RCM Technologies, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks), compared with the 52 weeks ended December 31, 2016. Although the request metadata references 2016 Q4, this filing reports fiscal 2017 results, not a standalone quarter.
Business context
RCM provides engineering, specialty health care staffing, and information technology services across the U.S., Canada, Puerto Rico, and Serbia. Fiscal 2017 revenue mix was 44.3% Engineering, 38.2% Specialty Health Care, and 17.5% IT.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $186.7 million | $176.4 million |
| Gross profit / margin | $48.4 million / 25.9% | $47.0 million / 26.6% |
| Operating income | $0.3 million | $3.8 million |
| Income before taxes | Loss of $0.2 million | Income of $3.3 million |
| Income tax benefit (expense) | $2.3 million | Expense of $1.5 million |
| Net income | $2.0 million | $1.8 million |
| Diluted EPS | $0.17 | $0.14 |
| Cash from operations | $5.1 million | $11.6 million |
Revenue increased 5.8%, but gross margin declined 0.7 percentage points and operating income fell sharply. The net-income increase reflected a $2.3 million tax benefit despite a pretax loss; the unusually large reported effective tax rate is not meaningful, according to management. Adjusted EBITDA, a non-GAAP measure, was $8.0 million versus $7.0 million; GAAP EBITDA was $2.1 million versus $5.4 million.
Segments and notable changes
- Engineering: Revenue rose 12.1% to $82.8 million; operating income increased to $4.3 million from $3.1 million.
- Specialty Health Care: Revenue rose 19.3% to $71.3 million, while gross margin fell to 24.6% from 26.2% and operating income declined to $1.3 million from $1.5 million. Growth was driven in part by school staffing contracts; management cited competition and constrained labor as margin pressures.
- Information Technology: Revenue fell 23.7% to $32.7 million as large client projects declined and were not replaced. The segment recorded a $3.7 million operating loss, including a $3.5 million goodwill impairment, versus $0.5 million operating income in FY2016. Management warned that further declines in revenue, cash flows, or share price could trigger additional goodwill impairment.
Cash, debt, and liquidity
At year-end, cash was $2.9 million, total assets were $73.3 million, and stockholders’ equity was $22.0 million. Revolver borrowings were $27.3 million, up from $14.3 million; $0.8 million of letters of credit were outstanding and reported additional availability was approximately $6.9 million. The $35 million secured revolving facility was due to expire December 11, 2019; a February 2018 amendment increased the limit to $40 million. The company reported covenant compliance at year-end. Cash from operations declined to $5.1 million, while investing activities used $1.8 million and financing activities used $0.8 million.
RCM paid a $1.00-per-share special dividend totaling $12.2 million, funded principally with increased revolver borrowings. It repurchased 59,312 shares for $0.4 million during FY2017. Management stated it had no current plans for further dividends and believed capital resources were adequate for normal obligations for at least 12 months.
Outlook, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance was provided. Management described the business as cyclical and sensitive to customer spending, competition, and economic conditions, and emphasized growth in higher-value solutions, internal growth, and selective acquisitions.
- A major utility customer dispute is in arbitration: RCM claims $6.9 million in unpaid receivables, subject to possible upward adjustment; the customer asserts $9.3 million in counterclaims. RCM believes its receivable is collectible and the counterclaims lack merit but cannot assure the outcome. The filing reports a $0.1 million accrual for legal contingencies overall.
- Customer concentration increased: the five largest customers accounted for 37.9% of revenue, and Sikorsky Aircraft alone represented 10.4%. New York City Board of Education and New York Power Authority each exceeded 10% of year-end net accounts receivable.
- The Tax Cuts and Jobs Act produced an estimated $1.2 million increase in FY2017 tax expense, including a $1.0 million deferred-tax remeasurement and $0.2 million of transition tax. The tax accounting remained provisional, with final adjustments expected by the end of FY2018.
- Hurricane Maria was estimated to have reduced Puerto Rico revenue by approximately $0.3 million in late 2017; management expected San Juan revenue and gross profit to remain affected for at least several quarters.
- RCM may review replacement or upgrade of its legacy financial reporting system; estimated cost is $1.0–$2.0 million, with timing undecided. The company also disclosed seasonality, staffing and wage-law exposure, self-insured workers’ compensation and medical claims, foreign-exchange exposure, and cybersecurity and data-center risks.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Track IT segment recovery, project wins, staffing utilization, and potential additional goodwill impairment.
- Monitor arbitration developments, recoverability of the $6.9 million utility receivable, and exposure to the $9.3 million counterclaims.
- Reconcile operating cash conversion and working-capital trends with reported net income; assess the impact of the special dividend on leverage and revolver capacity.
- Verify final Tax Act accounting and future tax rates, given the unusual FY2017 tax benefit and provisional estimates.
- Assess customer concentration and the durability and margins of school staffing and other large contracts, including Puerto Rico operations.