Business Context and Reporting Period
Company: RCM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 2009 (Thirteen and Thirty-Nine Weeks)
Business Overview: RCM provides information technology, engineering, and commercial staffing and consulting services. The company operates in the United States and Canada and is classified as a smaller reporting company.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 13 Weeks Ended Sept 26, 2009 |
39 Weeks Ended Sept 26, 2009 |
39 Weeks Ended Sept 27, 2008 |
|---|---|---|---|
| Revenues | $44,751 | $140,023 | $155,742 |
| Gross Profit | $11,840 | $34,361 | $40,703 |
| Gross Margin | 26.5% | 24.5% | 26.1% |
| Operating Income | $697 | $406 | ($1,282) |
| Net Income | $437 | $6,235 | ($665) |
| Diluted EPS | $0.03 | $0.48 | ($0.05) |
| Cash from Operations | N/A | $16,657 | ($7,971) |
| Cash & Equivalents (End) | $11,967 | $11,967 | $3,314 |
| Debt (Line of Credit) | $0 | $0 | $4,900 |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 13.3% ($6.9M) for the quarter and 10.1% ($15.7M) year-to-date compared to the prior year. Management attributes this to a weakening general economy, particularly impacting the Information Technology and Commercial segments.
- Profitability Improvement: Despite revenue declines, the company reported a net income of $6.2M for the 39-week period, compared to a net loss of $0.7M in the prior year. This turnaround was primarily driven by a $9.8 million legal settlement received in March 2009.
- Debt Reduction: The company fully repaid its $4.9 million balance on its revolving line of credit during the period, resulting in zero outstanding borrowings as of September 26, 2009.
- Segment Performance:
- Information Technology: Revenues declined 21.9% (quarter) and 15.0% (YTD) due to reduced capital spending by clients.
- Engineering: Revenues increased 5.4% (quarter) and 6.7% (YTD), driven by major customer growth.
- Commercial: Revenues declined 17.7% (quarter) and 19.6% (YTD), heavily impacted by the Southern California manufacturing and retail sectors.
Guidance, Outlook, and Risks
- Outlook: Management expects revenues for the remainder of fiscal 2009 to remain generally consistent with the 39-week period results. The company anticipates cost of sales and SG&A ratios to remain comparable to recent trends.
- Acquisitions: The company acquired Project Solutions Group (PSG) in July 2009. Future contingent consideration (Deferred Consideration and Earnouts) for PSG and prior acquisitions (NuSoft, MBH) could total up to $5.3 million in fixed deferred payments, with earnouts unestimable.
- Liquidity: The company has $13.4 million available under its $15 million revolving credit facility. Cash flow from operations was strong ($16.7M) due to the legal settlement and improved collections.
- Risks:
- Economic sensitivity: The business is cyclical and highly sensitive to client capital spending.
- Legal Contingencies: The company faces potential indemnity obligations related to construction projects and ongoing litigation, though management believes impacts will not be significant.
- Competition: High price competition in staffing and consulting markets.
Investor Verification Checklist
- Legal Settlement Impact: Verify the sustainability of earnings without the one-time $9.8M legal settlement gain, which was the primary driver of the year-to-date net income.
- Revenue Trends: Monitor the Information Technology and Commercial segments for continued revenue erosion due to economic conditions.
- Contingent Liabilities: Review the potential $5.3 million in deferred consideration payments for acquisitions and the status of construction project indemnities.
- Cash Flow Quality: Confirm that the strong operating cash flow ($16.7M) is repeatable absent the legal settlement proceeds.
- Debt Covenants: Ensure the company remains in compliance with the financial covenants of its $15M credit facility, particularly regarding dividend restrictions.