RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2018 Q3, this filing covers the 13 and 39 weeks ended September 28, 2019, compared with periods ended September 29, 2018. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context and reporting period
RCM provides engineering, specialty health care, and information technology services, including consulting, project solutions, staffing, and permanent placement. The company reported its unaudited third-quarter results on a 52/53-week fiscal calendar. Its results are exposed to economic cycles, customer spending, competition, staffing needs, and currency movements.
Financial performance and liquidity
| Metric | 13 weeks ended Sep. 28, 2019 | 13 weeks ended Sep. 29, 2018 | 39 weeks ended Sep. 28, 2019 | 39 weeks ended Sep. 29, 2018 |
|---|---|---|---|---|
| Revenue | $40.250 | $42.559 | $142.550 | $145.081 |
| Gross profit / margin | $10.615 / 26.4% | $10.988 / 25.8% | $35.935 / 25.2% | $36.278 / 25.0% |
| Operating income / margin | $0.731 / 1.8% | $1.232 / 2.9% | $4.579 / 3.2% | $3.842 / 2.6% |
| Net income | $0.335 | $0.684 | $3.049 | $2.116 |
| Diluted EPS | $0.03 | $0.06 | $0.24 | $0.17 |
- Third-quarter gross margin improved, but operating margin and net income declined. SG&A rose to $9.498 million from $9.412 million, and acquired-intangible amortization increased to $0.082 million from $0.007 million.
- For the 39-week period, operating income and net income increased despite lower revenue. The comparison benefited from the absence of $1.371 million in prior-year severance, professional, and other charges. Current-period net income also included a $0.6 million tax benefit from an IRS verbal settlement.
- Operating cash flow was negative $3.870 million, versus positive $2.064 million a year earlier. The principal working-capital uses included a $5.184 million increase in accounts receivable, a $3.366 million decrease in accounts payable and accrued expenses, and a $1.986 million decrease in accrued payroll.
- Cash was $0.393 million at quarter-end. Total assets were $91.740 million and stockholders’ equity was $31.051 million. Line-of-credit borrowings were $31.735 million, up from $27.540 million at December 29, 2018; the company reported $11.7 million of additional availability and $1.6 million in outstanding letters of credit.
- The company reported compliance with credit-facility covenants. The effective weighted-average borrowing rate, including unused-line fees, was 4.6% for the 39 weeks, compared with 3.8% in the prior-year period.
Material changes versus the prior comparable period
- Quarterly revenue fell 5.4%; 39-week revenue fell 1.7%. Engineering was the principal source of weakness, with 39-week revenue down $9.6 million. Management cited lower Canadian Power Systems and Aerospace client spending, increased competition in Canada, and timing of Energy Services projects.
- Specialty Health Care revenue rose 6.1% year to date, led by school-contract paraprofessional work in New York City and Honolulu; travel nursing revenue declined amid competition. Information Technology revenue rose 15.4% year to date, which management attributed to investments in management and sales personnel.
- Operating cash flow shifted to an outflow, driven by receivables and payment timing. Management attributed receivable growth to temporary client approval and payment delays and expected the receivables balance relative to revenue to improve in Q4 2019.
- At September 28, 2019, the company recorded $6.290 million of operating right-of-use assets and $6.539 million of operating lease liabilities following adoption of ASC 842; prior-year figures were not restated.
Outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance is provided. Management said results are cyclical and sensitive to economic conditions, customer spending, and competition, and stated that weaker economic conditions could require cost reductions or strategy changes.
- A major U.S. utility customer dispute is in binding arbitration. The company reported $12.2 million of related receivables, up from $8.9 million at year-end 2018. The customer’s counterclaims were anticipated to be at least $10.3 million, with the total amount not known; no liability accrual was recorded. RCM considers the receivables collectible and the counterclaims without merit, but warned that an adverse outcome could affect financial position, liquidity, and results.
- On October 18, 2019, after quarter-end, the company amended and restated its revolving facility: $45.0 million capacity, no letter-of-credit sublimit, and an August 8, 2023 maturity. Borrowings are secured by company and subsidiary assets and subject to covenants.
- Estimated future acquisition contingent consideration was $3.061 million, with potential payments capped at $6.3 million. Estimates depend on acquired businesses’ future performance and may differ materially from actual payments.
- Management estimated a future $1.0–$2.0 million cost to upgrade or replace its financial reporting and accounting system; timing was not determined. Other stated risks include personnel recruitment and retention, client concentration and collections, foreign exchange, cybersecurity, legal claims, and workers’ compensation and insurance costs.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, collectability, and outcome of the utility arbitration, including the exposure from the customer’s counterclaims and any effect on the recorded receivable.
- Whether the expected Q4 improvement in receivables occurred, and whether operating cash flow and borrowing levels improved.
- Whether Engineering demand stabilizes and growth in Specialty Health Care and Information Technology offsets weakness in Engineering.
- Compliance with the amended credit facility, borrowing availability, interest costs, and the timing and amount of contingent acquisition payments.
- Actual results versus management’s commentary: the filing provides no formal full-year financial guidance, and interim results are not necessarily indicative of full-year performance.