RCM Technologies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2018 Q2, but the filing is for the 13 and 26 weeks ended June 29, 2019, compared with periods ended June 30, 2018. The filing was signed August 8, 2019. Amounts below are in millions unless noted.
Business context and reporting period
RCM provides engineering, specialty health care and information technology services, including consulting, project solutions, staffing and permanent placement. The company operates in the United States, Canada, Puerto Rico and Serbia. Results are unaudited; management cautions that interim results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $50.7 | $51.7 | $102.3 | $102.5 |
| Gross profit (margin) | $12.8 (25.3%) | $12.7 (24.6%) | $25.3 (24.8%) | $25.3 (24.7%) |
| Operating income | $2.2 | $0.9 | $3.8 | $2.6 |
| Net income | $1.3 | $0.4 | $2.7 | $1.4 |
| Diluted earnings per share | $0.10 | $0.03 | $0.21 | $0.12 |
| Cash from operating activities | — | $(2.5) | $(3.6) |
First-half operating margin was 3.8%, versus 2.6% a year earlier. First-half income tax expense was $0.2 million, including a $0.6 million benefit from a verbal IRS settlement relating to a prior-year uncertain tax position. Excluding that discrete benefit, management reported a 27.1% effective tax rate.
At June 29, 2019, cash was $0.9 million, accounts receivable net was $58.2 million, current assets were $63.9 million and current liabilities were $21.8 million. Total assets were $92.1 million and stockholders’ equity was $30.5 million. Revolver borrowings were $30.9 million, up from $27.5 million at year-end 2018; the $45.0 million facility had $12.5 million of additional borrowing availability. The reported effective average borrowing rate, including unused-line fees, was 4.7% for the first half.
Operating cash use reflected working-capital needs, notably a $5.9 million increase in accounts receivable. Net cash from financing was $3.1 million, principally reflecting net revolver borrowings; investing activities used $0.2 million. The company adopted lease accounting standard ASC 842, recognizing $6.1 million of operating lease right-of-use assets and $6.4 million of operating lease liabilities at quarter-end.
Material changes versus prior comparable periods
- Q2 revenue declined 1.9%; first-half revenue was nearly flat, down 0.2%. In the first half, Engineering revenue fell $5.3 million, offset by increases of $2.0 million in Specialty Health Care and $3.1 million in Information Technology.
- Engineering weakness reflected lower client spending in Canadian Power Systems and Aerospace, competition, and timing of large Energy Services projects. TKE, acquired in September 2018, contributed $3.4 million of first-half revenue.
- Information Technology grew 20.2% in Q2 and 21.9% in the first half, which management attributed to investment in management and sales staff. Q2 segment margin was pressured by lower-margin staffing contracts and lower consultant utilization.
- Specialty Health Care revenue rose 2.2% in Q2 and 4.5% in the first half, supported by school-contract paraprofessional staffing in New York City and Honolulu; travel nursing faced increased competition.
- Q2 net income improved from $0.4 million to $1.3 million, partly because the prior-year quarter included $1.4 million of severance, professional fees and other charges. First-half net income also benefited from the $0.6 million IRS tax benefit.
- First-half interest and other expense increased to $0.9 million from $0.7 million, primarily due to higher revolver borrowings. Accounts receivable, net increased to $58.2 million from $52.3 million at year-end 2018.
Outlook, risks and unusual items
- Management said it expected accounts receivable relative to revenue to improve in the second half of fiscal 2019 and believed capital resources were sufficient for obligations expected in the next 12 months. No quantitative earnings or revenue guidance was provided.
- The company was out of compliance with one financial covenant at June 29, 2019 and obtained a lender waiver. Management said it believed it would regain compliance by the reporting of results for the 39-week period ending September 28, 2019, or obtain another waiver if needed. All other reported covenants were met.
- A major-utility customer arbitration concerns $11.2 million of disputed receivables; the customer’s counterclaims were anticipated to be at least $10.3 million, with the total not yet known. The company recorded no liability for these claims, believes its receivable is collectible and disputes the counterclaims, but cautioned that it cannot assure the outcome.
- Estimated future acquisition contingent consideration was $4.3 million, with potential payments capped at a cumulative $9.3 million. Estimates depend on acquired businesses’ future performance.
- Management identified cyclical demand, competition and pricing pressure, hiring and retention, customer concentration and collections, foreign-exchange changes, litigation, insurance claims, and acquisition financing and integration as risks. A potential SAP accounting-system upgrade or replacement was estimated at $1.0–$2.0 million, with timing undetermined.
- The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the intended reporting year: this filing covers Q2 2019, not Q2 2018.
- Track collections, receivables aging and the expected second-half improvement; assess the $11.2 million arbitration receivable and at-least-$10.3 million counterclaim exposure.
- Monitor covenant compliance, lender waivers, revolver utilization and borrowing costs.
- Assess whether growth in IT and Specialty Health Care can offset Engineering weakness, and whether segment margins and utilization improve.
- Review the effects of the one-time IRS tax benefit, acquisition earnouts, and lease obligations on recurring earnings and liquidity.
- Check the covenant-period description: the financial-statement note refers to the trailing 12 months ended June 29, 2019, while the MD&A contains a reference to a period ended March 30, 2018. The filing text is inconsistent on this point.