RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13- and 39-week periods ended September 27, 2014, not 2013 Q3 as indicated in the request metadata. Comparatives are the periods ended September 28, 2013. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context and reporting period
RCM provides engineering, information technology, and specialty health care services. The company describes its markets as cyclical and sensitive to economic conditions. Its third quarter and year-to-date periods each comprised 13 and 39 weeks, respectively.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $46.4m | $41.3m | $144.5m | $124.9m |
| Gross profit (margin) | $13.2m (28.4%) | $10.7m (25.9%) | $38.4m (26.6%) | $32.6m (26.1%) |
| Operating income | $2.8m | $1.8m | $7.9m | $5.0m |
| Net income | $1.9m | $1.1m | $5.1m | $3.6m |
| Diluted EPS | $0.15 | $0.09 | $0.40 | $0.29 |
| Operating cash flow | Not presented separately | Not presented separately | $1.2m | $0.7m |
- For the 39-week period, revenue increased 15.6%; gross margin rose 0.5 percentage points and operating margin increased from 4.0% to 5.5%. Net income increased 42.7%.
- Year-to-date revenue growth was led by Engineering (+19.5%) and Specialty Health Care (+22.1%); Information Technology grew 6.5%. Specialty Health Care operating income declined to $0.2m from $0.7m.
- At September 27, 2014, cash was $8.3m, total assets $94.3m, and current liabilities $26.1m. Cash was $9.3m at December 28, 2013. Net accounts receivable was $60.5m, up from $55.7m.
- The company had no revolver borrowings and reported $14.2m of availability under its $15m revolving facility, with $0.8m of letters of credit outstanding. It was in covenant compliance. The facility matures August 31, 2016.
- Year-to-date investing activities used $2.0m, primarily for property and equipment; financing activities provided $0.3m. Cash declined $1.0m over the period. Working-capital movements, including higher receivables, constrained operating cash generation.
Material changes and management commentary
- Q3 revenue grew 12.3% year over year. Improved Engineering and IT gross margins contributed to the increase in total gross margin; SG&A rose 16.4% as the company invested in personnel and infrastructure.
- Engineering benefited from completion of a Canadian fixed-price contract that had incurred costs above initial estimates. IT margins improved as the company focused on higher-margin services. Specialty Health Care’s expansion efforts and tighter labor supply pressured margins and profitability.
- RCM acquired Toronto-based Point Comm, Inc. (PCI) effective August 1, 2014, adding engineering capabilities. Preliminary consideration was $0.8m, including $0.765m of contingent consideration; future earnouts are performance-based and capped at $2.0m.
- Management said it was optimistic that results in the remaining fiscal 2014 quarter would be favorable compared with the prior-year quarter. This is commentary, not quantified financial guidance. Management stated capital resources should cover obligations and normal-course needs for at least 12 months.
- Planned spending included up to $1.0m for a project-management software platform, expected to begin in Q4 2014, and possible additional financial-system investment in 2015–2016.
Risks, contingencies, and unusual items
- Customer and collection exposure: RCM had $15.8m of receivables from Black & McDonald (B&M), including $5.6m tied to a disputed Ontario Power Generation purchase order. OPG had notified B&M of default and termination and said it would make no further payments to B&M on that project. RCM disputed any assertion that it was in default and considered its receivables collectible, but warned collection could be delayed by a protracted dispute. OPG indicated it intended to contract directly with RCM for remaining project work.
- Legal claims asserted against the company were approximately $8.4m; the recorded provision was $0.1m. The filing notes that outcomes and insurance coverage are uncertain.
- Management cited economic cyclicality, intense price competition, recruiting and retaining qualified personnel, acquisition integration and contingent-payment uncertainty, labor and insurance costs, regulation, and litigation as risks.
- Year-to-date severance and other charges were $0.1m versus $0.5m. RCM said current-period costs mainly related to proxy-contest settlement fees and could incur additional fiscal 2014 costs related to its research-and-development tax-credit study. A $2.7m severance payment to the former CEO was paid in Q3 from an amount accrued in 2013.
- Estimated future contingent consideration for BGA and PCI totaled $1.4m, but actual payments could differ materially. The company also disclosed a $0.6m unrecognized tax benefit.
Important facts for investors to verify
- Subsequent developments in the OPG–B&M dispute, direct-contract arrangements, and collection of RCM’s $15.8m B&M receivable balance.
- Whether the expected Q4 reduction in receivables from two major customers occurred, and the resulting impact on cash conversion.
- Engineering and IT margin durability, and whether Specialty Health Care expansion can improve margins and operating results.
- PCI integration, operating performance, and the assumptions underlying its contingent consideration valuation.
- Actual spending and implementation progress for the planned project-management and financial-system upgrades.
- Amounts and outcomes of legal claims, tax-credit-study costs, and future acquisition earnouts.