RCM TECHNOLOGIES INC

Previous wording

The Company 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.

Current wording

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.

Previous wording

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.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.

Current wording

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.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 provision for credit losses, goodwill, long-lived intangible assets, accounting for stock options and restricted stock awards, insurance liabilities, accounting for income taxes and accrued bonuses.

Previous wording

The Company records revenue under Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.

Current wording

The Company records revenue under Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.

Previous wording

The Company derives its revenue from several sources. The Company’s Engineering Services and Life Sciences and Information Technology segments perform consulting and project solution services. The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.

Current wording

The Company derives its revenue from several sources. The Company’s Engineering Services and Life Sciences, Data and Solutions segments perform consulting and project solution services. The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees.

Previous wording

The Company’s Health Care segment predominantly recognizes revenue through time and material work while its Engineering and Life Sciences and Information Technology segments recognize revenue through both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.

Current wording

The Company’s Health Care segment predominantly recognizes revenue through time and material work while its Engineering and Life Sciences, Data and Solutions segments recognize revenue through both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.

Previous wording

From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on these contracts are incurred. From time-to-time, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying consolidated balance sheets. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable and the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.

Current wording

From time to time and predominantly in our Engineering segment, the Company enters into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. For engineering contracts estimated costs are budgeted by project, the Company then recognizes revenue by applying the costs incurred to date against the total budgeted costs and applying the percentage of completed cost against the total contract value to recognize revenue for each period. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on these contracts are incurred. From time-to-time, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue. Some contracts also limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable and the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.

Previous wording

There was $1.9 million of deferred revenue as of December 30, 2023. Deferred revenue was $1.1 million as of December 31, 2022. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. In the fiscal years ended December 30, 2023 and December 31, 2022, the Company recognized revenue of $1.1 million and $3.4 million, respectively, that was included in deferred revenue at the beginning of the reporting period.

Current wording

Deferred revenue was $4.2 million as of December 28, 2024 and $1.9 million as of December 30, 2023. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. In the fiscal years ended December 28, 2024 and December 30, 2023, the Company recognized revenue of $1.9 million and $1.1 million, respectively, that was included in deferred revenue at the beginning of the reporting period.

Previous wording

The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables previously written off are credited to bad debt expense.

Current wording

The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of a provision for credit losses. Accounts outstanding longer than the payment terms are considered past due. The Company determines its provision by considering a number of factors, including the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables previously written off are credited to bad debt expense.

Previous wording

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment” (“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has three reporting units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” effective December 29, 2018 which has eliminated Step 2 from the goodwill impairment test. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

Current wording

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment” (“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has three reporting units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company follows “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which has eliminated Step 2 from the goodwill impairment test. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

Previous wording

There was no goodwill impairment in fiscal 2023 or 2022. During all periods presented, the Company determined that the existing qualitative factors did not suggest that an impairment of goodwill exists. There can be no assurance that future indicators of impairment and tests of goodwill impairment will not result in impairment charges for both its Engineering and Specialty Healthcare segments.

Current wording

There was no goodwill impairment in fiscal 2024 or 2023. The Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and determined that no indicators of impairment of goodwill existed in its Engineering and Specialty Health Care segments during the fiscal year ended December 28, 2024 and for all segments during the year ended December 30, 2023. With respect to the fiscal year ended December 28, 2024, since the Company remeasured contingent consideration associated with its Life Sciences, Data and Solutions segment, the Company determined that further testing was necessary. After comparing the fair value of the Life Sciences, Data and Solutions segment to its carrying amount, the Company determined that no impairment loss occurred for the Company’s goodwill related to that segment during the fiscal years ended December 28, 2024 or December 30, 2023. Except for the aforementioned remeasurement of contingent consideration, the Company determined that the existing qualitative factors did not suggest that an impairment of goodwill exists. There can be no assurance that future indicators of impairment and tests of goodwill impairment will not result in impairment charges for both its Engineering and Specialty Healthcare segments.

Previous wording

The Company has risk participation arrangements with respect to workers compensation and health care insurance. The Company establishes loss provisions based on historical experience and in the case of expected losses from workers compensation, considers input from third parties. The amounts included in the Company’s costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.

