RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 4, 2015, not 2014 Q2 as indicated in the request metadata. Comparative periods ended June 28, 2014. Financial statements are unaudited; amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context and reporting period
RCM provides engineering, information technology, and specialty health care staffing and consulting services. The filing reports its second fiscal quarter and first half of fiscal 2015. Revenue is substantially service-based, and results are exposed to economic cycles, client spending, personnel availability, and foreign-exchange movements, particularly the Canadian dollar.
Financial performance and liquidity
| Metric | 13 weeks ended July 4, 2015 | 13 weeks ended June 28, 2014 | 26 weeks ended July 4, 2015 | 26 weeks ended June 28, 2014 |
|---|---|---|---|---|
| Revenue | $45.3 | $49.5 | $93.3 | $98.1 |
| Gross profit / margin | $12.1 / 26.7% | $13.0 / 26.2% | $25.4 / 27.2% | $25.2 / 25.7% |
| Operating income / margin | $1.2 / 2.7% | $3.0 / 6.1% | $3.6 / 3.8% | $5.1 / 5.2% |
| Net income | $0.7 | $2.0 | $2.1 | $3.2 |
| Diluted earnings per share | $0.05 | $0.15 | $0.16 | $0.25 |
For the first half, operating cash flow was negative $2.5 million versus positive $3.9 million a year earlier. Investing activities used $1.0 million, primarily for property and equipment; financing activities provided $0.1 million. Cash declined $3.8 million from $6.4 million at the start of the fiscal year to $2.6 million at July 4, 2015. Working-capital uses included a $3.4 million increase in accounts receivable and a $1.8 million cash use from transit receivables/payables.
At July 4, current assets were $71.0 million and current liabilities $20.6 million. The company had $20.0 million drawn on its $35 million revolving credit facility, $0.8 million of letters of credit, and $14.2 million of additional availability. The facility matures December 11, 2019; the effective rate, including unused fees, was 2.5% for the first half. The company was in compliance with its covenants. Total liabilities were $41.4 million and stockholders’ equity $44.4 million.
Changes versus the comparable periods
- Second-quarter revenue fell 8.5% and first-half revenue fell 4.9%. Operating income declined approximately 60% in the quarter and 30% year to date; net income fell about 66% and 36%, respectively.
- Gross margin improved, but higher SG&A more than offset the gross-profit benefit. First-half SG&A rose 8.0% to $21.2 million, reflecting investment in personnel and infrastructure, higher insurance and claims costs, and share-based compensation.
- Engineering was the principal weakness: first-half revenue decreased $8.2 million and operating income fell to $1.2 million from $3.1 million, reflecting lower Canadian project activity and currency translation.
- Information Technology revenue was nearly flat year to date, with higher gross margin but slightly lower operating income. Specialty Health Care revenue increased 19.8% to $21.1 million for the first half, and segment operating income rose to $1.0 million from $0.4 million.
- Canadian-dollar translation reduced reported revenue by an estimated $0.9 million in the quarter and $2.1 million year to date versus the prior-period exchange rates. The company reported a $1.4 million first-half foreign-currency translation loss in comprehensive income.
Outlook, risks, and unusual items
- No specific full-year revenue or earnings guidance is provided. Management stated that capital resources should meet obligations in the normal course for at least the next 12 months and expected first-half receivables to decline during the remainder of fiscal 2015.
- Management described the market as cyclical and noted client budget scrutiny, pricing competition, and reliance on attracting and retaining qualified personnel. The company’s forward-looking statements are subject to economic, customer-concentration, foreign-exchange, acquisition, regulatory, insurance, and litigation risks.
- A dispute between Ontario Power Generation and subcontractor Black & McDonald involves RCM work on contested purchase orders. RCM had $6.2 million of receivables associated with disputed orders and $10.0 million total receivables from B&M. Management considered the receivables collectible, subject to reserves, but acknowledged that a prolonged dispute could delay collection.
- Asserted legal claims sought approximately $2.2 million at July 4, 2015; the company had not accrued a liability. Management cautioned that an unfavorable outcome in legal matters could affect financial results or liquidity.
- Planned technology investments include up to $1.0 million for the initial project-management software phase, potentially another $0.5 million for expansion, and an estimated $1.0–$2.0 million to upgrade or replace the SAP financial system, likely in fiscal 2016. Estimates may change.
- The company paid a $25.3 million special cash dividend in the fourth quarter of fiscal 2014 and said the $20.0 million facility borrowing was primarily used to finance it. First-half contingent acquisition payments were $0.1 million; estimated future contingent consideration was $1.2 million.
Most important facts for investors to verify
- Whether the $10.0 million B&M receivable is collected, and how the OPG/B&M dispute and existing reserves develop.
- Whether operating cash flow recovers as receivables and transit balances normalize, given cash of $2.6 million and $20.0 million of drawn credit.
- Whether Engineering activity stabilizes and Canadian-dollar movements continue to pressure reported revenue and earnings.
- Whether Specialty Health Care growth and IT margin improvement can offset Engineering weakness and higher SG&A.
- Actual timing and cost of the project-management and SAP system investments, as well as contingent acquisition payments and unaccrued legal exposures.