Business context and reporting period
RCM Technologies, Inc. provides engineering, information technology, and specialty health-care staffing and consulting services. This Form 10-Q covers the 13 weeks ended April 4, 2015, compared with the 13 weeks ended March 29, 2014; despite the request metadata, the filing is for fiscal 2015 Q1, not 2014 Q1. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Financial results and liquidity
| Metric | Q1 2015 | Comparable 2014 |
|---|---|---|
| Revenue | $47.966 million | $48.569 million |
| Gross profit / margin | $13.303 million / 27.7% | $12.257 million / 25.2% |
| Operating income / margin | $2.355 million / 4.9% | $2.038 million / 4.2% |
| Net income | $1.388 million | $1.203 million |
| Diluted earnings per share | $0.11 | $0.10 |
| Cash used in operating activities | $4.909 million | $2.807 million |
Revenue declined 1.2%, while gross profit rose 8.5%, operating income 15.6%, and net income 15.4%. Cost of services fell to 72.3% of revenue from 74.8%; SG&A increased 6.9% to $10.632 million, or 22.2% of revenue versus 20.4%. The effective tax rate was 37.5%, compared with 39.1%.
Cash and cash equivalents were $528,000 at April 4, 2015, down from $6.411 million at January 3, 2015. Current assets were $70.589 million and current liabilities $21.616 million. Accounts receivable, net, was $62.277 million. Operating cash use reflected working-capital movements, including a $4.991 million accounts-receivable increase and $2.106 million cash use from the net transit-account position.
Borrowings under the revolving credit facility were $20.0 million, unchanged from year-end; the $35 million facility had $14.2 million of additional availability after outstanding letters of credit. The facility matures December 11, 2019, and the company reported covenant compliance. Its effective borrowing rate, including unused-line fees, was 2.5%. Total liabilities were $42.391 million and stockholders’ equity was $43.076 million.
Material changes and segment performance
- Engineering: Revenue decreased 7.8% to $22.8 million, principally due to lower Canadian project activity and currency translation. Gross margin improved to 24.7% from 21.2%; operating income was approximately $1.1 million, flat year over year.
- Information Technology: Revenue decreased 2.4% to $14.7 million, partly because projects for two large Life Sciences clients concluded or slowed. Gross margin increased to 31.1% from 30.2%; operating income was approximately $0.8 million, flat.
- Specialty Health Care: Revenue increased 19.2% to $10.5 million, supported by travel nursing, Honolulu, and permanent placement activity. Gross margin rose to 29.6% from 28.1%; operating income increased to approximately $0.4 million from $0.2 million.
- Canadian-dollar translation was a material headwind: management estimated Q1 2015 revenue would have been $1.2 million higher had the exchange rate matched the prior-year rate. The company recorded a $1.679 million foreign-currency translation loss in other comprehensive income, versus a $331,000 loss a year earlier.
Outlook, risks, and unusual items
No specific revenue or earnings guidance is provided. Management said it expects the Q1 accounts-receivable balance to decline during the remaining fiscal year and believes capital resources are sufficient for obligations over at least the next 12 months. It described demand as sensitive to economic conditions and customer spending, while emphasizing investment in higher-margin services and business infrastructure.
- Customer dispute and collection exposure: RCM had $10.9 million of receivables from Black & McDonald, including $4.5 million tied to a disputed Ontario Power Generation purchase order. OPG said it would make no further payments to B&M on that project. RCM believes its receivables remain collectible, subject to reserves, but acknowledged that a prolonged dispute could delay collection.
- Cash use and investment: Q1 operating cash flow was negative. Planned project-management software spending could reach $1.0 million for its first phase and a further $0.5 million for expansion. A possible SAP upgrade or replacement, more likely in fiscal 2016, was estimated at $1.0–$2.0 million.
- Debt and market risks: The credit line is secured by company assets and subsidiary stock; it carries variable-rate exposure. Management estimated that a 1 percentage-point higher borrowing rate would have increased Q1 interest expense by $0.2 million. The company does not use derivatives to hedge currency or interest-rate risk.
- Other obligations and contingencies: Estimated future contingent acquisition consideration was $1.164 million, subject to change. Operating lease commitments totaled $9.5 million. The company reported ordinary-course legal proceedings and asserted claims seeking about $1.4 million in damages; it had not accrued a liability for these matters at quarter-end.
- Unusual financing context: The company borrowed $20.0 million to help finance a $25.3 million special cash dividend paid in Q4 2014; management attributed higher Q1 interest expense primarily to this borrowing.
- Management identified economic cyclicality, competition and pricing pressure, dependence on key customers and qualified personnel, foreign exchange, staffing-related claims, acquisitions, and regulatory and litigation outcomes among its risks. It reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether the B&M/OPG dispute affects collection of the $10.9 million receivable exposure, and whether reserves remain adequate.
- Whether receivables and operating cash flow improve as management anticipated; monitor the company’s low quarter-end cash balance and working-capital needs.
- Facility availability, interest-rate exposure, covenant compliance, and the ongoing impact of debt associated with the prior special dividend.
- Canadian-dollar movements and underlying Canadian activity, separating currency effects from operating trends.
- Execution and final costs of the planned software projects, plus future contingent acquisition payments and legal claims.