RCMT

Business Context and Reporting Period

Company: RCM Technologies, Inc. (RCMT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2008
Business Overview: RCM is a provider of business and technology solutions, operating through three segments: Information Technology (IT), Engineering, and Commercial Services. The company serves commercial and government sectors across North America through a network of 35 offices. IT services accounted for 49.4% of 2008 revenues, Engineering for 28.3%, and Commercial Services for 22.3%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 2.3% ($4.9 million) compared to 2007. This was driven by a 16.7% drop in Engineering revenues (loss of a major customer) and a general economic downturn affecting IT demand, partially offset by growth in the Commercial segment.
• Significant Impairment Charges: The company recorded a non-cash goodwill and intangible asset impairment charge of $43.3 million. This was primarily due to reduced expectations for future cash flows in the IT and Engineering segments caused by the economic crisis and a sustained decline in stock price.
• Bad Debt Write-offs: A specific bad debt charge of $6.1 million was recorded for a non-collectible promissory note from a customer. Additionally, general bad debt expense on accounts receivable increased to $1.6 million from $0.6 million in 2007.
• Segment Performance:
  • IT: Revenues increased 4.5% due to acquisitions, but EBITDA fell from $5.9 million to $0.9 million.
  • Engineering: Revenues decreased 16.7% due to the loss of a client generating $18.0 million in 2007. EBITDA turned negative at $(2.2 million).
  • Commercial: Revenues increased 5.6% driven by healthcare staffing demand. EBITDA improved to $2.7 million.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management notes that the business is cyclical and sensitive to economic changes. The company expects continued pressure from the global economic crisis, including potential delays in customer capital spending and increased competition.
• Liquidity and Debt: The company utilizes a $25 million Revolving Credit Facility (amended to $15 million in Feb 2009). As of year-end, $4.9 million was outstanding with $18.5 million available. The company believes its capital resources are sufficient for the next 12 months.
• Unusual Items:
  • Legal Settlement: In March 2009 (subsequent to year-end), the company settled a lawsuit against former counsel, expecting to receive $9.8 million ($5.9 million net of tax) by March 31, 2009.
  • Acquisitions: Two IT acquisitions (NuSoft and MBH) were completed in 2008, contributing to revenue but also increasing SG&A expenses and amortization.
• Risks: Key risks include the concentration of revenue (United Technologies accounted for 11.1% of 2008 revenue), dependence on key personnel, potential for further goodwill impairments, and exposure to workers' compensation and medical insurance costs.

Investor Verification Checklist

• Goodwill Impairment: Verify the assumptions used in the discounted cash flow analysis that led to the $43.3 million impairment charge and assess the likelihood of future impairments.
• Customer Concentration: Monitor the status of United Technologies (11.1% of revenue) and the impact of their announced workforce reductions on RCM's future bookings.
• Legal Recovery: Confirm the receipt of the $9.8 million legal settlement proceeds expected in Q1 2009.
• Credit Facility: Review the terms of the amended credit facility (reduced to $15 million) and ensure continued compliance with financial covenants.
• Engineering Segment: Assess the company's ability to replace the $18.0 million in lost Engineering revenue from the departed major client.