Current wording

The Company has risk participation arrangements with respect to workers compensation and healthcare insurance. The Company establishes loss provisions based on historical experience and in the case of expected losses from workers compensation, considers input from third parties. The amounts included in the Company’s costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.

Previous wording

In establishing the provision for income taxes and deferred income tax assets and liabilities and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted tax laws, published tax guidance and estimates of future earnings. As of December 30, 2023, the Company had both domestic and foreign net deferred tax liabilities of $1.7 million. The domestic long term net deferred tax liability of $1.6 million includes $4.3 million in deferred liabilities offset by $2.7 million in deferred tax assets. The deferred tax liabilities consist of acquisition amortization of $1.8 million, prepaid expenses of $1.0 million, advance depreciation deductions of $0.7 million and right of use assets of $0.7 million. The domestic deferred tax assets consist of lease liabilities of $0.8 million, reserves and accruals of $0.8 million, compensation of $0.7 million and allowance for doubtful accounts of $0.4 million. The realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the effectiveness of tax planning strategies in the relevant tax jurisdictions. If actual results differ from these estimates and assessments, valuation allowances may be required. As of December 30, 2023, the Company had $0.1 million in foreign net deferred tax liabilities associated with its Canadian operations and a small deferred tax asset associated with its German operations.

Current wording

In establishing the provision for income taxes and deferred income tax assets and liabilities and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted tax laws, published tax guidance and estimates of future earnings. As of December 28, 2024, the Company had both domestic and foreign net deferred tax liabilities of $4.4 million. The domestic long term net deferred tax liability of $4.5 million includes $7.6 million in deferred liabilities offset by $3.0 million in deferred tax assets. The deferred tax liabilities consist of acquisition amortization of $4.3 million, prepaid expenses of $1.1 million, advance depreciation deductions of $0.9 million and right of use assets of $1.2 million. The domestic deferred tax assets consist of lease liabilities of $1.3 million, reserves and accruals of $0.5 million, compensation of $0.8 million and provision for credit losses of $0.4 million. The realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the effectiveness of tax planning strategies in the relevant tax jurisdictions. If actual results differ from these estimates and assessments, valuation allowances may be required. As of December 28, 2024, the Company had no foreign deferred tax balances associated with its Canadian operations and a deferred tax asset of $0.1 million associated with its German operations.

Previous wording

The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Germany, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated United States Federal income tax return and file in various states. The Company has no open Federal audits as of December 30, 2023. Except for limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2019. The Company is no longer subject to audit in Canada for the tax years prior to tax year 2019. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2018.

Current wording

The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Germany, Philippines, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated United States Federal income tax return and file in various states. The Company has no open Federal audits as of December 28, 2024. Except for limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2020. The Company is no longer subject to audit in Canada for the tax years prior to tax year 2020. The Company is under audit in Canada for tax years 2021 and 2022. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2019.

Previous wording

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 international conflicts or health pandemics and endemics 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.

Current wording

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, data and solutions. When the U.S., Canadian or global economies decline, the Company’s operating performance could be adversely impacted. In addition, global events such as international conflicts, trade disputes, or health pandemics and endemics 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.

Previous wording

Revenue. Revenue decreased 7.5%, or $21.4 million, for the fiscal year ended December 30, 2023 as compared to December 31, 2022 (the “comparable prior year period”). Revenue decreased $23.2 million in the Specialty Health Care segment, decreased $1.2 million in the Engineering segment and increased $3.0 million in the Life Sciences and Information Technology segment. See Segment Discussion for further information on revenue changes.

Current wording

Revenue. Revenue increased 5.8%, or $15.1 million, for the fiscal year ended December 28, 2024 as compared to December 30, 2023 (the “comparable prior year period”). Revenue increased $6.4 million in the Specialty Health Care segment, increased $11.8 million in the Engineering segment and decreased $3.1 million in the Life Sciences, Data and Solutions segment. See Segment Discussion for further information on revenue changes.

