RCM Technologies, Inc. — Form 10-K Summary
Reporting period: The filing covers the 52-week fiscal year ended December 28, 2019, compared with the 52-week year ended December 29, 2018. Although the request metadata says “2018 Q4,” this is the company’s fiscal 2019 annual report, filed March 5, 2020.
Business context
RCM provides engineering, specialty health care staffing, and information technology services to commercial and government customers. Fiscal 2019 revenue mix was Engineering 35.5%, Specialty Health Care 46.8%, and IT 17.7%. The business is labor-intensive, cyclical, and exposed to customer spending, staffing availability, seasonality, and price competition.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $191.1 million | $200.4 million |
| Gross profit / margin | $48.6 million / 25.4% | $49.3 million / 24.6% |
| Operating income / margin | $6.6 million / 3.4% | $5.4 million / 2.7% |
| Net income | $4.1 million | $2.7 million |
| Diluted EPS | $0.31 | $0.22 |
| Operating cash flow | $(4.8) million | $(0.1) million |
| Cash and cash equivalents, year-end | $1.8 million | $0.5 million |
| Revolver borrowings, year-end | $34.8 million | $27.5 million |
Revenue fell 4.6%, while gross margin improved 0.8 percentage points and operating income rose 21%. Net income increased about 49%, helped by lower income tax expense, including a $0.7 million benefit from prior-year research and development tax credit settlements. The reported effective tax rate was 15.8% in FY2019 versus 30.5% in FY2018. Adjusted EBITDA, a non-GAAP measure, was $8.2 million versus $8.9 million.
Operating cash use reflected working-capital demands, particularly a $7.6 million increase in accounts receivable, plus decreases in accounts payable and accrued payroll. Financing activities provided $6.6 million, principally through net revolver borrowing. Investing activities used $0.4 million. Year-end total assets were $96.2 million, total liabilities $63.8 million, and stockholders’ equity $32.4 million.
Segment trends and material changes
- Engineering: Revenue declined 21.1% to $67.9 million, mainly from lower activity in Energy, Canadian Power Systems, and Aerospace. Segment operating income fell to $3.7 million from $5.4 million; margin improved through higher consultant utilization and lower overhead.
- Specialty Health Care: Revenue rose 6.8% to $89.3 million and operating income increased to $2.9 million from $1.9 million. School-contract paraprofessional activity and higher bill rates contributed; travel nursing faced increased competition.
- IT: Revenue grew 10.7% to $33.9 million, attributed to investments in management and sales staff. Gross margin improved, but higher SG&A largely offset the gross-profit increase, leaving operating income nearly unchanged.
Canadian revenue fell to $16.8 million from $27.9 million, reflecting weaker Canadian engineering activity and currency translation. U.S. revenue was nearly flat at $166.8 million.
Liquidity, debt, risks, and outlook
- The amended $45 million revolving facility expires August 8, 2023. At year-end, $34.8 million was drawn, $1.6 million of letters of credit was outstanding, and $8.6 million remained available. The weighted-average borrowing rate, including unused-line fees, was 4.4%; the company reported covenant compliance.
- Management said capital needs are expected to be primarily working capital and believed resources were sufficient for obligations over at least the next 12 months. The filing provides no quantified revenue or earnings guidance.
- A major utility customer arbitration involves $14.1 million of disputed receivables at year-end, up from $8.9 million a year earlier, and customer counterclaims expected to be at least $10.3 million. The company asserted the receivables were collectible, disputed the counterclaims, and recorded no liability accrual; outcomes remain uncertain.
- Customer concentration is significant: the New York City Board of Education and Hawaii Department of Education represented 17.6% and 11.1% of revenue, respectively. The five largest customers generated 43.5% of revenue. New York Power Authority represented 27.3% of total receivables including transit receivables.
- Other risks include economic weakness, competition and pricing pressure, recruiting and retention, seasonality, foreign exchange, insurance costs, cyber incidents, and contingent acquisition payments. The filing specifically cited the coronavirus outbreak as a potential risk, but did not quantify its effect.
- Expected contingent acquisition payments totaled $3.1 million, subject to estimates and performance conditions. The company also anticipated reviewing replacement or upgrade of its legacy accounting system; estimated cost was $0.5–$1.0 million, with timing undetermined.
No goodwill impairment was recorded in FY2019 or FY2018. No common-stock dividends were declared in either year; the credit facility restricts dividends without lender consent. Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the FY2019 financial statements.
Important facts for investors to verify
- Subsequent developments and final outcome of the utility arbitration, including collectability of the $14.1 million receivable and exposure to counterclaims.
- Whether receivables and operating cash flow improved after year-end, given the FY2019 cash outflow and increased borrowings.
- Customer concentration and the sustainability of school-contract revenue, especially the two education customers.
- Engineering demand, Canadian operations, and segment-level margin and operating income trends.
- Revolver availability, covenant headroom, borrowing costs, and planned handling of the LIBOR transition.
- Actual contingent acquisition payments and the timing and cost of any accounting-system replacement.