Business Context and Reporting Period
Company: RCM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2008 (39 weeks year-to-date; 13 weeks for the quarter)
Business Overview: RCM provides information technology, engineering, and commercial staffing solutions. The company operates in a cyclical market sensitive to economic conditions, which management notes has weakened in 2008.
Key Financial Metrics
| Metric (in thousands) | 39 Weeks Ended Sep 27, 2008 |
39 Weeks Ended Sep 29, 2007 |
13 Weeks Ended Sep 27, 2008 |
13 Weeks Ended Sep 29, 2007 |
|---|---|---|---|---|
| Revenues | $155,742 | $165,418 | $51,617 | $54,079 |
| Gross Profit | $40,703 | $39,768 | $13,255 | $13,433 |
| Gross Margin % | 26.1% | 24.0% | 25.7% | 24.8% |
| Operating Income (Loss) | ($1,282) | $7,669 | $907 | $2,776 |
| Net Income (Loss) | ($665) | $5,148 | $565 | $1,724 |
| Diluted EPS | ($0.05) | $0.41 | $0.04 | $0.14 |
| Cash & Equivalents (End of Period) | $3,314 | $11,642 | $3,314 | $7,916 |
| Line of Credit Outstanding | $9,100 | $0 | $9,100 | $0 |
| Total Assets | $119,479 | $109,714 | $119,479 | $109,714 |
Material Changes vs. Prior Period
- Revenue Decline: Year-to-date revenues decreased 5.8% ($9.7 million) compared to the prior year. This was driven by a $13.6 million drop in the Engineering segment due to the loss of a major client, partially offset by growth in the Commercial segment and acquisitions in the IT segment.
- Significant Non-Recurring Charge: The company recorded a $6.1 million bad debt expense related to a promissory note from a customer that defaulted. This charge was the primary driver of the year-to-date operating loss.
- Acquisition Activity: RCM acquired NuSoft Solutions and MBH Solutions in 2008 to expand its IT services. These acquisitions contributed approximately $15.1 million in year-to-date revenue but increased amortization and SG&A expenses.
- Liquidity Shift: Cash and cash equivalents decreased by $8.3 million year-to-date. The company utilized its revolving credit facility, drawing $9.1 million to fund acquisitions and operations, compared to zero borrowings at the end of 2007.
- Executive Departure: The CFO, Stanton Remer, departed effective September 30, 2008, resulting in a $246,000 severance charge in the quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects revenues for the final 13 weeks of fiscal 2008 to remain generally consistent with the third quarter results. The company anticipates cost of sales and SG&A ratios to remain comparable to the third quarter.
- Capital Resources: The company has a $25 million revolving credit facility with $14.3 million available as of September 27, 2008. Management believes current resources are sufficient for the next 12 months.
- Key Risks:
- Economic Sensitivity: Operations are highly sensitive to general economic conditions and client capital spending.
- Client Concentration: Loss of significant clients (as seen in the Engineering segment) materially impacts revenue.
- Legal Contingencies: Ongoing litigation regarding a 1998 shareholder dispute; the company is seeking indemnification from former counsel. A trial is expected in the first half of 2009.
- Debt Covenants: The company must maintain compliance with financial covenants on its credit facility to avoid adverse liquidity impacts.
Investor Verification Checklist
- Bad Debt Recovery: Verify the status of the $6.1 million write-off and any potential recovery efforts regarding the defaulted note receivable.
- Engineering Segment Stability: Assess the company's ability to replace the $16.6 million in lost Engineering revenue from the departed client.
- Acquisition Integration: Monitor the performance of NuSoft and MBH to ensure they meet the earn-out targets and contribute to profitability.
- Debt Utilization: Track the usage of the $9.1 million line of credit and the company's ability to repay or refinance before the 2011 maturity.
- Legal Proceedings: Follow the progress of the legal malpractice suit against former counsel, which could result in significant recovery or further costs.