Previous wording

Cost of Services and Gross Profit. Cost of services decreased 7.5%, or $15.2 million, for the fiscal year ended December 30, 2023 as compared to the comparable prior year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the fiscal years ended December 30, 2023 and the comparable prior year period was 70.9%. See Segment Discussion for further information regarding changes in cost of services and gross profit.

Current wording

Cost of Services and Gross Profit. Cost of services increased 6.5%, or $12.1 million, for the fiscal year ended December 28, 2024 as compared to the comparable prior year period, primarily due to the increase in revenue. Cost of services as a percentage of revenue was 71.3% for the fiscal year ended December 28, 2024 and 70.9% for the comparable prior year period. See Segment Discussion for further information regarding changes in cost of services and gross profit.

Previous wording

Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $52.2 million for the fiscal year ended December 30, 2023 as compared to $53.4 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 19.8% for the fiscal year ended December 30, 2023 and 18.8% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.

Current wording

Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $56.8 million for the fiscal year ended December 28, 2024 as compared to $52.2 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 20.4% for the fiscal year ended December 28, 2024 and 19.8% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.

Previous wording

Gain on sale of assets. 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 Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment. For the fiscal years ended December 30, 2023 and December 31, 2022, the Company recorded a gain of $0.4 and $0.2 million, respectively, which was due to receiving escrow funds associated with the sale of Canada Power Systems in fiscal 2021.

Current wording

Gain on sale of assets. 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 Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment. For the fiscal year ended December 30, 2023, the Company recorded a discrete gain on the sale of these assets and liabilities of $0.4 million due to the final collection of escrow funds from the transaction.

Previous wording

Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income and gains and losses on foreign currency transactions. Other expense, net increased by $1.1 million as compared to the comparable prior year period, primarily due to an increase in interest expense, net. Interest expense increased due to increased borrowing. Borrowings increased primarily to fund treasury stock purchases.

Current wording

Other Expense, Net. Other expense, net consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income and gains and losses on foreign currency transactions. Other expense, net increased by $0.6 million for the fiscal year ended December 28, 2024 as compared to the comparable prior year period, primarily due to an increase in interest expense, net. Interest expense increased due to increased borrowing and increased interest rates.

Previous wording

Income Tax Expense. The Company recognized $5.4 million of income tax expense for the fiscal year ended December 30, 2023, as compared to $7.6 million for the comparable prior-year period. The consolidated effective income tax rate for the current period was 24.2% as compared to 26.7% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of December 30, 2023, were approximately 24.5%, 23.9% and 10.5% in the United States, Canada, and Europe, 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 European pretax income versus U.S. pretax income. The effective income tax rate can also be impacted by discrete permanent differences affecting any period presented. The primary reason for the decrease in the consolidated effective rate in the current period was due to a permanent tax difference associated with the tax deduction for equity grants in the United States that vested during the fiscal year ended December 30, 2023.

Current wording

Income Tax Expense. The Company recognized $6.9 million of income tax expense for the fiscal year ended December 28, 2024, as compared to $5.4 million for the comparable prior-year period. The consolidated effective income tax rate for the current period was 34.0% as compared to 24.2% for the comparable prior-year period. The effective fiscal 2023 income tax rates as of December 28, 2024, were approximately 29.4%, 21.1% and 10.8% in the United States, Canada, and Europe, 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. The primary reason for the increase in the consolidated effective rate in the current period was due to permanent tax differences in the United States during the fiscal year ended December 28, 2024.

Previous wording

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, and share-based compensation. The actual effective tax rate may vary in future years 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.

Current wording

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 2024 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.

