RCM Technologies, Inc. — Form 10-Q summary
Period: The filing covers the 13 and 39 weeks ended September 26, 2020, compared with the periods ended September 28, 2019. The request metadata says “2019 Q3,” but the filing itself is for 2020 Q3.
Financial performance
| Metric | 13 weeks ended Sept. 26, 2020 | 13 weeks ended Sept. 28, 2019 | 39 weeks ended Sept. 26, 2020 | 39 weeks ended Sept. 28, 2019 |
|---|---|---|---|---|
| Revenue | $31.6 million | $40.3 million | $109.2 million | $142.6 million |
| Gross profit / margin | $8.8 million / 27.9% | $10.6 million / 26.4% | $28.2 million / 25.8% | $35.9 million / 25.2% |
| Operating income (loss) | $(0.2) million | $0.7 million | $(9.1) million | $4.6 million |
| Net income (loss) | $(0.2) million | $0.3 million | $(7.2) million | $3.0 million |
| Basic and diluted EPS | $(0.02) | $0.03 | $(0.58) | $0.24 |
Cash flow and balance sheet: Operating cash flow was $23.7 million for the 39 weeks, versus cash used of $3.9 million a year earlier. The increase largely reflected lower receivables and collection of the arbitration award, so it should not be assumed to represent a recurring operating trend. Investing activities used $0.4 million; financing activities used $24.2 million, including $21.5 million of net line-of-credit repayments and repayment of a $2.2 million stock-repurchase note. Cash was $0.8 million at September 26, 2020.
Total assets were $62.6 million and total liabilities $38.9 million. Current assets of $36.1 million exceeded current liabilities of $19.9 million by $16.2 million. Line-of-credit borrowings were $13.3 million, down from $34.8 million at December 28, 2019; the company reported $30.0 million of additional availability under its $45.0 million facility. It was in compliance with its covenants at quarter-end. The effective average borrowing rate for the 39-week period was 2.9%.
Material changes and drivers
- Revenue declined 21.6% in the quarter and 23.4% year to date. Specialty Health Care was the largest contributor to the decline: revenue fell 46.2% in the quarter and 34.8% year to date, principally because of school closures and reduced in-person services related to COVID-19.
- For the quarter, Engineering revenue was nearly flat, while Information Technology revenue fell 10.6%. Year to date, Engineering revenue declined 18.0% and IT revenue 5.5%.
- Year-to-date results included an $8.4 million charge related to a major-utility arbitration: $6.7 million of receivables not awarded, $0.7 million written off for business reasons, $0.8 million of professional fees, and $0.2 million of transit receivables. The arbitrator awarded RCM $7.4 million, which was paid during the quarter, and rejected the customer’s $10.3 million counterclaims.
- Gross margin improved year to date, supported by improved utilization and mix in Engineering and IT. Specialty Health Care’s year-to-date gross margin declined as its mix shifted away from higher-margin school services. SG&A fell in dollars but rose as a percentage of revenue, to 25.5% year to date from 21.2%.
- The company recognized a $2.8 million income-tax benefit year to date, versus $0.3 million of tax expense in the prior-year period. A $2.7 million domestic deferred tax asset was reported at quarter-end.
Outlook, risks, and other notable items
- Management expected COVID-19 to continue negatively affecting revenue, gross profit, operating income, and financial position through at least the remainder of fiscal 2020 and possibly beyond; the financial impact could not be reasonably estimated. No quantified revenue or earnings guidance was provided.
- Management expected positive cash flow over at least the next two quarters and believed liquidity would be sufficient for at least 12 months, with flexibility to reduce costs if needed. It cautioned that credit-facility availability could not be assured, despite current covenant compliance and stated expectations of continued compliance.
- School reopenings and service demand remain uncertain. Management noted reduced field-services access, lower proposal activity than before COVID-19, and challenges recruiting healthcare professionals. Customer concentration, collections and bad debts, labor costs, foreign exchange, competition, and the pandemic were also identified as risks.
- On September 29, 2020, after quarter-end, the company amended its revolving credit facility, including changes to financial covenant calculations and required levels, and permission to repay the stock-repurchase note.
- In June 2020, RCM repurchased 1,858,139 shares at $1.20 per share for $2.2 million, financed initially with a subordinated note; the note was repaid September 25. The company reported no open repurchase plan. It also adopted a stockholder rights plan with a 10% acquisition trigger, scheduled to expire May 22, 2021 unless redeemed earlier.
- Management said disclosure controls were effective. It noted potential risks to control execution from conducting the financial close virtually, but reported no other material quarterly change to internal control over financial reporting.
Important facts for investors to verify
- Whether school-based Specialty Health Care demand and in-person services recover, and how that affects revenue and margins.
- How much of the reported operating cash flow reflects sustainable operations versus receivables collection, arbitration proceeds, and working-capital timing.
- The credit agreement’s amended covenant terms, ongoing compliance, and continued access to the revolving facility.
- Any further customer collection issues, credit-loss provisions, or litigation and insurance developments.
- Whether COVID-19-related demand, staffing, and utilization changes lead to further impairment reviews or materially alter future results.