RCM TECHNOLOGIES, INC. annual report, FY2012

Business context and reporting period

RCM Technologies, Inc. provides information technology (IT), engineering, and specialty health care staffing services. This Form 10-K covers the 52-week fiscal year ended December 29, 2012, compared with the 52-week year ended December 31, 2011. Although the request metadata refers to “2011 Q4,” the filing reports fiscal 2012 annual results and includes separate quarterly figures.

Financial performance and liquidity

At year-end, cash and equivalents were $14.1 million, total assets $84.5 million, and stockholders’ equity $58.8 million. Current assets were $70.3 million and current liabilities $25.1 million. There were no revolver borrowings; $14.2 million was available under the $15 million facility, with $0.8 million of letters of credit outstanding. The facility matures August 31, 2016. The filing reports no off-balance-sheet arrangements.

The company paid a one-time $1.00-per-share cash dividend of approximately $12.3 million and repurchased $4.7 million of shares during FY2012. Cash fell from $28.4 million at FY2011 year-end to $14.1 million, largely reflecting these capital returns. Operating cash flow also declined, including a $4.7 million use of cash from increased accounts receivable; work-in-progress rose to $13.6 million from $8.9 million.

Material changes versus prior year

• Reported revenue rose 1.4%, but pro forma revenue adjusted for the BGA acquisition declined slightly to $148.4 million from $148.8 million.
• Gross margin fell 1.1 percentage points, and operating income declined 25% as costs of services grew faster than revenue. Net income declined approximately 25%.
• IT revenue fell 3.2% to $52.2 million, while segment operating income improved to $1.1 million from $0.7 million, reflecting better service mix and lower SG&A.
• Engineering revenue rose 6.0% to $66.6 million, including $3.3 million from BGA in the second half; operating income fell to $3.1 million from $4.5 million. Specialty Health Care revenue declined 1.3% to $27.0 million and operating income fell to $1.1 million from $1.8 million.
• FY2012 fourth-quarter revenue was $37.0 million, operating income $1.3 million, and net income $1.0 million, compared with $35.0 million, $2.2 million, and $1.1 million, respectively, in FY2011’s fourth quarter.

Outlook, risks, and unusual items

Management expected moderate Engineering growth in 2013 based on its sales pipeline, but described the broader recovery as potentially slow, tenuous, and volatile. It cited continuing economic uncertainty, client spending restraint, pricing pressure, and the need to focus on higher-margin solutions. Management anticipated upgrades to its financial reporting and accounting systems in 2013.

Key risks include reliance on a concentrated customer base (the five largest customers generated 37.4% of revenue; United Technologies alone generated 11.8%), competition and labor availability, seasonal demand, economic conditions, nuclear-industry exposure, foreign exchange without hedging, and liability risks involving staffing and subcontractors. New York Power Authority represented 23.3% of accounts receivable including transit receivables at year-end.

Legal matters had an approximately $0.2 million recorded provision against asserted claims seeking about $10.4 million; outcomes and insurance coverage remain uncertain. A shareholder holding about 12.2% signaled plans to nominate directors and submit proposals for the 2013 annual meeting. The board subsequently adopted a rights plan triggered by an unapproved acquisition of 15% or more of the common stock. The BGA acquisition added $3.3 million of second-half revenue and included contingent consideration estimated at $1.057 million, with a cumulative cap of $3.0 million.

The independent auditor issued an unqualified opinion on the financial statements. Management stated that disclosure controls and internal control over financial reporting were effective; the auditor did not audit internal control effectiveness.

Most important facts to verify

• Whether FY2013 Engineering growth materialized and whether the company restored margins after FY2012’s decline.
• Conversion and collection of the higher work-in-progress and receivables balances, including customer and transit-receivable concentrations.
• Cash and liquidity after the special dividend and repurchases, and compliance with revolver covenants and dividend restrictions.
• Actual BGA performance, earnout payments, integration results, and any goodwill impairment indicators.
• Developments in the legal claims, activist shareholder campaign, and rights plan, including any financial or governance consequences.