RCM Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended June 30, 2018, compared with the periods ended July 1, 2017. The supplied metadata says 2017 Q2, but the filing itself reports second-quarter 2018. RCM provides engineering, specialty health care staffing and services, and information technology services. Figures below are in millions of dollars unless stated otherwise; interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $51.7 | $45.5 | $102.5 | $91.9 |
| Gross profit / margin | $12.7 / 24.6% | $12.1 / 26.6% | $25.3 / 24.7% | $23.9 / 26.0% |
| Operating income | $0.9 | $0.8 | $2.6 | $1.9 |
| Net income | $0.4 | $0.2 | $1.4 | $0.7 |
| Diluted EPS | $0.03 | $0.02 | $0.12 | $0.06 |
| Operating cash flow | Not stated for quarter | ($3.6) | $5.3 |
- Q2 revenue rose 13.6%; first-half revenue rose 11.6%. Specialty Health Care drove growth, while Information Technology revenue declined.
- Gross margins declined year over year in both periods. First-half operating margin was 2.6%, compared with 2.1%; first-half net margin was 1.4%, compared with 0.8%.
- First-half operating cash outflow reflected, notably, a $6.2 million increase in accounts receivable and a $1.1 million use of cash from changes in net transit balances. Investing activities used $0.6 million; financing activities provided $1.8 million.
- At June 30, cash was $0.4 million, accounts receivable net was $51.7 million, and borrowings under the credit line were $29.2 million, up from $27.3 million at fiscal year-end. Total assets were $73.8 million and total liabilities $50.1 million. The company reported $10.0 million of additional borrowing availability and compliance with credit covenants.
Material changes versus the prior comparable period
- Specialty Health Care revenue increased 39.6% in Q2 and 30.4% in the first half, largely from added paraprofessional staffing on school contracts in New York City and Hawaii. Segment margins fell as this lower-margin revenue expanded and competition and constrained labor affected travel nursing.
- Engineering revenue rose 4.8% in Q2 and 8.0% in the first half. Gross margin was pressured by consultant utilization on fixed-price work.
- Information Technology revenue fell 14.9% in Q2 and 18.2% in the first half, primarily because large client projects declined and were not replaced. The prior-year comparison also included the Microsoft business, sold at the end of fiscal 2017.
- First-half interest expense and other, net increased to $0.7 million from $0.3 million, primarily reflecting higher line-of-credit borrowings. The company attributed increased borrowing in part to funding its $12.2 million cash dividend paid in December 2017.
- Income tax expense declined to $0.5 million for the first half from $0.9 million; the effective tax rate was 25.2% versus 55.7%. The filing cites the U.S. federal tax-rate reduction and the addition of Serbian operations; the prior-period rate also reflected a contingent-consideration charge.
Outlook, commentary, risks and unusual items
- Management gave no numerical revenue or earnings guidance. It expects accounts receivable relative to revenue to improve in the second half of fiscal 2018 and stated capital resources should cover obligations for at least the next 12 months.
- Management describes demand as sensitive to economic conditions, client spending, competition and pricing pressure, and emphasizes risks around recruiting and retaining qualified personnel, customer concentration, acquisitions, regulation, foreign exchange and litigation.
- A major utility customer owes RCM $6.4 million in disputed receivables; the customer has asserted $9.3 million in counterclaims. RCM considers the claims without merit and believes the receivable is collectible, but says it cannot assure that it will not have to pay some or all of the counterclaims. Arbitration was expected to conclude in late 2018 or early 2019.
- Q2 included $1.4 million of severance, professional fees and other charges, including approximately $0.9 million related to the former CEO and approximately $0.5 million of advisory, legal and executive-search costs.
- After quarter-end, on August 9, 2018, RCM amended and restated its credit facility: commitment increased from $40 million to $45 million and maturity extended to August 8, 2023. The facility remains secured by substantially all company assets and subsidiary stock; the amendment includes covenant waivers for specified 2018 expenses.
- The filing says disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track collections, aging and reserves for the $51.7 million receivables balance, especially the disputed $6.4 million utility receivable and arbitration outcome.
- Monitor operating cash conversion, working-capital movements, cash levels, line-of-credit usage and covenant headroom under the amended facility.
- Assess whether Specialty Health Care growth can sustain margins and whether Engineering utilization and Information Technology client-project demand improve.
- Verify the eventual cost and timing of CEO transition and other one-time charges, and whether any additional charges arise.
- Review the amended loan agreement’s leverage, fixed-charge, capital-expenditure and dividend restrictions, along with the company’s stated estimate of $1–$2 million to upgrade or replace its financial reporting system.