RCM Technologies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 3, 2021, with comparisons to periods ended June 27, 2020. This conflicts with the request metadata of “2020 Q2”; the filing itself is for fiscal 2021 Q2. Amounts below are in U.S. dollars and millions unless stated otherwise.
Business context
RCM provides engineering, specialty healthcare staffing and services, and information technology services. Most revenue is generated through time-and-materials engagements. The interim financial statements are unaudited; the company cautions that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $48.9 | $32.7 | $93.5 | $77.7 |
| Gross profit / margin | $12.3 / 25.1% | $8.5 / 26.0% | $23.1 / 24.7% | $19.3 / 24.9% |
| Operating income (loss) | $1.9 | $(1.2) | $3.3 | $(8.9) |
| Net income (loss) | $1.3 | $(1.0) | $2.3 | $(6.9) |
| Diluted EPS | $0.11 | $(0.08) | $0.19 | $(0.54) |
| Operating cash flow | Not provided by quarter | $6.1 | $17.8 |
Q2 revenue rose 49.9% year over year; first-half revenue increased 20.3%. Q2 cost of services increased faster than revenue, and gross margin declined 0.9 percentage points. First-half gross margin was nearly flat year over year. First-half SG&A was $19.1 million, down from $19.2 million; as a share of revenue it declined to 20.4% from 24.8%.
At July 3, 2021, cash was $1.4 million, current assets $41.9 million and current liabilities $29.2 million. Total assets were $64.7 million and total liabilities $41.8 million. Line-of-credit borrowings were $9.7 million, down from $11.9 million at January 2, 2021; the $45 million facility had $33.4 million of additional availability and $1.9 million of letters of credit outstanding. The company reported compliance with its credit covenants and stated that it expected to meet liquidity needs for at least 12 months. The weighted average borrowing rate, including unused-line fees, was 2.2% for the first half.
First-half investing cash outflow was $0.1 million and financing cash outflow was $5.2 million. Financing included $2.2 million of net line-of-credit repayments and $2.6 million spent on share repurchases. Cash increased $0.7 million to $1.4 million.
Material changes and segment performance
- Specialty Health Care: Q2 revenue increased 114.7% to $22.9 million, driven mainly by school clients; operating income was $1.1 million versus a $1.1 million loss. First-half revenue rose 34.1% to $44.1 million.
- Engineering: Q2 revenue increased 20.6% to $16.9 million, but gross margin fell to 23.7% from 30.2%, reflecting lower Canadian Power Systems utilization and a lower-margin aerospace engagement. Q2 operating income was $0.2 million. First-half operating income was $0.1 million, versus a $7.4 million loss that included a prior-year arbitration-related charge.
- Information Technology: Q2 revenue increased 14.2% to $9.1 million; operating income was $0.7 million versus a $0.4 million loss. The company cited Life Sciences growth, improved gross margin and lower SG&A.
- First-half 2020 results included an $8.4 million charge related to a utility-customer arbitration, including receivable write-offs and professional fees. No comparable charge was recorded in 2021; this item materially affects the year-over-year improvement in operating results.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance was provided. Management expected COVID-19 to continue adversely affecting the business through at least the second half of fiscal 2021 and possibly beyond; the financial impact could not be reasonably estimated.
- COVID-19 risks include constrained access to customer facilities, uncertain school operations and healthcare staffing availability, and possible workforce or supply-chain disruptions. Management noted that school clients’ shifts toward hybrid or remote instruction could materially reduce Specialty Health Care revenue.
- On July 30, 2021, RCM sold the principal assets and certain liabilities of its Pickering and Kincardine, Ontario offices (Canada Power Systems). Those offices had generated $4.4 million of first-half 2021 revenue. RCM said it would continue other engineering services in Canada and similar services in the United States; sale proceeds and gain or loss were not stated in the provided filing text.
- The company had accrued $1.9 million for asserted claims, including $1.6 million for a California travel-nurse overtime class-action settlement, expected to be paid in fiscal Q4 2021. Other claims could exceed accrued amounts, although management did not expect a material overall adverse effect.
- Potential acquisition earn-out payments were estimated at $2.4 million, capped at a cumulative $2.4 million. RCM also disclosed that a future upgrade or replacement of its accounting system could cost $0.5 million to $1.0 million, with timing undetermined.
- The company repurchased 842,055 shares during the first half at an average $3.14 per share; $4.9 million remained available under its repurchase authorization at July 3.
- Management identified customer concentration, collections, competition and pricing pressure, employee recruitment and retention, wage-and-hour and other regulatory matters, insurance claims, foreign exchange, litigation, and COVID-19 as risks. A 1 percentage-point increase in variable borrowing rates would have increased annualized interest expense by approximately $0.2 million, based on period borrowings.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended July 3, 2021, not 2020 Q2.
- Assess whether Specialty Health Care growth, particularly school-related revenue, is sustainable as school operations and staffing conditions change.
- Track Engineering margins and the financial implications of the July sale of the Canada Power Systems offices.
- Reconcile operating cash flow’s year-over-year decline with receivables, payment timing and the company’s stated cash-management actions.
- Review the credit facility’s covenants and availability, the expected class-action settlement payment, and contingent acquisition obligations.
- Consider that first-half earnings comparisons are affected by the $8.4 million prior-year arbitration charge, and that COVID-19 impacts and customer concentration remain uncertain.