RCM Technologies, Inc. — Form 10-Q Summary
Period: The filing covers the thirteen weeks ended March 30, 2019, compared with the thirteen weeks ended March 31, 2018. The request metadata says “2018 Q1,” but the filing is for 2019 Q1. Amounts below are in millions of dollars unless stated otherwise.
Business context and results
RCM provides engineering, specialty health care, and information technology services, including consulting, project work, staff augmentation, and placement services. The company describes its markets as cyclical and sensitive to economic conditions, client spending, competition, and the availability of qualified personnel.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $51.595 | $50.812 | Up 1.5% |
| Gross profit / margin | $12.517 / 24.3% | $12.555 / 24.7% | Profit down $0.038; margin down 0.4 percentage points |
| Operating income / margin | $1.654 / 3.2% | $1.720 / 3.4% | Down $0.066 |
| Income before taxes | $1.189 | $1.413 | Down $0.224 |
| Net income | $1.463 | $1.051 | Up $0.412 |
| Diluted earnings per share | $0.11 | $0.09 | Up $0.02 |
Net income benefited from a $0.6 million tax benefit related to a verbal IRS settlement over a prior-year uncertain tax position. Excluding that discrete benefit, the reported earnings comparison would be materially different.
Revenue and operating changes
- Engineering: Revenue fell 11.0% to $19.1 million; operating income declined to $0.6 million from $1.3 million. Lower Canadian Power Systems, Energy Services, and Aerospace activity and reduced utilization pressured results. TKE, acquired in September 2018, contributed $2.6 million of quarterly revenue.
- Specialty Health Care: Revenue rose 6.8% to $24.2 million and operating income increased to $1.1 million from $0.7 million, primarily on school-contract staffing growth. Travel nursing revenue declined amid competition.
- Information Technology: Revenue grew 23.8% to $8.4 million and gross margin increased to 26.1% from 23.8%, reflecting higher-margin work and improved utilization. The segment reached approximately break-even operating income, versus a $0.2 million loss.
- Consolidated gross margin declined as cost of services grew faster than revenue. SG&A was broadly steady at $10.5 million.
Cash flow, balance sheet, and liquidity
- Cash was $1.7 million at March 30, 2019, versus $0.5 million at December 29, 2018. Accounts receivable rose to $58.6 million from $52.3 million, including $9.6 million subject to arbitration.
- Borrowings under the revolving credit line increased to $34.4 million from $27.5 million. The $45 million facility had $9.0 million of stated additional availability, with $1.6 million in letters of credit outstanding. The effective weighted-average interest rate, including unused-line fees, was 4.7%.
- Current assets were $64.6 million and current liabilities $21.3 million. Total liabilities were $63.7 million and stockholders’ equity $29.1 million.
- Cash flow from operations was reported as $(5.555) million in the cash-flow statement, mainly reflecting the $6.3 million accounts-receivable increase. MD&A instead reports operating cash use of $5.482 million; the filing text does not reconcile this difference. Investing used $0.1 million; financing provided $6.9 million, mainly through net line-of-credit borrowings.
- The company adopted lease accounting ASC 842 in the quarter. At period-end it reported $5.8 million of operating lease right-of-use assets and $6.1 million of operating lease liabilities; adoption materially affected the balance sheet but did not significantly affect earnings or cash flows.
Outlook, risks, and unusual items
- Management anticipated improvement in accounts receivable relative to revenue during fiscal 2019. It expected working capital to be the primary future use of capital and stated that resources should cover normal obligations for at least the next 12 months. No formal revenue or earnings guidance is provided.
- The company was out of compliance with one financial covenant at March 30, 2019, but obtained a one-time lender waiver. Management believed it would be compliant at the next quarterly reporting date or could obtain another waiver; neither outcome is assured.
- A binding arbitration with a major U.S. utility concerns $9.6 million of unpaid disputed receivables. The customer’s counterclaims were anticipated to be at least $10.6 million, although the total was unknown. The company asserted the claims lacked merit and expected arbitration to conclude by fiscal Q3 2019; no accrual for these asserted liabilities was recorded. An adverse outcome could materially affect financial position, liquidity, and results.
- Estimated future acquisition contingent consideration was $4.6 million, subject to forecast uncertainty, with aggregate potential payments capped at $9.6 million. The company paid $0.2 million during the quarter.
- Management said a possible upgrade or replacement of its financial reporting system could cost $1.0–$2.0 million; timing had not been determined. Other stated risks include economic cyclicality, pricing competition, customer concentration and collections, staffing, foreign exchange, litigation, and acquisition integration.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Confirm the period and resolve the cash-flow discrepancy: the statements show $5.555 million of operating cash use, while MD&A says $5.482 million.
- Track collection of receivables, especially the $9.6 million arbitration balance, and any updates to the customer’s counterclaims and arbitration timetable.
- Monitor covenant compliance, lender waivers, revolver availability, and debt levels as working-capital needs evolve.
- Assess whether revenue and margin trends improve in Engineering and whether growth in Specialty Health Care and IT is sustainable.
- Separate recurring earnings from the $0.6 million discrete tax benefit, and monitor contingent acquisition payments and possible systems-replacement costs.