Previous wording

Specialty Health Care revenue of $136.2 million for the fiscal year ended December 30, 2023 decreased 14.6%, or $23.2 million, as compared to the comparable prior-year period. The decrease in revenue was driven by both the Company’s school and non-school clients. Revenue from school clients for the fiscal year ended December 30, 2023 was $103.0 million as compared to $114.2 million for the comparable prior-year period. Revenue from non-school clients for the fiscal year ended December 30, 2023 was $33.2 million as compared to $45.2 million for the comparable prior-year period. Revenue decreases were primarily due to decreased demand associated with COVID-19 transitioning from a high level of activity relating during the fiscal year ended December 31, 2022 to a lesser level of activity associated with the change of COVID-19 to an endemic during the fiscal year ended December 30, 2023. The Specialty Health Care segment’s gross profit decreased by 16.6%, or $8.0 million, to $39.9 million for the fiscal year ended December 30, 2023, as compared to $47.9 million for the prior-year period. The decrease in gross profit was primarily driven by the decrease in revenue. Gross profit margin for the fiscal year ended December 30, 2023 decreased to 29.3% as compared to 30.0% for the comparable prior-year period. The decrease in gross profit margin was primarily due to a mix shift for certain lower margin services. Specialty Health Care experienced operating income of $13.5 million for the fiscal year ended December 30, 2023, as compared to $19.8 million for the comparable prior-year period. The primary reason for the decrease in operating income was the decrease in gross profit, offset by a decrease in SGA expense. SGA expense decreased by $1.7 million to $26.0 million, as compared to $27.7 million in the comparable prior-year period. The decrease in SGA expense was primarily due to a decrease in expenses associated with lower revenue and a lower allocation of corporate SGA expenses.

Current wording

Specialty Health Care revenue of $142.7 million for the fiscal year ended December 28, 2024, increased 4.7%, or $6.4 million, compared to the comparable prior-year period. The increase in revenue was driven by the Company’s school clients, offset by a decrease in revenue from the Company’s non-school clients. Revenue from school clients for the fiscal year ended December 28, 2024, was $117.7 million as compared to $103.0 million for the comparable prior-year period. Revenue from non-school clients for the fiscal year ended December 28, 2024, was $25.0 million as compared to $33.2 million for the comparable prior-year period. The decrease in non-school revenue was primarily driven by the reduction in revenue from a large long-term care group where the Company deliberately reduced services, which generated $3.2 million in the current period as compared to $9.8 million in the comparable prior-year period. Gross profit increased by 6.5%, or $2.6 million, to $42.5 million for the fiscal year ended December 28, 2024 as compared to $39.9 million in the comparable prior-year period. Gross profit increased due to an increase in revenue and gross profit margin. Gross profit margin for the fiscal year ended December 28, 2024, increased to 29.8% compared to 29.3% for the comparable prior-year period. The increase in gross profit margin was primarily attributed to a greater mix shift to school services as opposed to non-school services, offset by increased unemployment tax rates in New York. Specialty Health Care experienced operating income of $11.7 million for the fiscal year ended December 28, 2024, as compared to $13.5 million for the comparable prior-year period. The primary reason for the decrease in operating income was an increase in SGA expense to $30.3 million for the fiscal year ended December 28, 2024 compared to $26.0 million for the comparable prior-year period. SGA expense increased primarily due to sales and recruiting infrastructure investments expected to generate higher growth rates for the 2024/2025 and 2025/2026 school years and a higher allocation of corporate SGA expense.

Previous wording

Engineering revenue of $84.7 million for the fiscal year ended December 30, 2023 decreased by 1.5%, or $1.2 million, compared to the comparable prior-year period. The decrease in revenue comprised the following: decreases in Aerospace revenue of $4.9 million and Industrial Processing revenue of $4.8 million, offset by an increase to Energy Services revenue of $8.5 million. The decrease in Aerospace revenue was primarily due to a contract reduction for the Company’s major outsourcing client. The Company believes the decrease in Industrial Processing revenue was primarily due to the irregular timing of large contracts with its Industrial Processing clients. Gross profit decreased by 5.1%, or $1.1 million, as compared to the comparable prior-year period. Gross profit decreased because of the decrease in revenue and a decrease in gross profit margin. Gross profit margin of 24.3% for the current period decreased from 25.3% for the comparable prior-year period. The decrease in gross profit margin was primarily due to lower utilization resulting from an increase in staff associated with lower revenue as the Company absorbed fixed salaried costs over lower revenue. The Engineering segment experienced operating income of $3.5 million for the fiscal year ended December 30, 2023, as compared to $4.3 million for the comparable prior-year period. The decrease in operating income was primarily due to the decrease in gross profit, offset by a $0.3 million decrease in SGA expense.

