RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The filing is for the thirteen and thirty-nine weeks ended October 2, 2021, not 2020 Q3 as stated in the request metadata. Fiscal Q3 2020 comparison period ended September 26, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
RCM provides engineering, specialty healthcare staffing and services, and information technology services. Most revenue is billed on a time-and-materials basis. The company reports three segments: Engineering, Specialty Health Care, and Information Technology. Interim results are unaudited.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Revenue | $45.5 | $31.6 | $139.0 | $109.2 |
| Gross profit / margin | $12.2 / 27.0% | $8.8 / 27.9% | $35.3 / 25.4% | $28.2 / 25.8% |
| Operating income (loss) | $3.7 | $(0.2) | $7.0 | $(9.1) |
| Net income (loss) | $2.8 | $(0.2) | $5.0 | $(7.2) |
| Diluted earnings (loss) per share | $0.24 | $(0.02) | $0.43 | $(0.58) |
| Cash provided by operating activities | Not provided quarterly | Not provided quarterly | $4.8 | $23.8 |
- Q3 revenue increased 44.1% year over year; 39-week revenue increased 27.2%. Specialty Health Care led growth, with Q3 revenue up 117.9% and 39-week revenue up 52.1%.
- Q3 SG&A was $10.3 million, or 22.7% of revenue, versus $8.6 million, or 27.3%, a year earlier. For 39 weeks, SG&A was $29.4 million, or 21.1% of revenue, versus $27.8 million, or 25.5%.
- Cash and cash equivalents were $2.8 million at October 2, 2021, versus $0.7 million at January 2, 2021. Current assets were $47.3 million and current liabilities $33.7 million.
- Revolving-credit borrowings were $8.0 million, down from $11.9 million at fiscal year-end; $35.1 million remained available. The facility is $45 million, expires August 2023, is secured by company assets, and has financial and other covenants. RCM reported covenant compliance.
- Thirty-nine-week investing cash flow was positive $6.1 million, including $6.6 million of proceeds from the Canadian business sale. Financing used $8.8 million, including $4.1 million for share repurchases. The company repurchased 1.16 million shares during the 39 weeks.
Material changes versus comparable periods
- Q3 Engineering revenue rose 9.2%, but segment gross margin fell to 23.0% from 29.3%, reflecting fixed-price contract rework and a lower-margin aerospace engagement. A $2.2 million sale gain contributed to reported operating income.
- Q3 Specialty Health Care revenue rose sharply as school clients reopened and demand for healthcare professionals increased. Segment operating income improved to $1.0 million from an operating loss of $0.8 million.
- Q3 Information Technology revenue rose 18.8%; operating income was $0.7 million versus a $0.2 million loss, supported by Life Sciences growth and lower SG&A.
- The 39-week comparison benefited from the absence of the prior-year $8.4 million charge for receivable write-offs and arbitration-related professional fees. The 2021 period also included the $2.2 million gain on sale of Canadian Power Systems assets.
- Operating cash flow decreased to $4.8 million from $23.8 million, with the current period’s higher receivables using $9.6 million of cash. Deferred revenue rose to $3.9 million from $0.4 million at fiscal year-end, partly due to front-loaded customer payments.
Outlook, risks, contingencies, and unusual items
- No numerical revenue or earnings guidance was provided. Management said it believes liquidity is sufficient for at least the next 12 months and that the credit facility is adequate, while cautioning that COVID-19 effects and their financial impact remain uncertain.
- COVID-19 continued to weigh on revenue, gross profit, and operating income. Risks include restricted client-site access, potential school shifts to hybrid or remote learning, limited availability of healthcare professionals, and possible workforce or supply-chain disruption. Management noted that school reopening and healthcare demand supported recent Specialty Health Care growth.
- On July 30, 2021, RCM sold the principal assets and certain liabilities of its Pickering and Kincardine, Ontario offices. The sale generated a $2.2 million gain; the business contributed $4.9 million of revenue in the first 39 weeks of 2021, versus $8.6 million a year earlier. A $0.8 million indemnity escrow may be received about 18 months after the sale if there are no claims; it was not recorded as an asset.
- RCM accrued $2.1 million for asserted claims. This includes a $1.6 million California travel-nurse overtime class-action settlement, expected to be paid in fiscal Q1 2022. The company said other claims could exceed accrued amounts, though it did not expect them to have a material aggregate adverse effect.
- Estimated acquisition-related contingent consideration was $2.4 million, potentially payable in 2022 and 2023. The company also expects to pay $3.3 million of employer payroll taxes deferred under the CARES Act in two equal installments at the ends of 2021 and 2022.
- Management cited customer concentration, credit and collection risk, competition and pricing pressure, recruiting and retention challenges, labor and healthcare regulation, foreign exchange exposure, litigation, and reliance on a variable-rate credit facility among its risks. The company does not use derivatives to hedge currency or interest-rate exposure.
- Management reported disclosure controls were effective. It noted potential control challenges from conducting a virtual financial close, but no other material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Specialty Health Care demand, school operations, and healthcare staffing availability remain strong, and how customer concentration affects results.
- Whether Engineering margins recover from fixed-price rework and the lower-margin aerospace contract, and how the Canadian asset sale affects ongoing segment revenue.
- Receivables collection, operating cash flow, and the repeatability of customer prepayments and deferred revenue.
- Compliance with credit-facility covenants and the use of the $35.1 million of reported borrowing availability.
- Payment timing and final amounts for the California settlement, other asserted claims, contingent consideration, and deferred payroll taxes.
- Actual proceeds from the sale escrow and whether further COVID-19 effects lead to impairment, operational disruption, or material changes in demand.