.48% | | Engineering | $61,956 | $61,726 | +$230 | +0.37% | | Life Sciences and IT | $30,700 | $29,095 | +$1,605 | +5.52% | | Total Revenue | $192,209 | $214,459 | -$22,250 | -10.37% | Segment Operating Income (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Segment | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Specialty Health Care | $9,438 | $15,341 | -$5,903 | -38.48% | | Engineering | $1,873 | $3,301 | -$1,428 | -43.26% | | Life Sciences and IT | $4,475 | $3,347 | +$1,128 | +33.70% | | Total Operating Income | $15,786 | $21,989 | -$6,203 | -28.21% | Revenue by Geographic Area (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Geographic Area | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | United States | $179,800 | $205,162 | -$25,362 | -12.36% | | Canada | $5,060 | $3,555 | +$1,505 | +42.34% | | Puerto Rico | $4,745 | $3,760 | +$985 | +26.20% | | Europe | $2,604 | $1,982 | +$622 | +31.38% | | Total | $192,209 | $214,459 | -$22,250 | -10.37% | Note 14. Income Taxes - Income tax expense for the thirty-nine weeks ended September 30, 2023, was $3.2 million, down from $6.0 million in the prior-year period[91] - The consolidated effective income tax rate decreased to 21.9% for the current period from 27.1% in the comparable prior-year period, primarily due to a permanent tax difference from equity grants in the U.S[91] - Effective tax rates by jurisdiction for the thirty-nine weeks ended September 30, 2023, were approximately 21.5% in the United States, 26.1% in Canada, and 13.3% in Europe[91] Note 15. Contingencies - The Company is a defendant in various legal actions and is exposed to asserted claims, accruing $2.8 million for these as of September 30, 2023[93][95] - A specific claim from April 2022 regarding a partially designed system has a potential liability limited to $3.3 million, with $0.5 million reserved and potential insurance coverage up to $5.0 million (subject to deductible)[96] Note 16. Leases Lease Liabilities Maturities (After September 30, 2023) | Fiscal Year | Operating Leases (in thousands) | Finance Leases (in thousands) | | :---------- | :------------------------------ | :---------------------------- | | 2023 (After Sep 30) | $357 | $117 | | 2024 | $754 | $233 | | 2025 | $493 | $0 | | 2026 | $409 | $0 | | 2027 | $302 | $0 | | Thereafter | $1,455 | $0 | | Total Lease Payments | $3,770 | $350 | - Weighted average remaining lease term for operating leases is 8.23 years and for finance leases is 0.75 years as of September 30, 2023[102] - Weighted average discount rate for operating leases is 3.15% and for finance leases is 0.87% as of September 30, 2023[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, operational results, liquidity, and capital resources for the period Overview - RCM operates in a cyclical market sensitive to economic changes, leading to potential volatility in financial performance[105] - The Company aims to be a single-source premier provider of business and technology solutions with a strong vertical focus and integrated services[106] - There is increasing demand for outsourcing due to the complexity of advanced life sciences, information technology, and engineering solutions[108] - The Company generally endeavors to expand its sales of higher-margin solutions and project management services[109] Critical Accounting Policies and Use of Estimates - Financial statements require significant management judgments and estimates for items such as accounts receivable, goodwill, long-lived intangible assets, stock options, restricted stock awards, insurance liabilities, income taxes, and accrued bonuses[112] Recently Issued Accounting Pronouncements - Refers to Note 12 for discussion of new accounting standards and updates, including ASU 2016-13 (Credit Losses) and ASU 2020-04 (Reference Rate Reform)[114] Forward-looking Information - Growth prospects are influenced by broad economic trends, customer capital spending, and global events such as the COVID-19 pandemic[115] - Changes in government regulations could impact earnings through new employment service restrictions, benefits, licensing, or tax requirements[116] - The consulting and employment services market is highly competitive, with significant price competition expected to continue[117] Thirteen Weeks Ended September 30, 2023 Compared to Thirteen Weeks Ended October 1, 2022 Operating Results (Thirteen Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Revenue | $58,049 | $58,152 | -$103 | -0.18% | | Gross Profit | $17,281 | $17,358 | -$77 | -0.44% | | Operating Income | $4,331 | $4,760 | -$429 | -9.01% | | Net Income | $3,756 | $3,518 | +$238 | +6.77% | - Revenue decreased slightly by $0.1 million, with Specialty Health Care down $3.1 million, offset by increases in Engineering ($1.5 million) and Life Sciences and IT ($1.5 million)[120] - Other expense, net increased by $0.2 million due to higher interest expense from increased borrowing, primarily for treasury stock purchases[123] - Income tax expense decreased to $0.4 million from $1.3 million, with the effective tax rate falling to 10.4% from 26.9%, mainly due to a permanent tax difference from equity grants[124] Segment Discussion (Thirteen Weeks) Specialty Health Care (Thirteen Weeks) - Revenue decreased by 11.1% ($3.1 million) to $24.9 million, primarily due to decreased demand from non-school clients as COVID-19 transitioned to an endemic[127] - Gross profit decreased by 17.0% ($1.5 million) to $7.5 million, with gross profit margin declining to 30.0% from 32.1% due to a mix shift to lower-margin services[127] - Operating income decreased to $1.4 million from $2.9 million, driven by the decrease in gross profit[127] Engineering (Thirteen Weeks) - Revenue increased by 7.3% ($1.5 million) to $22.5 million, driven by a $3.1 million increase in Energy Services, partially offset by decreases in Aerospace and Industrial