Current wording

Engineering revenue of $96.5 million for the fiscal year ended December 28, 2024, increased 13.9%, or $11.8 million, compared to the comparable prior-year period. The increase in revenue comprised the following: an increase in Energy Services revenue of $15.1 million, offset by decreases in Aerospace revenue of $0.2 million and Industrial Processing revenue of $3.1 million. Aerospace revenue decreased primarily due to a contract reduction for the Company’s major outsourcing client. The Company believes the decrease in Industrial Processing revenue was mainly due to the irregular timing of large contracts with its Industrial Processing clients. Gross profit increased by 9.4%, or $1.9 million, compared to the comparable prior-year period. Gross profit increased because of the increase in revenue, offset by a decrease in gross profit margin. The gross profit margin of 23.4% for the current period decreased from 24.3% for the comparable prior-year period. The decrease in gross profit margin was primarily due to lower utilization and mix-shift associated with fixed-price project revenue from the Energy Services group. The Engineering segment experienced operating income of $4.5 million for the fiscal year ended December 28, 2024, compared to $3.5 million for the comparable prior-year period. Operating income increased due to the increase in gross profit, offset by an increase in SGA expense. The Engineering segment’s SGA expense of $17.4 million increased from $17.0 million, primarily due to a higher allocation of corporate SGA expense.

Previous wording

Operating activities provided $12.5 million of cash for the fiscal year ended December 30, 2023 as compared to $28.3 million in the comparable prior year period. The major components of cash used in or provided by operating activities in the fiscal year ended December 30, 2023 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.

Current wording

Operating activities provided $6.2 million of cash for the fiscal year ended December 28, 2024 as compared to providing $12.5 million in the comparable prior year period. The major components of cash provided by operating activities in the fiscal year ended December 28, 2024 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.

Previous wording

For the fiscal year ended December 30, 2023, the Company experienced net income of $16.8 million as compared to $20.9 million for the comparable prior year period. An increase in accounts receivables in the fiscal year ended December 30, 2023, used $20.6 million of cash as compared to $1.5 million in the comparable prior year period. The Company primarily attributes this increase in accounts receivables for the fiscal year ended December 30, 2023 to normal fluctuations in accounts receivable relative to revenue.

Current wording

For the fiscal year ended December 28, 2024, the Company experienced net income of $15.0 million as compared to $16.8 million for the comparable prior year period. An increase in accounts receivables in the fiscal year ended December 28, 2024, used $7.3 million of cash as compared to using $20.6 million in the comparable prior year period. The Company primarily attributes this increase in accounts receivables for the fiscal year that ended December 28, 2024, to these factors:

Previous wording

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 $22.2 million as of December 30, 2023 as compared to a net payable of $6.5 million as of December 31, 2022, providing $15.7 million of cash during the fiscal year ended December 30, 2023. The increase to net transit payable as of December 30, 2023 was due to several large, multiyear EPC (Engineering, Procurement and Construction) projects starting in the Company’s second fiscal quarter. In a typical EPC contract, the Company receives significant cash upfront to fund equipment procurement and construction subcontractors throughout the project.

Current wording

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 $16.6 million as of December 28, 2024 as compared to a net payable of $22.2 million as of December 30, 2023, using $5.6 million of cash during the fiscal year ended December 28, 2024. The decrease to net transit payable as of December 28, 2024 was due to normal fluctuations associated with several large, multiyear EPC projects. In a typical EPC contract, the Company receives significant cash upfront to fund equipment procurement and construction subcontractors throughout the project.

Previous wording

Prepaid expenses and other current assets provided negligible cash for the fiscal year ended December 30, 2023 as compared to using $2.4 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 three quarters of the following fiscal year.

Current wording

Prepaid expenses and other current assets used cash of $3.7 million for the fiscal year ended December 28, 2024 as compared to providing negligible cash for the comparable prior year period. The Company typically 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 three quarters of the following fiscal year. The December 28, 2024 prepaid expense balance of $8.3 million included $3.1 million for domestic tax payments, as compared to $0.6 million as of December 30, 2023.

Previous wording

A decrease in accounts payable and accrued expenses used cash of $1.5 million for the fiscal year ended December 30, 2023 as compared to providing $4.9 million for the comparable prior year period. The Company attributes these changes to typical fluctuations in the normal course of business.

