RCMT

Business Context and Reporting Period

Company: RCM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 2, 2010 (13 weeks) and Thirty-Nine Weeks Ended October 2, 2010
Business Overview: RCM provides information technology, engineering, and specialty health care staffing and consulting services. The company operates in the U.S., Canada, Puerto Rico, and Ireland. During the period, the company classified its Oracle business unit (closed March 2010) and Intertec staffing business (sold September 2010) as discontinued operations.

Key Financial Metrics

Note: The prior year 39-week net income included a $9.8 million legal settlement gain. Current year net income includes a $1.2 million tax benefit from the liquidation of a subsidiary.

Material Changes vs. Prior Period

• Revenue: For the 39-week period, revenue decreased slightly by 0.8% ($1.0 million) compared to the prior year. This was driven by a 10.3% decline in the Information Technology segment, partially offset by a 10.9% increase in the Engineering segment.
• Profitability: Operating income for the 39-week period increased significantly to $6.7 million from $1.3 million in the prior year. This improvement is largely due to a reduction in Selling, General, and Administrative (SG&A) expenses (down 8.3%) and improved gross margins (up to 28.2% from 25.8%).
• Discontinued Operations: The company sold its Intertec division in September 2010, recognizing a gain of $143,000. The Oracle business unit was closed in March 2010. Both are now reported as discontinued operations.
• Liquidity: Cash and cash equivalents increased to $26.9 million from $10.9 million at the beginning of the fiscal year, driven by strong operating cash flows and the absence of debt repayments.

Guidance, Outlook, and Risks

• Outlook: Management remains cautious regarding the remainder of fiscal 2010, citing a potentially slow and tenuous economic recovery. They anticipate cost of sales to revenues to remain comparable to current levels, adjusted for seasonal factors in Q4.
• Capital Expenditures: The company anticipates significant capital expenditures in late 2010 or early 2011 for an upgraded ERP system.
• Acquisitions: The company continues to pursue strategic acquisitions. Future contingent consideration (earnouts) related to the NuSoft and PSG acquisitions could total up to $1.29 million, though management does not expect payments in 2011 to exceed $144,000.
• Risks: Key risks include general economic conditions affecting IT and engineering spending, competition, the ability to retain qualified personnel, and potential indemnity claims related to a construction project managed by a former customer (contract price ~$6.2 million).
• Legal Proceedings: The company has accrued approximately $0.7 million for legal contingencies, with asserted claims seeking approximately $9.0 million in damages.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the Engineering segment's growth versus the continued weakness in the Information Technology segment, particularly regarding Life Sciences clients.
• Discontinued Operations: Confirm the final settlement of liabilities and any remaining obligations related to the closed Oracle unit and sold Intertec business.
• Contingent Liabilities: Review the status of the $9.0 million in asserted legal claims and the $6.2 million construction project indemnity to assess potential future charges.
• ERP Implementation: Monitor the timeline and cost impact of the planned ERP system upgrade expected in late 2010/early 2011.
• Acquisition Earnouts: Track the performance of the PSG and NuSoft acquisitions against earnings targets to determine actual future cash outflows for contingent consideration.