RCM Technologies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 2, 2011, with comparisons to periods ended July 3, 2010. Although the request metadata says 2010 Q2, the filing itself is for fiscal 2011 Q2. Amounts below are in millions, except per-share data and where stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $36.5 | $42.8 | $75.2 | $88.1 |
| Gross profit / margin | $10.5 / 28.6% | $12.5 / 29.1% | $21.5 / 28.6% | $24.8 / 28.1% |
| Operating income / margin | $2.0 / 5.5% | $2.8 / 6.5% | $4.1 / 5.4% | $4.9 / 5.5% |
| Net income | $1.2 | $1.7 | $2.4 | $3.5 |
| Diluted EPS | $0.09 | $0.13 | $0.18 | $0.27 |
- Q2 revenue fell 14.7% year over year; first-half revenue also declined 14.7%. First-half operating income decreased 16.0%.
- First-half cash from operations was a use of $0.3 million, versus $8.2 million provided in the prior-year period. Investing activities used $0.2 million and financing activities used $0.7 million. Cash declined $1.2 million to $23.5 million.
- At July 2, cash was $23.5 million, current assets $69.9 million, current liabilities $12.0 million, and total assets $83.6 million. Stockholders’ equity was $71.4 million.
- No revolving-credit borrowings were outstanding. The $15 million secured facility had $14.1 million of additional availability after $0.9 million of letters of credit. The facility’s maturity had been extended after quarter-end to October 31, 2011.
Changes and segment results
- Information Technology drove most of the revenue contraction: first-half revenue declined 26.5% to $28.7 million, with segment operating income falling to $0.3 million from $0.7 million. Management attributed the shortfall primarily to weak sales execution and ended or curtailed pharmaceutical projects.
- Engineering first-half revenue declined 8.7% to $32.0 million and operating income was $2.5 million, down from $2.9 million. Management cited project timing and unusually strong demand from certain major clients in the prior-year period.
- Specialty Health Care first-half revenue increased 3.3% to $14.5 million; operating income was $1.2 million, unchanged.
- First-half SGA expense declined 12.6% to $16.8 million, but rose as a share of revenue to 22.4% from 21.8%. The gross margin improved year over year for the first half, attributed to favorable Engineering fixed-price contracts and a focus on higher-margin work; Q2 gross margin declined year over year.
- First-half net income comparisons were affected by a nonrecurring $1.1 million tax benefit recognized in the 2010 period related to the Oracle subsidiary liquidation. The 2011 first-half effective tax rate was 40.8%.
Outlook, risks and unusual items
- Management described economic and market recovery as potentially slow or uncertain and was cautious about the remainder of 2011. It expected the cost-of-services ratio to remain broadly comparable to the first half, adjusted for seasonal vacation and holiday effects; SGA to remain generally consistent with first-half levels if gross profit did not materially change; and the effective tax rate to approximate the first-half rate.
- Management anticipated an ERP system upgrade during 2011 and possible Engineering equipment purchases totaling about $0.5 million. It stated that capital resources should meet present and normal-course obligations for at least 12 months.
- Accounts receivable increased $1.9 million from year-end; management attributed the operating cash use partly to Engineering work-in-progress billings and temporary timing-related increases in sales days outstanding, and expected improvement during the balance of fiscal 2011.
- Legal matters had asserted claims seeking approximately $7.3 million; the recorded provision was about $0.4 million at July 2, 2011. The company cautioned that an unfavorable outcome could materially affect results, liquidity or financial position. It also noted possible residual losses from discontinued Oracle and Intertec operations, but did not anticipate material losses.
- The company repurchased 194,541 shares for approximately $0.9 million in the first half. Its repurchase authorization had been extended through February 2013.
- Management cited cyclical demand, competition and pricing pressure, client spending, employee recruitment and retention, workers’ compensation and insurance costs, litigation, and financing availability among key risks. No goodwill impairment trigger was identified in the first half. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Information Technology sales execution and segment revenue recover, and whether management’s remediation actions produce measurable results.
- Whether operating cash flow improves as expected, including collection timing, receivables growth, and sales days outstanding.
- Whether the revolving facility is extended or replaced before its October 31, 2011 maturity, and whether covenant or collateral terms change.
- The outcome and potential insurance coverage of legal claims, including the gap between asserted damages and the recorded provision.
- The timing and cost of the ERP upgrade and planned equipment purchases, alongside the company’s share repurchases and potential contingent acquisition payments.