RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended June 30, 2012, not 2011 Q2. Comparative periods ended July 2, 2011. Dollar amounts below are USD millions unless noted.
Business context and reporting period
RCM provides information technology, engineering, and specialty health care services, including consulting, project solutions, and staffing. The filing reports unaudited results for the second quarter and first half of fiscal 2012; each comparable period contains the same number of weeks.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $35.8 | $36.5 | $74.0 | $75.2 |
| Gross profit / margin | $9.7 / 27.0% | $10.5 / 28.6% | $19.9 / 27.0% | $21.5 / 28.6% |
| Operating income / margin | $1.0 / 2.8% | $2.0 / 5.5% | $2.8 / 3.8% | $4.1 / 5.4% |
| Net income | $0.5 | $1.2 | $1.6 | $2.4 |
| Diluted EPS | $0.04 | $0.09 | $0.12 | $0.18 |
| Operating cash flow | Not separately presented | $4.7 | $(0.3) |
First-half cost of services rose to 73.0% of revenue from 71.4%; selling, general and administrative expense was $16.6 million versus $16.8 million. The consolidated effective tax rate was 44.6% for the first half, compared with 40.8% a year earlier; management attributed the increase primarily to a pretax loss in Canada.
At June 30, cash was $29.2 million, total assets $89.4 million, and stockholders’ equity $69.4 million. Current assets were $77.0 million and current liabilities $19.7 million. There was no revolver borrowing; $14.1 million remained available under the $15 million facility, after $0.9 million of letters of credit. The facility matures August 31, 2016 and is secured by company assets and subsidiary stock. First-half investing cash use was $0.2 million and financing cash use was $3.8 million, including $4.1 million of share repurchases.
Material changes and segment results
- First-half revenue declined 1.7% year over year; net income fell about 35%. Operating margin contracted from 5.4% to 3.8%.
- Information Technology: first-half revenue fell 5.4% to $27.1 million, but segment operating income improved to $0.5 million from $0.3 million. Management cited lingering effects of weak sales execution in 2011 and said remediation was underway.
- Engineering: first-half revenue decreased 1.9% to $31.4 million, with Canadian revenue down $3.3 million, partly offset by $2.2 million growth elsewhere in the segment. Operating income declined to $1.3 million from $2.5 million, reflecting lower revenue and higher non-billable labor.
- Specialty Health Care: first-half revenue increased 6.2% to $15.4 million, while operating income declined to $1.0 million from $1.2 million as service costs rose.
Outlook, risks, and unusual items
- Management described economic and market recovery as potentially slow or tenuous and expressed caution about the remainder of 2012. It expected Canadian Engineering revenue to improve in the second half as clients awarded anticipated contracts, with lower service costs as a percentage of revenue. These are expectations, not formal numerical guidance.
- Management cited economic cyclicality, customer spending, competition and pricing pressure, hiring and retention, insurance costs, regulatory exposure, acquisition integration, and litigation as risks. It said capital resources were sufficient for obligations and normal-course needs for at least 12 months.
- On July 1, 2012, after quarter-end, RCM acquired BGA, LLC’s operating assets for $1.3 million cash, with potential earned contingent payments capped at $3 million in total. The filing does not provide pro forma financial results for the acquisition.
- Legal matters had a recorded provision of approximately $0.2 million at June 30; asserted claims sought approximately $13.4 million. The company noted that some matters may not be insured and an unfavorable outcome could materially affect results, liquidity, or financial position.
- First-half operating cash flow benefited from transit payables temporarily exceeding transit receivables; management expected these balances to equalize shortly after June 30. Transit receivables were $4.6 million and transit payables $9.1 million at quarter-end.
- RCM repurchased 750,014 shares for approximately $4.1 million in the first half, including 695,252 shares in Q2. The filing reports $0.7 million remaining under the repurchase authorization at June 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether anticipated Canadian Engineering contract awards and second-half revenue and margin improvement occurred.
- Whether IT sales-generation remediation translated into sustained revenue growth and whether Health Care growth improved profitability.
- Cash conversion after transit balances normalize, receivables collection, and the company’s allowance for doubtful accounts.
- The ultimate outcome and insurance coverage of legal claims, including asserted damages of $13.4 million versus the recorded provision.
- BGA’s subsequent contribution, contingent purchase payments, and integration results; also any costs associated with the planned ERP upgrade.
- Confirm the reporting-period discrepancy: the filing itself covers Q2 2012, notwithstanding the request metadata’s “2011 Q2” label.