Processing[130] - Gross profit decreased by 5.2% ($0.3 million), with gross profit margin falling to 25.0% from 25.5% due to lower utilization from increased staff in anticipation of higher revenue[130] - Operating income increased to $1.2 million from $0.9 million, due to increased gross profit and a decrease in SGA expense[130] Life Sciences and Information Technology (Thirteen Weeks) - Revenue increased by 15.9% ($1.5 million) to $10.7 million[131] - Gross profit increased by 38.4% ($1.2 million) to $4.2 million, with gross profit margin rising to 39.4% from 33.0%, attributed to managed service offerings and higher revenue from recruitment process outsourcing (RPO)[131] - Operating income increased to $1.8 million from $0.9 million, driven by higher gross profit, partially offset by increased SGA expenses due to the TalentHerder acquisition[131] Thirty-Nine Weeks Ended September 30, 2023 Compared to Thirty-Nine Weeks Ended October 1, 2022 Operating Results (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | :------------- | | Revenue | $192,209 | $214,459 | -$22,250 | -10.37% | | Gross Profit | $55,065 | $62,461 | -$7,396 | -11.84% | | Operating Income | $15,786 | $21,989 | -$6,203 | -28.21% | | Net Income | $11,576 | $16,052 | -$4,476 | -27.88% | - Revenue decreased by 10.4% ($22.3 million), primarily due to a $24.1 million decrease in Specialty Health Care, partially offset by increases in Engineering ($0.2 million) and Life Sciences and IT ($1.6 million)[133] - Other expense, net increased by $1.0 million, mainly due to higher interest expense from increased borrowing to fund treasury stock purchases[137] - Income tax expense decreased to $3.2 million from $6.0 million, with the effective tax rate at 21.9% (vs. 21.5% prior year), primarily due to a permanent tax difference from equity grants[138] - The Company recorded a $0.4 million discrete gain on the sale of its Canada Power Systems assets due to the final collection of escrow funds[136] Segment Discussion (Thirty-Nine Weeks) Specialty Health Care (Thirty-Nine Weeks) - Revenue decreased by 19.5% ($24.1 million) to $99.6 million, driven by decreased demand from both school and non-school clients as COVID-19 transitioned to an endemic[141] - Gross profit decreased by 21.5% ($7.9 million) to $28.9 million, with gross profit margin declining to 29.1% from 29.8% due to a mix shift to lower-margin services[141] - Operating income decreased to $9.4 million from $15.3 million, primarily due to the decrease in gross profit, partially offset by a $2.0 million decrease in SGA expenses[141] Engineering (Thirty-Nine Weeks) - Revenue increased slightly by $0.2 million to $61.9 million, with a $5.7 million increase in Energy Services offsetting decreases in Aerospace ($3.0 million) and Industrial Processing ($2.5 million)[144] - Gross profit decreased by 9.9% ($1.6 million), with gross profit margin falling to 23.4% from 26.0% due to lower utilization from increased staff and fixed salaried costs over lower revenue[144] - Operating income decreased to $1.9 million from $3.3 million, primarily due to the decrease in gross profit[144] Life Sciences and Information Technology (Thirty-Nine Weeks) - Revenue increased by 5.5% ($1.6 million) to $30.7 million[145] - Gross profit increased by 22.5% ($2.1 million) to $11.7 million, with gross profit margin rising to 38.0% from 32.7%, attributed to managed service offerings[145] - Operating income increased to $4.5 million from $3.3 million, driven by higher gross profit, partially offset by increased SGA expenses due to the TalentHerder acquisition and higher corporate SGA allocation[145] Liquidity and Capital Resources Cash Flow Summary (Thirty-Nine Weeks Ended Sep 30, 2023 vs. Oct 1, 2022) | Metric | Sep 30, 2023 (in thousands) | Oct 1, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | | Operating activities | $27,548 | $20,741 | +$6,807 | | Investing activities | -$480 | -$576 | +$96 | | Financing activities | -$26,558 | -$19,468 | -$7,090 | - The Company believes it can satisfy its liquidity needs for at least the next 12 months through cash provided by operations and its revolving line of credit[162] - Current assets of $73.0 million exceeded current liabilities of $67.3 million by $5.7 million as of September 30, 2023[163] Operating Activities - Cash provided by operating activities increased to $27.5 million from $20.7 million in the prior-year period[148] - Net income for the thirty-nine weeks ended September 30, 2023, was $11.6 million, down from $16.1 million in the prior-year period[149] - The net of transit accounts payable and transit accounts receivable provided $22.4 million of cash, significantly up from using $1.0 million in the prior-year period, due to several large, multiyear EPC projects starting in Q2[150] - Accounts receivable used $6.7 million of cash, compared to $1.6 million in the prior-year period, attributed to normal fluctuations relative to revenue[149] Investing Activities - Net cash used in investing activities was $0.48 million for the thirty-nine weeks ended September 30, 2023, compared to $0.453 million in the prior-year period[20] - Property and equipment acquisitions used $0.9 million, up from $0.7 million in the prior-year period[155] Financing Activities - Net cash used in financing activities increased to $26.6 million from $19.5 million in the prior-year period[156] - The Company used $24.4 million for common stock repurchases, significantly higher than $6.4 million in the prior-year period[156] - Net payments under the line of credit were $2.1 million, a decrease from $13.0 million in the prior-year period[156] - The effective weighted average interest rate on the revolving credit facility increased to 6.4% from 2.7% in the prior-year period[158] - The Company has an 'at the market' (ATM) issuance program for up to $25.0 million but has not sold any shares under it to