RCM Technologies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended April 2, 2016, compared with the thirteen weeks ended April 4, 2015. The request metadata says “2015 Q1,” which does not match the filing period.
Business context and results
RCM provides engineering, information technology, and specialty health care staffing and services. The company describes its market as cyclical and sensitive to economic conditions, client spending, and competition. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $47.2 | $48.0 |
| Gross profit / margin | $12.7 / 26.9% | $13.3 / 27.7% |
| Operating income / margin | $1.8 / 3.9% | $2.4 / 4.9% |
| Net income / margin | $1.0 / 2.1% | $1.4 / 2.9% |
| Diluted earnings per share | $0.08 | $0.11 |
| Operating cash flow | $1.1 | ($4.9) |
| Capital expenditures | $0.4 | $0.6 |
Financial position and liquidity
- At April 2, 2016, cash was $0.1 million, current assets were $59.2 million, and current liabilities were $21.8 million. Total assets were $76.2 million and stockholders’ equity was $33.3 million.
- Revolver borrowings were $19.9 million, down from $21.0 million at January 2, 2016. The $35 million facility expires December 2019; $14.4 million was available at quarter-end after outstanding letters of credit. The effective borrowing rate, including unused-line fees, was 3.1%. The company reported compliance with all covenants.
- Operating cash flow benefited from a $2.8 million increase in the net transit payable position. Receivables consumed $2.2 million of cash; management attributed the increase to slower-than-expected collections from Canadian Engineering and Specialty Health Care clients and expected it to reverse in Q2.
Changes versus the prior-year quarter
- Revenue declined 1.6% overall. Excluding the QAD Software Solutions business, disposed of at the end of fiscal 2015 and responsible for $1.0 million of prior-year revenue, revenue increased 0.5%.
- Engineering revenue fell 18.0% to $18.7 million, primarily due to lower Canadian project activity and currency translation. Segment operating income fell to $0.7 million from $1.1 million.
- Information Technology revenue declined 13.1% to $12.7 million, reflecting the QAD disposal and lower activity in certain practices. Segment operating income was approximately unchanged at $0.6 million.
- Specialty Health Care revenue rose 49.7% to $15.8 million, driven by newer offices and staffing lines. Lower-margin new-client revenue reduced segment gross margin to 25.7% from 29.6%; operating income increased to $0.5 million from $0.4 million.
- Overall gross margin contracted to 26.9% from 27.7%. Operating income fell 22.7%, while interest expense and other net expense increased to $0.2 million from $0.1 million, primarily due to borrowings.
- Net income was lower, though operating cash flow improved from a use of cash to a source of cash, reflecting working-capital movements as well as earnings.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management says it believes capital resources are sufficient for obligations in the normal course of business for at least 12 months.
- The company may need to upgrade or replace its SAP financial reporting system, potentially as early as fiscal 2016; estimated cost is $1 million to $2 million and subject to change.
- Estimated future acquisition earnout payments total $1.765 million through 2018. Actual payments may differ materially because estimates depend on forecast performance.
- Asserted legal claims sought approximately $1.9 million in damages; no liability was accrued. The company notes that some claims may not be insured and an unfavorable outcome could materially affect results, liquidity, or financial position.
- Key disclosed risks include economic and client-spending cycles, competition and pricing pressure, attracting and retaining qualified personnel, significant-customer relationships, Canadian-dollar fluctuations, acquisition integration and financing, staffing-related claims, and regulatory requirements.
- The company repurchased 115,318 shares for approximately $0.6 million at an average $5.19 per share during the quarter. Management said performance-based restricted stock unit targets were considered unlikely to be achieved, so no related compensation expense was recorded.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the anticipated Q2 collection of overdue Canadian Engineering and Specialty Health Care receivables occurred, and the resulting cash-flow effect.
- Whether weakness in Canadian Engineering and Information Technology continues, and whether Specialty Health Care growth can sustain margins.
- Actual spending and timing for the SAP system upgrade or replacement, and its effect on liquidity.
- Revolver availability, borrowing costs, covenant compliance, and the company’s very low quarter-end cash balance.
- Developments in the unaccrued legal claims and the performance-based acquisition earnouts.
- The effect of adopting revenue-recognition standards: the company planned early adoption beginning in fiscal 2017 and did not anticipate a material impact, but was still evaluating the standard.