RCM Technologies, Inc. — Q1 2020 Form 10-Q
Business context and period. RCM provides engineering, specialty healthcare staffing, and information technology services. The filing covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. COVID-19 began affecting operations during the quarter; the company expected greater effects in subsequent periods.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $45.0 million | $51.6 million |
| Gross profit / margin | $10.8 million / 24.1% | $12.5 million / 24.3% |
| Operating income (loss) | ($7.8 million) | $1.7 million |
| Net income (loss) | ($5.9 million) | $1.5 million |
| Diluted EPS | ($0.45) | $0.11 |
| Cash from (used in) operations | $0.9 million | ($5.6 million) |
Revenue fell 12.7%. Gross margin edged down from 24.3%; SG&A was $10.2 million, or 22.7% of revenue, versus $10.5 million, or 20.3%. Results included an $8.0 million charge for arbitration-related receivables and costs. The reported tax benefit was $2.2 million, compared with $0.3 million.
By segment, Engineering revenue declined 25.7% to $14.2 million; Specialty Health Care declined 8.2% to $22.2 million; and Information Technology increased 3.6% to $8.7 million. Segment operating results were losses of $7.8 million for Engineering and $0.1 million for Specialty Health Care, and income of $0.1 million for IT. Engineering’s result included the arbitration charge.
Financial position and liquidity
- At March 28, 2020, cash was $0.6 million, total current assets $57.2 million, current liabilities $50.6 million, and total assets $84.0 million. Stockholders’ equity was $26.5 million.
- Revolver borrowings were $32.8 million, down from $34.8 million at year-end; the $45.0 million facility had $10.5 million of additional availability and expires in August 2023. The facility is secured by company assets and subsidiary stock.
- Operating cash flow was positive despite the net loss, with the reconciliation including a $7.8 million provision for receivable losses and working-capital movements. Cash declined $1.2 million during the quarter.
- The company reported $5.8 million of operating lease liabilities and $0.4 million of finance lease liabilities. Estimated contingent acquisition payments totaled $3.1 million.
Material changes, outlook, and risks
- Arbitration: In April 2020, after quarter-end, an arbitrator awarded RCM $7.4 million on a major utility dispute and denied the customer’s $10.3 million counterclaims. RCM recorded an $8.0 million charge in Q1, including the unawarded receivable portion and other dispute-related amounts.
- COVID-19: Management attributed demand pressure in part to the pandemic, including school closures, and anticipated a more significant negative effect on revenue, gross profit, operating income, and financial position through at least Q2 and possibly beyond. The financial impact could not be reasonably estimated. The company reported estimated Q1 lost Specialty Health Care school revenue of about $3.0 million and gross profit of about $1.1 million.
- Liquidity and covenant: RCM received a lender waiver for its debt-to-EBITDA covenant at March 28, 2020, and classified the revolver as current. Management expected possible noncompliance for the foreseeable future and gave no assurance of future waivers or continued credit availability. It expected positive cash flow for at least the next two quarters and believed liquidity was sufficient for at least 12 months, but said it could not assure planned reductions in revolver borrowings.
- Management response: The company focused on consultant utilization, reducing SG&A, and protecting operations and employees. It reported limited new work proposals in IT and lower Engineering proposals than before the pandemic; healthcare demand outside school services was described as high, but qualified staff were difficult to recruit. No quantified revenue or earnings guidance was provided.
- Other exposures: Customer concentration, collection risk, labor and insurance costs, competition, foreign exchange, ordinary-course legal claims, and possible future financing needs are disclosed risks. Management reviewed goodwill and intangible assets in light of COVID-19 and recorded no impairment. The company also noted potential control-process challenges from conducting a virtual financial close, while concluding disclosure controls were effective.
Investor verification priorities
- Track lender waivers, covenant terms, borrowing availability, and actual revolver repayments after quarter-end.
- Verify collection and cash realization of the $7.4 million arbitration award, and the accounting and timing of related receivables.
- Assess COVID-19 effects on school openings, healthcare staffing, customer demand, revenue, margins, and cash flow.
- Monitor receivable quality and customer concentration, especially given the large arbitration charge and the decline in accounts receivable.
- Review subsequent-period liquidity and whether management’s positive-cash-flow and 12-month liquidity expectations were achieved.