date[161] Current Liquidity and Revolving Credit Facility - The Company's liquidity is primarily met through cash from operations and its $45.0 million revolving line of credit[162] - As of September 30, 2023, the Company had $36.3 million available for additional borrowings under the Revolving Credit Facility[160] - Current assets of $73.0 million exceeded current liabilities of $67.3 million by $5.7 million as of September 30, 2023[163] - The Company was in compliance with all financial covenants of the Revolving Credit Facility and expects to maintain compliance for the foreseeable future[159][164] Commitments and Contingencies - Primary uses of capital in future periods are for working capital, with funding from the Revolving Credit Facility, operations, or future financing[165] - The Company has accrued $2.8 million for asserted claims as of September 30, 2023, and is involved in other legal proceedings[167] - A specific client claim in the Industrial Processing Group has a potential liability limited to $3.3 million, with $0.5 million reserved and potential insurance coverage[168] - The Company is upgrading its SAP financial reporting and accounting system, estimated to cost between $0.5 million and $1.0 million, with a go-live expected in 2024[170] Future Contingent Payments Estimated Future Contingent Payments (as of September 30, 2023) | Period | Total (in thousands) | | :-------------------------------- | :------------------- | | The four quarters following Sep 30, 2023 | $300 | | Thereafter | $1,671 | | Estimated future contingent consideration payments | $1,971 | - Potential future contingent payments for acquisitions after September 30, 2023, are capped at a cumulative maximum of $11.6 million[50] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate changes on its debt - The Company's market risk exposure primarily relates to interest rates on its Revolving Credit Facility[174] - A 1.0% increase in the variable interest rate on the line of credit would increase annualized interest expense by $0.1 million based on balances during the thirty-nine weeks ended September 30, 2023[174] - The Company does not use interest rate derivative instruments and does not expect material losses with respect to its investment portfolio[174] Item 4. Controls and Procedures The company details the effectiveness of its disclosure controls, identified material weaknesses, and remediation plans Planned Material Weakness Remediation Activities - Management concluded that disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal control over financial reporting[175] - Material weaknesses identified include deficiencies in IT controls related to separation of duties, administrator access, program change management, and user access controls for SAP ERP and General Ledger[177] - These material weaknesses did not result in a misstatement of the annual or interim consolidated financial statements[178] - Remediation efforts are in progress, focusing on formalizing control procedures, improving IT general controls, assessing segregation of duties, implementing annual user access reviews, designing IT controls in change management, and providing additional training[180][183] Changes in Internal Control Over Financial Reporting - In Q3, management implemented and designed IT general controls to address and mitigate identified material weaknesses, including enhancing role design, eliminating sensitive access, and segregating developers[181] - Significant progress has been made in executing the remediation plan, and a final assessment of these efforts will be carried out as part of the annual review of internal controls[182] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 15 for details on legal proceedings and contingencies - See discussion of Contingencies in Note 15 to the Condensed Consolidated Financial Statements included in Item 1 of this report[184] Item 1A. Risk Factors This section directs readers to the company's Annual Report on Form 10-K for a discussion of risk factors - For information regarding factors that could affect the Company's business, refer to the risk factors discussed under Part I, Item 1A, Risk Factors, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022[185] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities This section details the company's common stock repurchases during the third quarter of 2023 Common Stock Purchases (Third Quarter 2023) | Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | | :-------------------------- | :------------------------------- | :------------------------------------ | :--------------------------------------------------------------------------- | | July 2, 2023 - July 31, 2023 | 97,016 | $19.09 | $16,471,000 | | August 1, 2023 - August 31, 2023 | 59,177 | $18.56 | $15,372,000 | | September 1, 2023 - September 30, 2023 | 22,235 | $19.46 | $14,940,000 | | Total | 178,428 | $18.96 | | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[187] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[188] Item 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 trading arrangements during the quarter - None of the Company's directors and officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company's fiscal quarter ended September 30, 2023[189] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL documents - Includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[190] - Includes XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Label Linkbase, Presentation Linkbase, and Definition Linkbase Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF)[190] Signatures The report is signed by the Executive Chairman and President, and the Chief Financial Officer - The report was signed by Bradley S. Vizi (Principal Executive Officer and Executive Chairman and President) and Kevin D. Miller (Principal Financial Officer) on November 9, 2023[195]