RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q1, but the filing covers the thirteen weeks ended March 31, 2018, compared with the thirteen weeks ended April 1, 2017. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
RCM provides engineering, specialty health care, and information technology services, including consulting, staffing, project work, and permanent placement. The filing reports unaudited results for the first quarter of fiscal 2018; both comparative quarters comprised 13 weeks.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $50.8 | $46.3 |
| Gross profit / margin | $12.6 / 24.7% | $11.8 / 25.4% |
| Operating income / margin | $1.7 / 3.4% | $1.0 / 2.3% |
| Net income | $1.1 | $0.6 |
| Diluted earnings per share | $0.09 | $0.05 |
| Operating cash flow | $(7.0) | $1.9 |
| Capital expenditures | $0.3 | $0.1 |
Revenue rose 9.6%. Engineering revenue increased 11.4% to $21.4 million; Specialty Health Care increased 22.3% to $22.6 million; Information Technology declined 21.5% to $6.8 million. Gross margin narrowed as cost of services grew faster than revenue. SG&A was $10.4 million, or 20.5% of revenue, versus $10.3 million, or 22.2%.
The effective tax rate was 25.6%, compared with 39.0%, primarily reflecting the lower U.S. federal tax rate under the Tax Cuts and Jobs Act and the addition of Serbian operations. Interest and other expense increased to $0.3 million from $0.1 million, mainly due to higher credit-facility borrowings.
At March 31, cash was $0.5 million, current assets were $57.1 million, and current liabilities were $17.4 million. Line-of-credit borrowings were $32.0 million, up from $27.3 million at fiscal year-end; the $40 million revolving facility had $7.2 million available, including the effect of outstanding letters of credit. The company reported compliance with its covenants. Stockholders’ equity was $23.3 million.
Material changes and management commentary
- Operating cash use of $7.0 million contrasted with cash generation in the prior-year quarter. A $6.1 million increase in accounts receivable was the main driver; management attributed collection delays to several clients and expected receivables to move toward fiscal year-end levels in the near term.
- Specialty Health Care growth was led by school-contract paraprofessional additions in New York City and Hawaii. Travel nursing revenue fell amid increased competition and constrained labor; segment gross margin declined to 23.2% from 24.6%.
- Information Technology revenue and gross profit fell due to reduced projects at several large clients, the prior-year contribution from the Microsoft business sold at fiscal 2017 year-end, and a lower-margin revenue mix.
- The company adopted ASC 606 in the quarter using the modified retrospective method, with no adjustment to opening retained earnings. Other accounting-standard adoptions disclosed for the quarter had no material impact.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management cites economic cyclicality, client spending, competition and pricing pressure, and the ability to recruit and retain qualified personnel as factors affecting results. It said capital resources should cover obligations for at least the next 12 months.
- A major U.S. utility dispute is in arbitration. RCM reports $5.9 million due from the customer, subject to possible upward adjustment, and $9.3 million in customer counterclaims. The company considers the counterclaims without merit but cannot assure it will avoid paying some or all of them; it anticipated a conclusion in late fiscal 2018 or early fiscal 2019. The filing reports a $0.1 million accrual for asserted claims generally.
- Puerto Rico operations remained affected by Hurricane Maria: the San Juan office had not generated meaningful revenue since the storm, while the company expected to incur some compensation costs to retain employees.
- Operating leases had $6.2 million of disclosed minimum future commitments. RCM was evaluating an upgrade or replacement of its SAP financial system, estimated at $1.0–$2.0 million, with timing not determined. Estimated acquisition contingent consideration totaled $2.1 million; actual payments may differ.
- The revolving facility is secured by company assets and subsidiary stock. The company disclosed exposure to variable interest rates and does not use derivatives to hedge interest-rate or foreign-currency risk.
Important facts for investors to verify
- Whether the large receivables increase reverses as management expected, and the collectability and timing of the $5.9 million utility receivable.
- Developments and potential financial exposure from the utility arbitration and its $9.3 million counterclaims.
- Cash conversion, borrowing levels, available credit, and covenant compliance, particularly given low quarter-end cash.
- Whether Specialty Health Care margins recover and whether Information Technology can replace lost project revenue.
- Potential costs and timing of the SAP system replacement, lease obligations, and contingent acquisition payments.