RCM Technologies, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended September 29, 2012, compared with periods ended October 1, 2011. The request metadata says “2011 Q3,” but the filing itself is for 2012 Q3.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue | $34.8 | $33.6 | $108.8 | $108.8 |
| Gross profit / margin | $9.7 / 27.8% | $9.1 / 27.1% | $29.6 / 27.2% | $30.6 / 28.1% |
| Operating income / margin | $1.1 / 3.2% | $0.7 / 2.2% | $3.9 / 3.6% | $4.8 / 4.4% |
| Net income / margin | $0.6 / 1.9% | $0.7 / 2.2% | $2.2 / 2.0% | $3.1 / 2.9% |
| Diluted EPS | $0.05 | $0.06 | $0.17 | $0.24 |
| Operating cash flow | Not separately presented for quarter | $7.4 | $9.8 |
Business context and material changes
- RCM provides information technology, engineering, and specialty health-care services. Q3 revenue grew 3.8%; year-to-date revenue was essentially flat.
- Q3 Engineering revenue rose 9.8%, mainly reflecting the July 1 acquisition of BGA, which contributed $1.6 million for the quarter. IT revenue declined 1.3%; Specialty Health Care revenue declined 1.6% in the quarter, which management attributed to normal fluctuations and seasonal school-system activity.
- For the 39-week period, IT revenue declined 4.1%, Engineering revenue rose 1.9%, and Specialty Health Care revenue rose 4.1%. Engineering’s Canadian division revenue fell $3.5 million, partly offset by growth elsewhere and BGA.
- Despite flat year-to-date revenue, gross profit fell 3.2%, operating income fell 19.2%, and net income fell 30.1%. Year-to-date cost of services rose to 72.8% of revenue from 71.9%, reflecting less high-margin project work and higher non-billable labor in Canadian Engineering.
Liquidity, capital and other key items
- At September 29, 2012, cash was $30.2 million, current assets $74.1 million, current liabilities $17.8 million, and stockholders’ equity $70.0 million. Cash increased $1.8 million from year-end 2011.
- No credit-facility borrowings were outstanding. The $15 million revolving facility matures August 31, 2016; $14.1 million was available after $0.9 million of letters of credit. The facility is secured by company assets and subsidiary stock and includes covenants.
- Year-to-date investing used $1.7 million, including $1.3 million of cash paid for BGA. Financing used $4.0 million, principally $4.4 million of share repurchases. The company repurchased 814,841 shares year to date at an average $5.43 per share; $362,000 remained under the program at quarter-end.
- BGA consideration was estimated at $2.7 million, including $1.3 million cash and $0.9 million contingent consideration. The purchase-price allocation was preliminary and expected to be finalized in Q4. Estimated future contingent payments totaled $1.3 million; BGA earnouts are capped at $3.0 million cumulatively.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management described economic and market recovery as slow or uncertain and was cautious about 2013. It expected Engineering cost of services as a percentage of revenue to decline in Q4 2012 and fiscal 2013, citing anticipated demand and workforce investment.
- Management expects an ERP-system upgrade beginning sometime in 2013; spending could rise significantly depending on the system selected. It stated that available capital resources should meet normal obligations for at least 12 months.
- The projected 2012 effective tax rate was approximately 43.9%, elevated in part because of projected Canadian operating losses relative to U.S. income. The prior-year Q3 tax rate was unusually low due to a discrete tax benefit.
- Legal matters had approximately $0.2 million accrued at quarter-end, while asserted claims sought approximately $13.4 million in damages. The filing notes possible uninsured exposure and that an unfavorable outcome could materially affect results, liquidity, or financial position; no specific outcome is stated.
- Other risks include economic cyclicality, competition and pricing pressure, attracting and retaining qualified staff, acquisition integration and contingent payments, bad debts, insurance claims, and impairment of goodwill or other assets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2011 Q3, whereas this filing reports 2012 Q3.
- Track whether Canadian Engineering activity and non-billable labor improve as management anticipated, and whether year-to-date margin pressure persists.
- Assess BGA’s operating contribution, finalized purchase-price allocation, and actual earnout payments against the preliminary estimates.
- Review developments in the legal claims, asserted damages, and insurance coverage, as well as the company’s allowance for doubtful accounts.
- Monitor share repurchases, remaining authorization, liquidity and facility covenant compliance, and the potential cost of the planned ERP upgrade.