RCM TECHNOLOGIES, INC. annual report, FY2021

Business context and reporting period

RCM Technologies, Inc. (Nasdaq: RCMT) provides engineering, specialty health care staffing, and life sciences and information technology services. This is a fiscal-year Form 10-K for the 52 weeks ended January 1, 2022, compared with the 53 weeks ended January 2, 2021; it is not a standalone Q4 report. Amounts below are in U.S. dollars.

Key financial results

Revenue increased 35.5% despite one fewer fiscal week. Cost of services was 73.9% of revenue versus 74.2%; SG&A was 20.6% versus 25.1%. Management-reported non-GAAP adjusted EBITDA was $11.1 million, compared with $1.1 million; the company cautions that this measure is not a substitute for GAAP results or cash flow.

Segment revenue was $66.2 million in Engineering (32.5% of total), $98.5 million in Specialty Health Care (48.3%), and $39.2 million in Life Sciences and IT (19.2%). Segment operating income was $5.4 million, $5.5 million, and $3.3 million, respectively.

Liquidity, debt, and capital allocation

At year-end, current assets were $52.0 million and current liabilities were $29.9 million, or working capital of approximately $22.1 million. Accounts receivable, net, was $48.2 million, up from $36.0 million. The $45 million revolving facility had $14.2 million drawn, $1.9 million of letters of credit outstanding, and $28.9 million available; the company reported covenant compliance. The facility is secured by company assets and subsidiary stock. Management stated it expects liquidity to cover needs for at least the next 12 months.

Operating cash flow fell to $0.9 million, principally as higher receivables used $14.7 million of cash; the company attributed the increase to higher revenue, particularly late in the year. Investing activities provided $6.3 million, including $6.9 million of proceeds from the Canadian Power Systems sale. Financing activities used $7.6 million, including $9.0 million for share repurchases. No dividends were declared in either year.

Material changes and unusual items

• Specialty Health Care revenue rose 62.9%, reflecting reopened school clients and strong demand for health care professionals. Its gross margin increased to 25.7% from 22.1%.
• Engineering revenue rose 14.7%, but gross margin declined to 24.3% from 28.6%, reflecting lower utilization after the Canadian business sale, lower margin on a new aerospace engagement, and fixed-price contract rework.
• Life Sciences and IT revenue increased 21.7%, and gross margin improved to 30.0% from 27.9%.
• FY2020 results included an $8.4 million receivables and arbitration-related charge and $2.2 million of office impairment and related costs. FY2021 included a $2.4 million gain on the Canadian Power Systems sale and a $1.7 million gain from reducing acquisition-related contingent consideration.
• The July 2021 Canadian Power Systems sale generated $6.9 million in proceeds and a $2.4 million gain. The business had contributed $4.9 million of FY2021 revenue before the sale, versus $11.8 million in FY2020.
• Net income included a 21.0% effective tax rate; management described this as abnormally low and estimated a normalized consolidated rate of 27.5%.

Outlook, risks, and contingencies

No quantitative revenue or earnings guidance was provided. Management described potential growth in engineering work tied to energy transition and industrial activity, and in health care staffing and telehealth, but emphasized uncertainty from COVID-19. School closures or a shift to virtual learning could reduce Specialty Health Care revenue; labor scarcity and higher labor-related costs may also pressure performance. Management said the pandemic’s future financial impact could not be reasonably estimated.

Other key risks include customer concentration (the five largest customers represented 35.8% of revenue and the ten largest 52.5%, although no single customer was at least 10% of FY2021 revenue), competition and pricing pressure, recruiting and retention, receivable collection, foreign exchange exposure, cyber and data-privacy risks, and possible effects of Russia-related sanctions on Serbian operations. Two customers each represented more than 10% of year-end accounts receivable: Ginkgo Bioworks (15.3%) and Hawaii Department of Education (14.2%).

Accrued asserted claims were $2.9 million, including $1.6 million for a California travel-nurse overtime class action settlement paid in early January 2022. Other claims may exceed recorded accruals, though management does not expect current matters to have a material adverse effect. The company also planned a fiscal 2022 upgrade or replacement of its financial reporting system, estimated at $0.5 million to $1.0 million. Management assessed disclosure controls and internal control over financial reporting as effective; the external auditor did not audit internal control effectiveness.

Important facts for investors to verify

• Confirm whether the intended period is this FY2021 10-K or a separate Q4 filing; the document covers the full fiscal year, not Q4 alone.
• Track collection of the sharply higher receivables and the cash-conversion impact of continued revenue growth.
• Assess whether Specialty Health Care demand and school-based activity remain resilient, and whether staffing shortages and wage inflation constrain margins.
• Review Engineering segment margins and the contribution from new aerospace and industrial engagements after the Canadian business divestiture.
• Monitor borrowing availability, covenant compliance, and the company’s use of cash for repurchases versus operating and investment needs.
• Follow legal claims, the realization of deferred tax assets, and the estimated contingent acquisition payments of up to $0.7 million.