RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13- and 26-week periods ended June 29, 2013, not 2012. Comparatives are the periods ended June 30, 2012. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context and reporting period
RCM provides information technology, engineering, and specialty health care services. The filing covers the second quarter and first half of fiscal 2013; both comparable periods comprised 13 and 26 weeks, respectively. Results are unaudited and are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | 13 weeks ended June 29, 2013 | 13 weeks ended June 30, 2012 | 26 weeks ended June 29, 2013 | 26 weeks ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $42.4 | $35.8 | $83.6 | $74.0 |
| Gross profit / margin | $11.3 / 26.5% | $9.7 / 27.0% | $21.9 / 26.2% | $19.9 / 27.0% |
| Operating income / margin | $1.7 / 4.0% | $1.0 / 2.8% | $3.2 / 3.9% | $2.8 / 3.8% |
| Net income | $1.5 | $0.5 | $2.4 | $1.6 |
| Diluted earnings per share | $0.12 | $0.04 | $0.20 | $0.12 |
- First-half operating cash flow was negative $0.2 million, versus positive $4.7 million in the prior-year period. Investing used $0.8 million; financing provided $0.1 million. Cash declined $0.9 million to $13.2 million.
- At June 29, 2013, total assets were $84.5 million, current assets $70.3 million, and current liabilities $22.5 million. The filing reports no borrowings under its $15 million revolving facility and $14.2 million of borrowing availability, after $0.8 million in letters of credit. The facility matures August 31, 2016.
- Accounts receivable, net, was $49.1 million, up from $43.7 million at year-end 2012. Transit receivables of $5.9 million and transit payables of $6.7 million represented a net payable of $0.8 million. The company reported no funded debt outstanding under the revolving facility.
Material changes versus prior comparable periods
- Quarterly revenue rose 18.5%; first-half revenue increased 13.0%. Engineering drove growth, while Specialty Health Care revenue declined.
- First-half Engineering revenue increased 31.5% to $41.3 million, including $3.5 million from the BGA acquisition and growth in Canadian Engineering. Information Technology revenue increased 4.0% to $28.2 million.
- First-half Specialty Health Care revenue fell 8.4% to $14.1 million, primarily due to lower revenue from its largest client. Segment operating income fell to $0.6 million from $1.0 million.
- Despite higher revenue and operating income, gross margin declined year over year: first-half cost of services rose to 73.8% of revenue from 73.0%. Management cited less higher-margin project work, higher non-billable engineering labor, and increased Specialty Health Care labor costs.
- SG&A as a percentage of revenue improved to 21.2% from 22.5% for the first half. Results include $0.3 million of facilities-consolidation charges related to combining two Canadian offices.
Outlook, commentary, risks, and unusual items
- Management was “cautiously optimistic” that results in the remaining two fiscal 2013 quarters would exceed the comparable prior-year periods. No quantified revenue, earnings, or cash-flow guidance was provided.
- Management expected accrued and unbilled receivables and work-in-progress receivables to improve in the second half. It attributed the increase in unbilled receivables partly to system and processing issues at the largest Specialty Health Care client, and higher work-in-progress to contract invoicing timing.
- First-half cash generation was pressured by a $5.6 million increase in accounts receivable and changes in transit balances. Management cited working capital as a primary future use of capital and anticipated potential higher spending to enhance financial reporting and accounting systems.
- A $0.5 million reduction in a previously unrecognized tax benefit lowered reported tax expense; the filing gives a 40.8% first-half effective tax rate before this discrete item. The company also recorded a $0.092 million gain from reducing contingent consideration associated with an earlier acquisition.
- Estimated future contingent payments related to BGA totaled $1.142 million and may differ materially from estimates; payments are capped at $3.0 million cumulatively. The BGA acquisition was completed effective July 1, 2012.
- Legal matters included asserted claims seeking approximately $10.4 million in damages; the recorded provision was approximately $0.1 million. The company cautioned that some matters may not be insured and an unfavorable outcome could materially affect results or liquidity.
- The company adopted a stockholder rights plan, amended in May 2013. Rights generally become exercisable if an unapproved person or group reaches 15% ownership; the plan may substantially dilute an unapproved acquirer. Management also cited cyclicality, economic conditions, competition and pricing pressure, hiring and retention, insurance costs, regulation, acquisitions, and litigation among key risks.
- Management said capital resources were sufficient for obligations expected in the normal course for at least 12 months. Operating lease commitments totaled $9.9 million. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the receivables increase, particularly unbilled and work-in-progress balances, converted to cash as management expected.
- Whether Engineering growth and BGA contributions continued, and whether cost pressures and lower gross margins persisted.
- Revenue retention and margin trends at the largest Specialty Health Care client, including effects of labor supply and geographic expansion.
- The size and resolution of asserted legal claims relative to the $0.1 million recorded provision, plus actual BGA contingent payments.
- The effect of the one-time $0.5 million tax benefit on comparisons of reported earnings and the company’s ongoing effective tax rate.
- Future spending on financial systems, working capital needs, and compliance with revolving-credit covenants.