RCM Technologies, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
RCM provides engineering, specialty health care staffing and information technology services. Its fiscal 2018 was a 52-week year ended December 29, 2018; comparisons are with the 52 weeks ended December 30, 2017. The supplied metadata says “2017 Q4,” but the filing is an annual report for fiscal 2018, not a quarterly filing. Unless noted, amounts below are in U.S. dollars.
Fiscal 2018 revenue mix was Engineering 42.9%, Specialty Health Care 41.8% and IT 15.3%. The New York City Board of Education accounted for 13.0% of revenue; the five largest customers represented 40.9%.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $200.4 million | $186.7 million |
| Gross profit / margin | $49.3 million / 24.6% | $48.4 million / 25.9% |
| Operating income / margin | $5.4 million / 2.7% | $0.3 million / 0.1% |
| Net income | $2.7 million | $2.0 million |
| Diluted EPS | $0.22 | $0.17 |
| Operating cash flow | $(0.1) million | $5.1 million |
Revenue grew 7.3%, while gross margin fell 1.3 percentage points as cost of services rose faster than revenue. SG&A was essentially flat at $40.4 million, lowering SG&A as a share of revenue to 20.2% from 21.6%. Other expense rose to $1.5 million, primarily from higher interest expense. Adjusted EBITDA, a non-GAAP measure, was $8.9 million versus $8.0 million; it excludes specified charges and should be considered alongside GAAP results.
- Engineering: Revenue rose 4.0% to $86.1 million; gross margin decreased to 26.2% from 27.1%. Operating income was $5.4 million.
- Specialty Health Care: Revenue rose 17.3% to $83.7 million, driven largely by school paraprofessional contracts in New York City and Hawaii. Gross margin fell to 22.5% from 24.6%; operating income was $1.9 million.
- IT: Revenue fell 6.3% to $30.6 million, reflecting the prior-year Microsoft business sale and lower project revenue. The segment reported a negligible operating loss, compared with a $3.7 million loss in 2017, which included a $3.5 million goodwill impairment.
Cash, debt and liquidity
Cash was $0.5 million at year-end, down from $2.9 million. Operating activities used $0.1 million, with a $7.7 million increase in accounts receivable contributing to the cash use. Investing activities used $2.6 million, including $1.5 million of property and equipment purchases and $1.1 million of acquisition payments.
Revolver borrowings were $27.5 million, compared with $27.3 million a year earlier. The amended $45 million facility expires August 8, 2023; letters of credit were $1.6 million and reported additional borrowing availability was $15.9 million. The effective weighted-average rate, including unused-line fees, was 4.0%. RCM reported covenant compliance at year-end. Debt is secured by company assets and subsidiary stock.
Material changes, outlook and notable items
- RCM acquired Thermal Kinetics Engineering and affiliate (TKE) effective September 30, 2018, for preliminary total consideration of $5.9 million, including stock and contingent consideration. TKE contributed $2.6 million of revenue and $0.5 million of operating income in the period included. Goodwill increased to $17.5 million, primarily reflecting the acquisition.
- Fiscal 2018 included $1.6 million of severance, professional, transaction, legal and other charges, including costs associated with the former CEO. No goodwill impairment was recorded in 2018; 2017 included a $3.5 million IT impairment.
- The 2017 comparison included a $12.2 million special cash dividend, funded primarily through borrowing. Management said it had no current plans for further dividends; the credit facility restricts dividends without lender consent.
- No formal revenue or earnings guidance is provided. Management expected accounts receivable relative to revenue to improve during fiscal 2019 and anticipated the utility arbitration to conclude by the end of fiscal Q3 2019.
- RCM anticipated adopting the new lease standard in 2019, adding an estimated $6.7–$7.1 million of right-of-use assets and lease liabilities, primarily for real estate. A possible ERP upgrade or replacement was estimated at $1–$2 million, with a review potentially during 2019.
Risks and contingencies
A major utility customer arbitration concerns $8.9 million of disputed receivables. The customer’s counterclaims were expected to exceed $10.6 million, although the amount was not yet known. RCM believed the receivable was collectible and the counterclaims lacked merit, but disclosed no assurance against an adverse outcome. The company reported no accrual for the asserted liabilities. This dispute, receivable concentration and the outcome of arbitration could materially affect cash flow and results.
Other key risks include customer concentration, economic cyclicality and seasonality, intense pricing and staffing competition, attracting and retaining qualified personnel, collection risk, foreign exchange exposure, workers’ compensation and medical claims, cyber and third-party technology risks, and potential liability for subcontractors. The company also cited risks to engineering demand from changes in the nuclear power industry; its liability insurance does not cover accidents at nuclear facilities. Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Progress, settlement terms and collectability of the $8.9 million disputed receivable, and potential exposure from the utility’s counterclaims.
- Whether the working-capital cash outflow reverses as management expected, including trends in receivables, allowance for doubtful accounts and operating cash flow.
- Revenue, margins and integration performance of TKE, as well as contingent consideration that could be payable; estimated future payments were $4.8 million, with a cumulative cap of $9.8 million.
- Customer concentration and the durability and margins of school-related health care contracts, especially given seasonal closures.
- Debt availability, covenant compliance, borrowing costs and the effect of the LIBOR transition; also confirm the reported $15.9 million of revolver availability.
- Actual cost and timing of the ERP project and lease-standard adoption, and whether either changes liquidity or reported leverage materially.