RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2012 Q1, but this filing reports the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context and reporting period
RCM provides information technology, engineering, and specialty health care staffing and consulting services. The company operates in the United States, Canada, and Puerto Rico. Results are unaudited, and management cautions that the quarter is not necessarily indicative of full-year performance.
Financial performance and liquidity
- Revenue rose 7.9% to $41.2 million from $38.2 million. Gross profit increased to $10.6 million from $10.3 million, but gross margin declined to 25.8% from 26.9%.
- Operating income fell to $1.5 million from $1.8 million; operating margin declined to 3.7% from 4.7%. Net income was $1.0 million versus $1.1 million, and diluted EPS was $0.08 in both periods.
- SG&A increased 7.4% to $8.8 million, mainly reflecting approximately $0.4 million of expense from the BGA acquisition. The effective tax rate was 40.2%, versus 41.5%.
- Operating cash flow was $0.1 million, down from $3.3 million. Higher accounts receivable used $5.9 million of cash, largely offset by movements in transit balances, payables, and accrued payroll. Investing activities used $0.3 million; financing activities provided $0.1 million.
- Cash was $13.9 million at March 30, 2013, compared with $14.1 million at December 29, 2012. Current assets were $72.2 million and current liabilities $25.9 million. No revolver borrowings were outstanding; $14.2 million remained available under the $15 million facility after letters of credit.
- Total liabilities were $26.6 million, including $0.9 million of contingent consideration. The company reported no funded debt under its revolving facility, which matures August 31, 2016. The facility is secured by company assets and subject to covenants.
Material changes and segment results
- Engineering: Revenue increased 22.2% to $20.3 million, driven by Canadian operations and $1.7 million from BGA, acquired in July 2012. Operating income remained approximately $0.9 million as lower-margin project mix and non-billable labor pressured costs.
- Information Technology: Revenue increased 1.7% to $14.0 million; operating income rose to $0.4 million from $0.3 million.
- Specialty Health Care: Revenue declined 11.5% to $6.9 million, including a roughly $0.7 million decline from its largest client. Operating income fell to $0.3 million from $0.5 million.
- Accounts receivable, net, increased to $49.5 million from $43.7 million. The company attributed the increase in receivables and weaker operating cash conversion primarily to higher revenue relative to the second half of 2012.
Outlook, risks, contingencies, and unusual items
- Management was “cautiously optimistic” that results for the remaining three quarters of fiscal 2013 would exceed the comparable 2012 periods. It expected Engineering cost of services as a percentage of revenue to decrease in the second half; this is not formal earnings guidance.
- Management cited economic cyclicality, client spending and demand, competition and pricing pressure, recruiting and retention, insurance costs, acquisition integration and financing, and litigation as key uncertainties. Customer contracts are generally terminable on 60–90 days’ notice.
- A $92,000 reduction in the estimated PSG acquisition contingent consideration liability increased other income; management said future PSG payments were highly unlikely. Estimated future contingent payments were $1.057 million, while BGA payments are capped at $3.0 million cumulatively.
- Legal provisions were approximately $0.1 million. Asserted claims sought approximately $10.4 million in damages; the company noted some matters may not be insured and that an unfavorable outcome could materially affect results, liquidity, or financial position.
- The company adopted a stockholder rights plan: rights generally become exercisable if an unapproved person or group acquires 15% or more of common stock. The plan had no financial statement impact when issued.
- Cash and money market funds included $3.5 million held by foreign subsidiaries. The company anticipates upgrading its financial reporting and accounting systems in 2013 and said capital resources should cover obligations for at least 12 months.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether receivables convert to cash and operating cash flow improves after the quarter’s significant working-capital use.
- Whether Engineering margin improves as management anticipates, and whether Specialty Health Care stabilizes after the largest-client decline.
- Customer concentration, receivable aging and collection quality, and the sustainability of revenue growth, particularly in Engineering.
- Developments in asserted legal claims, insurance coverage, and acquisition earnout estimates and payments.
- Terms, effects, and any subsequent developments involving the 15% stockholder rights plan.