RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the thirteen weeks ended March 29, 2014, compared with the thirteen weeks ended March 30, 2013. This differs from the “2013 Q1” period in the request metadata.
Business context and reporting period
RCM provides engineering, information technology and specialty health care services, including consulting and staffing. Results are unaudited and cover 13 weeks. The company describes its market as cyclical and sensitive to economic conditions.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $48.6 million | $41.2 million |
| Gross profit / margin | $12.3 million / 25.2% | $10.6 million / 25.8% |
| Operating income / margin | $2.0 million / 4.2% | $1.5 million / 3.7% |
| Net income | $1.2 million | $1.0 million |
| Diluted earnings per share | $0.10 | $0.08 |
| Cash from operating activities | $(2.8) million | $0.1 million |
| Capital expenditures | $0.4 million | $0.3 million |
Revenue increased 17.8%. Gross profit rose, but gross margin declined 0.6 percentage points, reflecting less higher-margin Engineering project work and higher Specialty Health Care service costs. SG&A increased 13.2% to $9.8 million, but declined as a share of revenue to 20.2% from 21.1%. The effective tax rate was 39.1%, compared with 40.2%.
Cash and cash equivalents were $5.6 million at March 29, 2014, down from $9.3 million at December 28, 2013. Accounts receivable, net, was $60.0 million, versus $55.7 million. Total assets were $88.6 million and total liabilities $26.0 million. The company had no revolving-credit borrowings, $0.8 million of letters of credit outstanding and $14.2 million of available borrowing capacity under its $15 million facility, which matures August 31, 2016. It reported compliance with facility covenants.
Operating cash use primarily reflected a $4.2 million increase in accounts receivable and a $1.2 million increase in prepaid and other current assets. The company had $3.1 million of cash held by foreign subsidiaries. Transit receivables and payables were each approximately $4.3 million, with a negligible net liability.
Material changes versus the prior period
- Revenue increased across all segments: Engineering 21.7%, Information Technology 7.3% and Specialty Health Care 27.4%.
- Engineering operating income rose to $1.1 million from $0.8 million; Information Technology operating income rose to $0.8 million from $0.5 million. Specialty Health Care operating income declined to $0.2 million from $0.3 million despite higher revenue.
- Operating cash flow shifted from $0.1 million provided to $2.8 million used. The prior-year period benefited from a larger net increase in transit payables over transit receivables.
- Other expense was $62,000, versus other income of $91,000, including a $48,000 foreign-currency loss and no repeat of the prior-year $92,000 reduction in contingent consideration.
Outlook, commentary, risks and unusual items
- Management said it was optimistic that results for the remaining three quarters of fiscal 2014 would be favorable compared with the prior-year periods; it provided no specific numerical guidance.
- A large fixed-price Engineering contract had costs above estimates; the company expected substantial completion by fiscal year-end 2014.
- Management said it may significantly enhance its financial reporting and accounting system in 2014, potentially increasing capital expenditures. It considered capital resources sufficient for obligations over at least the next 12 months.
- The company accrued $2.5 million for former CEO Leon Kopyt’s severance, payable in Q3 fiscal 2014; $1.7 million was funded to a Rabbi Trust and included in prepaid and other current assets.
- Estimated future contingent payments related to the BGA acquisition totaled $695,000, subject to performance and potentially differing materially from estimates; cumulative payments are capped at $2.7 million. The company paid $313,000 during the quarter.
- Legal matters had an accrued loss provision of approximately $0.1 million; asserted claims sought approximately $10.6 million. Management noted that an unfavorable outcome could materially affect financial position, liquidity or results.
- Key risks include economic cyclicality, competition and pricing pressure, attracting and retaining qualified personnel, customer spending, insurance and employment-related claims, acquisition integration and financing, and litigation. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether receivables and working-capital movements reverse sufficiently to support positive operating cash flow.
- Progress, cost and expected completion of the fixed-price Engineering contract, and whether its cost overrun is contained.
- Specialty Health Care margins as labor supply tightens and geographic expansion continues.
- Developments in litigation and the difference between the $0.1 million recorded provision and approximately $10.6 million of asserted claims.
- Actual severance, contingent-consideration and potential accounting-system investment cash requirements, alongside available revolver capacity.