RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q3, but the filing is for the 13 and 39 weeks ended September 29, 2018, with comparisons to the periods ended September 30, 2017. Amounts below are in millions of dollars 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 filing reports third-quarter and year-to-date fiscal 2018 results. The interim financial statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | 13 weeks ended Sept. 29, 2018 | 13 weeks ended Sept. 30, 2017 | 39 weeks ended Sept. 29, 2018 | 39 weeks ended Sept. 30, 2017 |
|---|---|---|---|---|
| Revenue | $42.6 | $43.8 | $145.1 | $135.7 |
| Gross profit / margin | $11.0 / 25.8% | $11.7 / 26.7% | $36.3 / 25.0% | $35.6 / 26.2% |
| Operating income | $1.2 | $1.6 | $3.8 | $3.5 |
| Net income | $0.7 | $1.0 | $2.1 | $1.8 |
| Diluted earnings per share | $0.06 | $0.08 | $0.17 | $0.15 |
| Cash from operating activities | Not separately reported for the quarter | $2.1 | $7.0 |
- Third-quarter revenue fell 2.9% year over year, and net income declined from $1.0 million to $0.7 million. Gross margin contracted to 25.8% from 26.7%.
- Year-to-date revenue rose 6.9% and net income increased to $2.1 million from $1.8 million. Gross margin nevertheless fell to 25.0% from 26.2%.
- Year-to-date SG&A decreased to $29.9 million from $30.1 million. Results included $1.4 million of severance, professional fees, and other charges in 2018; 2017 included a $0.8 million contingent-consideration charge.
- Year-to-date interest expense and other, net rose to $1.0 million from $0.4 million, primarily because of higher borrowings. The company cited its December 2017 $12.2 million cash dividend as the primary reason for increased borrowing.
Liquidity, debt, and cash flow
- At September 29, 2018, cash was $0.7 million, total current assets were $55.7 million, and total current liabilities were $22.7 million. Cash was $2.9 million at December 30, 2017.
- Revolver borrowings were $24.5 million, down from $27.3 million at year-end 2017. The amended facility provides up to $45.0 million and matures August 8, 2023; reported additional availability was $19.7 million. The effective weighted-average interest rate, including unused-line fees, was 3.8%. The company reported covenant compliance.
- Operating cash flow fell to $2.1 million from $7.0 million year over year. Receivables and the net change in transit receivables/payables used $1.7 million and $1.6 million of cash, respectively. Capital spending was $1.4 million, and net cash decreased $2.1 million during the 39-week period.
- The company said capital resources were sufficient for obligations expected in the normal course for at least the next 12 months. It identified working capital as a primary expected use of capital.
Material changes and management commentary
- Year-to-date Specialty Health Care revenue grew 23.1% to $60.6 million, driven mainly by school-contract paraprofessional work in New York City and Honolulu. Lower-margin service mix and competitive pressure reduced the segment’s gross margin to 22.7% from 24.7%.
- Engineering year-to-date revenue increased 1.5% to $62.4 million, but gross margin declined to 26.8% from 27.5%, which management attributed largely to utilization variability on fixed-price contracts.
- Information Technology year-to-date revenue fell 11.5% to $22.1 million, reflecting reduced project work from several large clients and the prior-year contribution of the Microsoft business, disposed of at the end of fiscal 2017.
- Management described demand as sensitive to economic conditions, client spending, competition, and pricing pressure. It emphasized attracting and retaining qualified personnel and pursuing higher-margin solutions and project-management work. No specific financial guidance was provided.
- Management anticipated that receivables relative to revenue would improve in the fourth quarter of fiscal 2018 and fiscal 2019. The filing also estimates a possible $1.0–$2.0 million cost to upgrade or replace the company’s financial reporting system; timing was not determined.
Risks, contingencies, and unusual items
- A major U.S. utility customer dispute is in arbitration. RCM reported $6.2 million of outstanding receivables it believes collectible, while the customer’s counterclaims were expected to exceed $11.5 million. RCM said the claims lack merit but could not assure it would avoid paying some or all of them; the arbitration was expected to conclude in the first half of fiscal 2019. The filing reported only a negligible accrual for the legal matters discussed.
- Effective October 1, 2018, after the reporting period, RCM acquired substantially all assets of Thermal Kinetics for approximately $3.7 million upfront, including $1.8 million cash and 440,751 shares, with contingent consideration of up to $7.6 million over three years.
- Other stated risks include cyclical demand, competition and pricing pressure, labor availability and retention, foreign-exchange exposure, litigation, acquisition execution, and variable-rate debt. A 1 percentage-point increase in the revolver rate would have increased annualized interest expense by approximately $0.3 million, based on period borrowings.
- The company planned to adopt the new lease accounting standard in 2019 and expected recognition of right-of-use assets and lease liabilities, particularly for real estate leases. Management said the impact was still being evaluated.
Most important facts for investors to verify
- Whether the $6.2 million utility receivable is collected and the outcome and financial exposure from arbitration and counterclaims.
- Whether cash conversion and receivables improve as management anticipated, given the sharp year-over-year decline in operating cash flow.
- Whether gross-margin pressure persists, particularly in Specialty Health Care and Engineering, and whether IT revenue stabilizes.
- The funding, integration, dilution, and contingent-payment implications of the Thermal Kinetics acquisition.
- Future borrowing costs, covenant headroom, and the impact of reduced cash balances and planned system-replacement spending.