RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2017, not 2016 Q3 as stated in the request metadata. The quarter and year-to-date comparisons are against the periods ended October 1, 2016. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and reporting period
RCM provides engineering, specialty health care staffing, and information technology services. This unaudited report covers 13 weeks for the quarter and 39 weeks year to date. The company notes that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $43.827m | $39.695m | $135.680m | $132.250m |
| Gross profit / margin | $11.718m / 26.7% | $10.144m / 25.6% | $35.583m / 26.2% | $34.924m / 26.4% |
| Operating income / margin | $1.596m / 3.6% | $0.422m / 1.1% | $3.481m / 2.6% | $3.771m / 2.8% |
| Net income | $1.020m | $0.110m | $1.759m | $1.974m |
| Diluted EPS | $0.08 | $0.01 | $0.15 | $0.16 |
- Cash flow: Year-to-date operating cash flow was $6.956m, down from $12.128m. Investing used $0.743m, primarily for property and equipment; financing used $5.621m, including $4.860m of net revolver repayments. Cash increased $0.546m to $0.825m.
- Balance sheet: At September 30, cash was $0.825m, current assets $47.643m, and current liabilities $19.659m. Working capital was approximately $27.984m. Total assets were $64.048m and stockholders’ equity $34.003m.
- Debt and availability: Revolver borrowings were $9.451m, versus $14.311m at year-end 2016; $24.7m remained available under the $35m facility. The facility expires December 2019, is secured by company assets and subsidiary stock, and carries a 2.6% effective rate for the year-to-date period. The company reported covenant compliance.
Material changes versus comparable periods
- Quarterly revenue rose 10.4%; year-to-date revenue rose 2.6%. Engineering and Specialty Health Care growth was partly offset by weaker Information Technology revenue.
- Quarterly operating income and net income improved substantially, while year-to-date operating income and net income declined. Year-to-date results included a $0.781m charge for increased acquisition contingent consideration, principally related to Point Comm; the charge also contributed to a 43.4% reported effective tax rate. Excluding that discrete tax effect, the company reported a 34.7% effective rate.
- Engineering revenue increased 23.4% in Q3 and 11.8% year to date; improved utilization on fixed-price work lifted segment margins. Specialty Health Care revenue increased, but lower margins and higher support costs weakened year-to-date operating income. Information Technology revenue fell 22.7% in Q3 and 26.1% year to date, reflecting lost large-client projects and a less favorable revenue mix.
- Year-to-date operating cash flow was lower despite improved collections; the prior-year period benefited from a larger decrease in receivables.
Outlook, risks, contingencies, and unusual items
- The filing gives no formal quantitative earnings or revenue guidance. Management describes the market as cyclical and sensitive to economic conditions, with competition, pricing pressure, client spending, and the ability to recruit and retain qualified staff as key risks.
- Hurricane Maria significantly disrupted the San Juan, Puerto Rico office. RCM estimated $0.1m of lost September revenue, but warned that the office may generate little or no significant revenue in the near term, potentially ever. Retaining staff during the recovery could create non-billable “bench time” costs and materially affect Information Technology segment contribution income.
- Asserted legal claims sought approximately $0.6m at quarter-end; no liability was accrued. The company cautions that an unfavorable outcome could materially affect financial position, liquidity, or results.
- Estimated acquisition contingent payments totaled $1.232m, including $0.992m due after September 30, 2017; estimates are judgmental and actual payments may differ. The company completed acquisitions of Allied Health Professionals and R.A.F. Services during the reporting period.
- Management expected a review of its legacy SAP financial reporting system during fiscal 2017 and estimated a possible upgrade or replacement cost of $1m–$2m. Operating lease commitments totaled $7.249m.
- Management stated capital resources should be sufficient for present obligations and normal-course needs for at least 12 months. The revolving facility amendment included a waiver excluding $1.3m of specified legal settlement and office-closure expenses from covenant calculations.
Important facts for investors to verify
- Confirm the reporting-period discrepancy in the request metadata: the filing is for Q3 2017.
- Track whether Information Technology can replace lost large-client project revenue and whether the Puerto Rico disruption and staffing costs persist.
- Assess sustainability of Engineering utilization and Specialty Health Care margins as support costs and labor constraints evolve.
- Monitor operating cash flow, receivables and collections, contingent acquisition payments, and remaining revolver capacity.
- Review developments in legal proceedings, tax examinations, the planned SAP system review, and the impact of applicable credit-facility covenants.