Current wording

An increase in accounts payable and accrued expenses provided cash of $1.1 million for the fiscal year ended December 28, 2024 as compared to using $1.5 million for the comparable prior year period. The Company attributes these changes to typical fluctuations in the normal course of business.

Previous wording

Changes in accrued payroll and related costs used $1.3 million for the fiscal year ended December 30, 2023 as compared to negligible cash for the fiscal year ended December 31, 2022. 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 thirty-nine 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 fiscal year ended December 30, 2023 was paid on December 29, 2023.

Current wording

Changes in accrued payroll and related costs used $1.3 million for the fiscal year ended December 28, 2024 as compared to using cash of $1.8 million for the fiscal year ended December 30, 2023. 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 thirty-nine 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 fiscal year ended December 28, 2024 was paid on December 27, 2024.

Previous wording

Investing activities used $2.5 million of cash for the fiscal year ended December 30, 2023 and $4.8 million for the fiscal year ended December 31, 2022. Investing activities used $2.9 million for the purchase of property and equipment in the current period as compared to $0.9 million in the prior year comparable period. The fiscal years ended December 30, 2023 and December 31, 2022 both included discrete gains associated with the Company’s sale of its Canada Power Systems business unit. The prior year period used $4.2 million for the acquisition of TalentHerder.

Current wording

Investing activities used $2.6 million of cash for the fiscal year ended December 28, 2024 as compared to using $2.5 million in the comparable prior year period. Investing activities used $2.6 million for the purchase of property and equipment in the current period as compared to using $2.9 million in the prior year comparable period. The fiscal year ended December 30, 2023 included a discrete gain associated with the Company’s sale of its Canada Power Systems business unit.

Previous wording

Financing activities used $3.9 million of cash for the fiscal year ended December 30, 2023 and $23.1 million for the fiscal year ended December 31, 2022. The Company made net borrowings under its line of credit of $22.0 million during the fiscal year ended December 30, 2023 as compared to net payments of $5.4 million in the comparable prior year period. The Company used $25.8 million to repurchase shares of its common stock in the current period as compared to $17.6 million in the comparable prior year period. The Company generated cash of $0.7 million and $0.4 million from sales of shares from its equity plans for the current period and the comparable prior year period, respectively. The Company paid contingent consideration of $0.3 million in the current period as compared to $0.1 million in the comparable prior year period.

Current wording

Financing activities used $4.8 million of cash for the fiscal year ended December 28, 2024 as compared to using $3.9 million in the comparable prior year period. The Company made net borrowings under its line of credit of $4.2 million during the fiscal year ended December 28, 2024 as compared to net borrowings of $22.0 million in the comparable prior year period. During the fiscal year ended December 28, 2024, the Company used $1.3 million to pay withholding taxes upon the vesting of equity grants, in connection with which a commensurate number of vesting shares was retired. The Company used $7.8 million to repurchase and retire shares of its common stock during the fiscal year ended December 28, 2024 as compared to using $25.8 million in the comparable prior year period. The Company generated cash of $0.7 million from sales of shares from its equity plans for both periods presented. The Company did not pay contingent consideration in the current period as compared to paying $0.3 million in the comparable prior year period.

Previous wording

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) SOFR (Secured Overnight Financing Rate), plus applicable margin, typically borrowed in fixed 30-day increments, 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 fiscal years ended December 30, 2023 and December 31, 2022 were 6.5% and 2.2%, respectively. However, during the Company’s fiscal fourth quarter of 2023, it experienced a weighted average interest rate of 6.8%, including unused line. The Company believes its fourth quarter interest rate is more reflective of rates expected in the near term.

Current wording

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) SOFR (Secured Overnight Financing 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

Previous wording

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 of December 30, 2023, the Company was in compliance with all covenants contained in the Revolving Credit Facility**.**The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.

Current wording

All borrowings under the Fifth Amended and Restated Loan Agreement remain collateralized with substantially all of the Company’s assets, as well as the capital 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 of December 28, 2024, the Company was in compliance with all covenants contained in the Revolving Credit Facility.** **The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.

