Business context and reporting period
RCM Technologies, Inc. provides information technology, engineering, and specialty health-care staffing, consulting, and project services. This Form 10-Q covers the 13 weeks ended March 31, 2012, compared with the 13 weeks ended April 2, 2011. The request metadata says 2011 Q1, but the filing itself reports 2012 Q1.
Financial performance and position
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2012 | Comparable Q1 2011 |
|---|---|---|
| Revenue | $38.206 | $38.706 |
| Gross profit / margin | $10.285 / 26.9% | $11.050 / 28.5% |
| Operating income / margin | $1.776 / 4.7% | $2.057 / 5.3% |
| Net income | $1.059 | $1.175 |
| Diluted EPS | $0.08 | $0.09 |
| Operating cash flow | $3.253 | $1.908 |
Cash and cash equivalents were $31.478 million at March 31, 2012, versus $28.417 million at year-end 2011. Total assets were $88.091 million and total liabilities were $15.347 million. There were no revolver borrowings; the $15 million facility had $14.1 million available after $0.9 million of letters of credit. The facility matures August 31, 2016 and is secured by company assets and subsidiary stock. Cash of $5.5 million was held by foreign subsidiaries. Investing activities used $0.147 million and financing activities used $0.025 million. No separate debt balance was reported.
Material changes versus the prior comparable period
- Revenue declined 1.3%, or $0.5 million. Information Technology revenue fell 9.8% to $13.8 million; Engineering revenue rose 2.8% to $16.6 million; Specialty Health Care revenue rose 7.3% to $7.8 million.
- Gross margin narrowed 1.6 percentage points, principally from less high-margin project work and higher non-billable labor in Canadian Engineering. SG&A fell 5.2% to $8.2 million, reflecting reductions in labor-related expenses and professional fees.
- Segment operating income was $0.3 million in IT (up from $0.2 million), $0.9 million in Engineering (down from $1.4 million), and $0.5 million in Specialty Health Care (up from $0.4 million).
- Net income declined to $1.1 million from $1.2 million. Operating cash flow increased, aided in part by working-capital timing, including accrued payroll and transit-account movements.
Outlook, risks, contingencies, and unusual items
Management described economic and market recovery as potentially slow or tenuous and was cautious about the remainder of 2012. It reported IT revenue was $1.1 million higher than in the preceding quarter and said early signs of sales-generation remediation were encouraging. Management expected Canadian Engineering revenue to improve in the second half of 2012 as clients awarded anticipated contracts, with lower related service costs as a percentage of revenue; these are expectations, not assurances. The company also anticipated an ERP-system upgrade in 2012 that could materially increase capital spending, depending on the system selected. Management said existing capital resources should cover normal obligations for at least 12 months.
Key risks include economic cyclicality, client spending and demand, intense price competition, recruiting and retaining qualified personnel, insurance-cost estimates, acquisitions and contingent payments, and litigation. Asserted legal claims sought approximately $13.4 million; the recorded provision was approximately $0.2 million at March 31, 2012. The filing warns an unfavorable legal outcome could materially affect financial position, liquidity, or results; insurance coverage may not apply. PSG acquisition contingent consideration was estimated at $0.195 million, with potential maximum deferred payments of $0.195 million through 2013. A $0.043 million liability reduction was recognized as other income in the quarter. The reported effective tax rate was 41.5%.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q1 2012 despite the request metadata labeling it 2011 Q1.
- Track whether IT remediation and expected second-half Canadian Engineering contract awards translate into revenue and improved margins.
- Monitor gross-margin pressure, especially non-billable Engineering labor and the mix of project work.
- Assess the outcome and insurance coverage of legal claims relative to the $0.2 million reserve and $13.4 million asserted damages.
- Verify the cost and timing of the anticipated ERP upgrade, and the availability of cash held by foreign subsidiaries.
- Review revolver covenants, lease commitments of $6.942 million, and any future acquisition financing or dilution.