RCM Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2021 (53 weeks), compared with the 52-week fiscal year ended December 28, 2019. Although the request metadata refers to 2019 Q4, this filing reports fiscal 2020, not a 2019 quarterly period. Amounts below are in U.S. dollars.
Business context
RCM provides engineering, specialty health care staffing and information technology services. Fiscal 2020 revenue mix was 38.4% Engineering, 40.2% Specialty Health Care and 21.4% IT. COVID-19 materially disrupted demand, especially school-based health care services.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $150.4 million | $191.1 million |
| Gross profit / margin | $38.9 million / 25.8% | $48.6 million / 25.4% |
| Operating income (loss) | ($11.0 million) / (7.3%) | $6.6 million / 3.4% |
| Net income (loss) | ($8.9 million); ($0.73) per share | $4.1 million; $0.31 per share |
| Operating cash flow | $25.2 million | ($4.8 million) |
| Capital expenditures | $0.5 million | $0.4 million |
| Cash and cash equivalents | $0.7 million | $1.8 million |
| Revolver borrowings | $11.9 million | $34.8 million |
- Revenue fell 21.3% year over year. Specialty Health Care declined $28.9 million (32.3%), Engineering $10.1 million (15.0%) and IT $1.7 million (4.9%).
- Gross margin edged up 0.4 percentage points, but SG&A increased to 25.0% of revenue from 21.1%, and exceptional charges drove the operating loss.
- FY2020 operating cash flow benefited substantially from a $15.9 million reduction in accounts receivable, excluding the arbitration resolution, and other working-capital changes. The company repaid $22.9 million net on its revolver.
- At year-end, current assets were $43.9 million and current liabilities $28.7 million, implying working capital of approximately $15.2 million. Revolver availability was $31.2 million, with $1.9 million of letters of credit outstanding; the company reported covenant compliance.
- Non-GAAP adjusted EBITDA was $1.3 million, versus $8.2 million in FY2019. FY2020 included add-backs of $8.4 million for the arbitration-related charge and $2.2 million for lease impairment and related costs; adjusted EBITDA is not a GAAP measure.
Material changes and unusual items
- Utility arbitration: The company received a $7.4 million award, paid during the year, and the customer’s $10.3 million counterclaims were denied. RCM recorded an $8.4 million charge, including receivable write-offs and professional fees.
- COVID-19 and office leases: Reduced office use led to a $1.9 million right-of-use asset impairment and $0.3 million of other lease and obsolete-equipment costs. The reported combined charge was $2.2 million.
- School-service exposure: Specialty Health Care school revenue fell to $37.3 million from $65.6 million, following widespread school closures. New York City Board of Education accounted for 10.6% of total revenue.
- Share repurchase: RCM repurchased 1,858,139 shares for $2.2 million in June 2020 and repaid the related subordinated note in September. After year-end, the board authorized a repurchase program of up to $7.5 million.
- California wage settlement: The company reserved $1.7 million to settle a travel-nurse overtime class action, with payment expected in FY2021’s third quarter.
Outlook, risks and contingencies
Management expected COVID-19 to weigh on revenue, gross profit and operating income through at least the first half of fiscal 2021 and likely beyond; the financial impact could not be reasonably estimated. Management said the revolver was adequate for liquidity needs and believed covenant compliance would continue, while acknowledging that credit availability could not be assured. It expects sufficient capital resources for at least the next 12 months.
Key risks include continued pandemic disruption, school operating patterns, customer concentration, labor availability and costs, competitive pricing pressure, receivable collection, dependence on the revolving facility, foreign-exchange exposure, litigation, and possible subcontractor liabilities. The five largest customers generated 33.4% of revenue; the top 20 generated 60.7%. No goodwill impairment was recorded, but future impairment remains possible. RCM also disclosed an estimated $2.9 million in future acquisition contingent consideration, subject to performance and estimation uncertainty.
No quantitative earnings or revenue guidance was provided. Management’s stated priorities included improving consultant utilization, controlling SG&A, and pursuing higher-margin project and solution work. The company paid no dividends; facility terms restrict dividends without lender consent.
Most important facts for investors to verify
- Whether school-based services recovered after closures, and how that affected Specialty Health Care revenue and margins.
- Whether cash generation is sustainable given FY2020’s substantial working-capital contribution, low ending cash and remaining revolver borrowings.
- Customer concentration, receivable aging and collection exposure, including the disclosed concentration of receivables with education customers.
- Cash timing and final payment of the $1.7 million class-action settlement, contingent acquisition payments and deferred employer payroll taxes of $3.3 million.
- Use and financing implications of the post-year-end $7.5 million repurchase authorization, alongside ongoing liquidity and covenant headroom.