RCM Technologies, Inc. — Form 10-Q Summary
Period note: The request metadata says 2015 Q3, but the supplied filing is for the 13 and 39 weeks ended October 1, 2016, compared with periods ended October 3, 2015. The financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
RCM provides engineering, information technology, and specialty health care staffing and services. Its results are exposed to economic cycles, client spending, competition, staffing availability, and foreign exchange. The company reports on a 52/53-week fiscal calendar.
Financial performance
| Metric | 13 weeks ended Oct. 1, 2016 | 13 weeks ended Oct. 3, 2015 | 39 weeks ended Oct. 1, 2016 | 39 weeks ended Oct. 3, 2015 |
|---|---|---|---|---|
| Revenue | $39.7 | $45.1 | $132.3 | $138.3 |
| Gross profit | $10.1 | $12.8 | $34.9 | $38.2 |
| Gross margin | 25.6% | 28.4% | 26.4% | 27.6% |
| Operating income | $0.4 | $1.9 | $3.8 | $5.5 |
| Net income | $0.1 | $1.0 | $2.0 | $3.0 |
| Diluted EPS | $0.01 | $0.07 | $0.16 | $0.23 |
| Operating cash flow | Not separately presented | Not separately presented | $12.1 | $7.5 |
Third-quarter revenue fell 11.9%; year-to-date revenue fell 4.4%. Year-to-date operating margin declined to 2.8% from 4.0%. Year-to-date net income declined 35%. The 39-week effective tax rate was 41.2%, versus 39.8%; the quarter’s rate was 62.6%, versus 44.5%.
At October 1, 2016, cash was $0.3 million, current assets $49.5 million, current liabilities $20.0 million, total assets $65.9 million, and stockholders’ equity $33.7 million. Line-of-credit borrowings were $11.2 million, down from $21.0 million at January 2, 2016; unused borrowing availability was $23.1 million. The facility’s effective interest rate, including fees, was 2.3%, and the company reported compliance with its covenants.
Material changes versus prior comparable periods
- Quarterly revenue weakness was concentrated in Information Technology, down $5.1 million, and Engineering, down $1.6 million; Specialty Health Care grew $1.3 million.
- Year-to-date Information Technology revenue fell $10.9 million and Engineering fell $6.8 million. Specialty Health Care increased $11.6 million, supported by newer offices and staffing lines.
- The company attributed IT weakness to lower project revenue from several large clients, not replaced in time, and the prior-year QAD business disposal. Excluding QAD, year-to-date revenue still declined 2.6%.
- Margins compressed as higher-margin project and software revenue fell and lower-margin staffing represented more of the mix. Quarterly gross margin declined in all three segments; year-to-date Specialty Health Care growth also came with lower segment margin.
- Operating cash flow increased to $12.1 million, primarily reflecting collections and working-capital changes. Financing used $12.1 million, including $9.8 million of net line-of-credit repayments and $1.8 million of share repurchases. Cash declined $0.7 million during the 39-week period.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management says results are sensitive to economic conditions and client spending, and describes competition and pricing pressure as significant.
- Risks include retaining qualified personnel, reliance on major customers, Canadian-dollar exposure, acquisition integration and contingent payments, financing availability, insurance and employment-related claims, and litigation.
- Management estimated $1.0–$2.0 million to upgrade or replace its legacy SAP financial system; the filing gives differing possible timing references, so the schedule is unclear.
- Future acquisition-related contingent consideration was estimated at $1.0 million. Estimates depend on forecast performance and could differ materially.
- Asserted legal claims sought approximately $1.1 million; $0.1 million was accrued. The filing warns that uninsured or adverse outcomes could affect results and liquidity.
- The company repurchased 357,250 shares for $1.8 million in the 39-week period and had $5.2 million authorized for future repurchases. It also reported $7.9 million of future minimum operating lease commitments.
- Goodwill was $11.6 million; management reported no impairment indicators and performed no quantitative impairment test. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q is for 2016 Q3, not 2015 Q3.
- Track whether IT project revenue stabilizes and whether Engineering utilization and fixed-price project margins improve.
- Assess whether Specialty Health Care growth can sustain acceptable margins as newer service lines mature.
- Monitor collections, very low cash on hand, credit-facility availability and covenant compliance, as well as planned SAP system spending.
- Review the status and potential cost of legal matters, acquisition earnouts, and the company’s share-repurchase pace.