RCM Technologies, Inc. — Form 10-Q Summary
Period discrepancy: Request metadata identifies “2013 Q2,” but the supplied filing is for the 13 and 26 weeks ended June 28, 2014, compared with periods ended June 29, 2013. The financial statements are unaudited; amounts below are in millions of dollars unless noted.
Business context and reporting period
RCM provides engineering, information technology, and specialty health care services, including consulting and staffing. Its fiscal second quarter ended June 28, 2014. Management describes its markets as cyclical and sensitive to economic conditions, client spending, competition, and access to qualified personnel.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $49.5 | $42.4 | $98.1 | $83.6 |
| Gross profit | $13.0 | $11.3 | $25.2 | $21.9 |
| Operating income | $3.0 | $1.7 | $5.1 | $3.2 |
| Net income | $2.0 | $1.5 | $3.2 | $2.4 |
| Diluted EPS | $0.15 | $0.12 | $0.25 | $0.20 |
Q2 revenue rose 16.8%; first-half revenue rose 17.3%. Gross margin was 26.2% for Q2 versus 26.5%, and 25.7% for the first half versus 26.2%. Operating margin improved to 6.1% from 4.0% in Q2 and to 5.2% from 3.9% year to date. First-half SG&A was $19.5 million, or 19.9% of revenue, versus $17.7 million, or 21.1%. Cost of services grew faster than revenue year to date, contributing to lower gross margin.
First-half operating cash flow was $3.9 million, versus cash used of $0.2 million in the prior-year period. Investing used $1.4 million, primarily for property and equipment; financing provided $0.1 million. Cash increased to $11.6 million from $9.3 million at fiscal year-end. Current assets were $80.3 million and current liabilities $29.3 million at June 28. The company reported no revolving-credit borrowings, $0.8 million in outstanding letters of credit, and $14.2 million of available capacity on its $15 million facility, which matures August 31, 2016. It reported compliance with facility covenants and stated capital resources should cover normal obligations for at least 12 months. No funded debt balance is reported in the balance sheet.
Accounts receivable, net, was $59.3 million, up from $55.7 million at year-end. Transit receivables of $4.3 million and transit payables of $6.8 million represented a $2.5 million net liability. The company paid $0.3 million in contingent acquisition consideration during the first half. Cash includes $1.7 million held by foreign subsidiaries.
Material changes versus the prior comparable period
- All three segments grew revenue year to date: Engineering 23.1%, Specialty Health Care 24.8%, and Information Technology 5.1%. Engineering growth was primarily driven by its Canadian group; Specialty Health Care growth was led by Honolulu.
- Engineering first-half operating income increased to $3.1 million from $1.5 million. A large fixed-price contract had costs above estimates; management expected substantial completion by fiscal year-end.
- Information Technology first-half operating income rose to $1.6 million from $1.0 million, with improved cost of services as a percentage of revenue.
- Specialty Health Care first-half operating income declined to $0.4 million from $0.8 million despite higher revenue. Management attributed pressure to tighter labor supply, lower-margin geographic expansion, and higher SG&A.
- First-half net income increased, while the comparison is affected by a $0.5 million reduction in a previously unrecognized tax benefit in the 2013 period. The 2014 first-half effective tax rate was 36.1%, versus 40.8% in 2013 before that discrete benefit.
Outlook, risks, contingencies, and unusual items
Management said it was optimistic that results for the remaining two quarters of fiscal 2014 would remain favorable compared with the prior year; it did not provide quantified earnings or revenue guidance. It anticipated possible increased 2014 spending on upgrades to its financial reporting and accounting systems. The filing cautions that interim results are not necessarily indicative of full-year results.
Management identified economic cyclicality, client spending, competition and pricing pressure, recruiting and retention, insurance costs and claims, regulatory compliance, acquisitions and contingent payments, and financing availability as risks. The company had $0.6 million in unrecognized tax benefits. Legal claims sought approximately $11.2 million in damages; no provision for legal losses was accrued at June 28, 2014, compared with $0.1 million at year-end. The company cautioned that some matters may not be insured and an unfavorable outcome could materially affect results or liquidity.
The company had accrued $2.5 million for former CEO Leon Kopyt’s severance, payable in Q3 2014, and had funded $1.7 million, net of taxes, to a rabbi trust. Estimated future BGA contingent consideration was $0.6 million, subject to actual performance and a $2.7 million cumulative cap. Management said no further facilities-consolidation or proxy-contest charges were expected, but additional costs related to its research-and-development tax credit study were possible. The new revenue recognition standard was expected to become effective for the company in Q1 2017; its impact was still being evaluated.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing covers Q2 2014, not Q2 2013.
- Track whether Engineering’s fixed-price contract completes as expected and whether its cost overruns affect margins.
- Assess whether Specialty Health Care can improve margins as labor tightness and geographic expansion continue.
- Monitor accounts-receivable collection, operating cash conversion, and fluctuations in transit balances.
- Review developments in the legal claims, severance payment, contingent acquisition obligations, and planned systems investment.
- Check subsequent filings for updated full-year outlook, tax-rate expectations, and any material change in liquidity or credit-facility compliance.