RCM Technologies, Inc. — Form 10-K Summary
Period clarification: Although the request metadata says “2010 Q4,” this filing is the annual report for the 52-week fiscal year ended December 31, 2011, filed February 22, 2012. It compares fiscal 2011 with the 52-week fiscal year ended January 1, 2011. Quarterly Q4 results are noted below.
Business context and reporting period
RCM provides information technology (IT), engineering, and specialty health care staffing and consulting services. Fiscal 2011 revenue mix was IT 37.4%, Engineering 43.6%, and Specialty Health Care 19.0%. The company cited continued economic weakness, client spending pressure, and underperformance in IT sales as factors affecting results.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $143.8 million | $162.0 million |
| Gross profit / margin | $40.7 million / 28.3% | $46.2 million / 28.5% |
| Operating income / margin | $7.0 million / 4.8% as reported | $9.0 million / 5.6% |
| Net income | $4.3 million | $5.8 million |
| Diluted EPS | $0.33 | $0.44 |
| Cash from operating activities | $6.5 million | $13.3 million |
- Revenue fell 11.2%. IT revenue declined 24.8% to $53.8 million; Engineering fell 3.0% to $62.6 million; Specialty Health Care rose 5.8% to $27.4 million.
- Cost of services was 71.7% of revenue, compared with 71.5%. SG&A declined to $32.6 million, but rose to 22.7% of revenue from 22.1%.
- Cash and cash equivalents were $28.4 million at year-end, including $4.5 million held by foreign subsidiaries. Current assets were $73.2 million and current liabilities were $14.3 million.
- No revolving-credit borrowings were outstanding. The $15 million facility, maturing August 2016, had $14.1 million of availability after $0.9 million of letters of credit. The facility is secured by company assets and subject to covenants; RCM reported compliance.
- Investing activities used $0.4 million and financing activities used $2.2 million, principally for $2.5 million of share repurchases. Year-end total assets were $86.2 million; goodwill was $7.3 million.
- Q4 2011: Revenue was $35.0 million versus $36.4 million in Q4 2010; operating income was $2.2 million versus $2.3 million; continuing-operations income was $1.1 million in both periods; diluted continuing-operations EPS was $0.09 in both.
Material changes, outlook, risks, and unusual items
- Management attributed the largest revenue decline to poor IT sales execution and said remediation efforts were underway. Engineering weakness primarily reflected reduced spending by major clients and the wind-down of a large Canadian project.
- The Canadian project was expected to end in Q1 2012, with approximately $2.0 million of revenue anticipated during completion. RCM signed a new master services agreement with that customer but could not predict future work awarded. Management expressed caution about a potentially slow or fragile recovery and provided no quantified company-wide guidance.
- Engineering operating income declined to $4.5 million from $5.5 million; IT operating income fell to $0.7 million from $1.6 million; Specialty Health Care operating income was $1.8 million versus $2.0 million.
- Income tax expense was $2.7 million and the reported effective tax rate was 38.3%, up from 28.6%; management said the prior-year comparison included unusual tax adjustments. The 2011 rate before specified adjustments was 43.7%.
- Legal matters had a recorded provision of approximately $0.3 million against asserted claims seeking approximately $13.4 million. Outcomes and insurance coverage are uncertain.
- Two customers, United Technologies and Bruce Power, represented 12.6% and 10.4% of annual revenue. The five largest customers accounted for 38.2% of revenue. Nuclear-industry safety concerns, customer concentration, economic and pricing pressures, recruitment and retention, staffing-related claims, and subcontractor obligations are identified risks.
- Other notable commitments include up to $0.359 million of deferred acquisition consideration, operating lease commitments totaling $5.6 million, and potential CEO termination-related payments of approximately $5.9 million under the change-in-control arrangement or $4.0 million under the severance arrangement, subject to their terms.
- RCM anticipated an ERP system upgrade in 2012 and expected approximately $0.5 million of equipment purchases for an Engineering division. The company reported no material off-balance-sheet arrangements and no goodwill impairment in either year.
Important facts for investors to verify
- Whether IT sales remediation and the new Engineering customer agreement produce replacement revenue as the large Canadian project ends.
- Customer concentration, especially exposure to United Technologies, Bruce Power, and other large accounts, and the collection quality of receivables.
- Cash-flow sustainability: operating cash generation fell to $6.5 million while reported net income was $4.3 million.
- Potential exposure from litigation, self-insured workers’ compensation and medical claims, subcontractor performance, and contingent acquisition consideration.
- Costs and timing of the planned ERP upgrade, lease renewal, and other 2012 spending, alongside compliance with credit-facility covenants.