Business context and reporting period
RCM Technologies, Inc. provides engineering, information technology (IT), and specialty health care staffing and consulting services. This 10-K covers the 52-week fiscal year ended December 28, 2013, compared with the 52-week year ended December 29, 2012; despite the request metadata, it is not a 2012 Q4 filing. Revenue mix in 2013 was Engineering 50.8%, IT 32.4%, and Specialty Health Care 16.8%.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $170.8 million | $145.8 million |
| Gross profit / margin | $44.4 million / 26.0% | $39.7 million / 27.2% |
| Operating income / margin | $2.6 million / 1.5% | $5.2 million / 3.6% |
| Net income / diluted EPS | $2.0 million / $0.16 | $3.2 million / $0.26 |
| Operating cash flow | $(3.8) million | $3.6 million |
| Cash and cash equivalents at year-end | $9.3 million | $14.1 million |
At December 28, 2013, total assets were $86.5 million, current assets $72.7 million, and current liabilities $24.7 million. The company reported no revolver borrowings, $0.8 million of letters of credit, and $14.2 million of additional borrowing availability under its $15 million facility, which matures August 31, 2016. It was in compliance with facility covenants. The filing does not present a separate total-debt figure; it reports no borrowings on the facility.
Material changes versus the prior year
- Revenue increased 17.1%. Engineering grew 30.2% to $86.7 million, IT grew 5.9% to $55.3 million, and Specialty Health Care grew 6.5% to $28.8 million.
- Gross margin fell 1.2 percentage points, chiefly from less higher-margin project work, higher non-billable labor in parts of Engineering, and increased Specialty Health Care service costs. A fixed-price Engineering contract also incurred costs above estimates.
- Operating income and net income declined despite revenue growth. FY2013 included $5.2 million of severance and other charges, versus none in FY2012; fourth-quarter operating loss was $2.5 million and net loss was $1.6 million, including $4.8 million of these charges.
- Operating cash flow swung to a $3.8 million use, principally reflecting a $12.5 million increase in accounts receivable and a $2.0 million cash use from the change in net transit receivables/payables. Management attributed receivables growth partly to higher revenue and expected the receivables-to-revenue ratio to improve over coming quarters.
- Cash declined by $4.8 million. The prior year included a $12.3 million special cash dividend; no dividend was paid in FY2013.
Outlook, commentary, risks, and unusual items
- Management was cautiously optimistic that overall FY2014 results would improve from FY2013, but provided no numerical guidance. It cited economic sensitivity, client spending priorities, competition and pricing pressure as important uncertainties.
- Ontario Power Generation represented 18.6% of FY2013 revenue and United Technologies 12.6%; the five largest customers generated 45.2% of revenue. This concentration makes results vulnerable to customer-specific changes.
- A shareholder proxy contest culminated in two shareholder-nominated directors joining the board in December 2013. The company reached a settlement with the shareholder group in January 2014. CEO Leon Kopyt retired effective February 28, 2014, with Rocco Campanelli named as successor. The company recorded $2.9 million of retirement-related charges and $1.6 million related to the proxy contest, including amounts it agreed to reimburse.
- Asserted legal claims sought approximately $10.7 million in damages; the recorded provision was approximately $0.2 million. The company cautioned that some proceedings may not be insured and an unfavorable outcome could materially affect results or liquidity.
- The company identified risks from economic downturns, staffing and retention, customer concentration, nuclear-industry exposure, subcontractor performance and payment timing, self-insured workers’ compensation and medical claims, foreign currency movements, and acquisition execution. It does not hedge foreign currency exposure.
- A review of the financial reporting and accounting system was anticipated; estimated possible costs were $0.5 million to $2.0 million. The company stated that capital resources should meet obligations for at least the next 12 months.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
Important facts for investors to verify
- Whether receivables and collections improved as management expected, given the sharp increase in net receivables and negative operating cash flow.
- Whether the reduced gross margin reflects temporary project mix and contract issues or a continuing pressure on profitability.
- The realized costs and operational effects of the CEO transition, proxy settlement, and other FY2013 charges.
- Any developments in the asserted legal claims, customer concentration, and the company’s exposure under construction-management and subcontractor arrangements.
- FY2014 performance against management’s non-numerical outlook, and the cost and timing of any accounting-system upgrades.