Previous wording

Borrowings under the line of credit as of December 30, 2023 and December 31, 2022 were $30.9 million and $8.8 million, respectively. At December 30, 2023 and December 31, 2022, there were letters of credit outstanding for $2.0 and $1.9 million, respectively. At December 30, 2023 and December 31, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of $12.1 million and $34.3 million, respectively.

Current wording

Borrowings under the line of credit as of December 28, 2024 and December 30, 2023 were $35.0 million and $30.9 million, respectively. At December 28, 2024 and December 30, 2023, there were letters of credit outstanding for $7.4 and $2.0 million, respectively. At December 28, 2024 and December 30, 2023, the Company had availability for additional borrowings under the Revolving Credit Facility of $22.6 million and $12.1 million, respectively.

Previous wording

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 its May 2021 At Market Issuance Sales Agreement with B. 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 $25.0 million from time to time through the Agent. To date, the Company has not sold any shares under the ATM Program.** **

Current wording

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 its March 2024 At Market Issuance Sales Agreement with B. 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 $50.0 million from time to time through the Agent. To date, the Company has not sold any shares under the ATM Program.** **

Previous wording

The Company’s liquidity and capital resources as of December 30, 2023, included accounts receivable and total current asset balances of $70.7 million and $90.5 million, respectively. Current liabilities were $58.2 million as of December 30, 2023 and were exceeded by total current assets by $32.3 million.

Current wording

The Company’s liquidity and capital resources as of December 28, 2024, included accounts receivable and total current asset balances of $78.0 million and $97.0 million, respectively. Current liabilities were $53.6 million as of December 28, 2024 and were exceeded by total current assets by $43.4 million.

Previous wording

The Company is exposed to various asserted claims as of December 30, 2023, 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 of December 30, 2023, the Company has accrued $2.9 million for asserted claims.

Current wording

The Company is exposed to various asserted claims as of December 28, 2024, 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 of December 28, 2024, the Company has accrued $2.8 million for asserted claims.

Previous wording

In April 2022, a client of the Company’s Industrial Processing Group alleged that a system partially designed by the Company is not operating as intended and that the Company is responsible. The Company has not determined if it has any liability. In the event of liability, the Company believes its damages are contractually limited to an amount no higher than $3.3 million. Furthermore, the Company believes that if it were found liable, any damages would be covered by insurance, subject to a deductible of $0.5 million and maximum coverage of $5.0 million. While the Company attempts to find a mutually agreeable solution, the Company has reserved $0.5 million for this project. The Company can give no assurance that its liability is limited to $3.3 million or that liability over $0.5 million, if any, will be covered by insurance.

Current wording

In April 2022, a client of the Company’s Engineering segment alleged that a system partially designed by the Company is not operating as intended and that the Company is responsible. The Company has not determined if it has any liability. In the event of liability, the Company believes its damages are contractually limited to an amount no higher than $3.3 million. Furthermore, the Company believes that if it were found liable, any damages would be covered by insurance, subject to a deductible of $0.5 million and maximum coverage of $5.0 million. While the clients estimated damages are not known, the client has either inferred or asserted during settlement discussions that it’s damages significantly exceed the Company’s insurance coverage of $5 million. While the Company attempts to find a mutually agreeable solution, the Company has reserved $0.5 million for this project. The Company can give no assurance that its liability is limited to $3.3 million or that liability over $0.5 million, if any, will be covered by insurance.

Previous wording

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 currently implementing an upgrade of its current system and expects to go live in 2024. 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.

Current wording

The Company utilizes SAP software for its financial reporting and accounting system which was initially implemented in 1999 and was upgraded during fiscal years 2023 and 2024. The Company went live with its new SAP system in April 2024.

Previous wording

As of December 30, 2023, the Company had two acquisition agreements whereby additional contingent consideration may be earned by the sellers: 1) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC, and 2) effective October 2, 2022, the Company acquired certain assets of TalentHerder LLC. The Company estimates future contingent payments at December 30, 2023 as follows:

Current wording

As of December 28, 2024, the Company had one acquisition agreement whereby additional contingent consideration may be earned by the sellers: effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC. The Company estimates future contingent payments at December 28, 2024 as follows: