RCM Technologies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended June 27, 2020, compared with the periods ended June 29, 2019. The request metadata says 2019 Q2, but the filing itself is for 2020 Q2. Amounts below are in U.S. dollars.
Business context and results
RCM provides engineering, specialty healthcare, and information technology services, including staffing, consulting, and project work. COVID-19 reduced customer demand and restricted work at client facilities; school closures particularly affected healthcare services.
| Metric | 13 weeks ended June 27, 2020 | Prior-year quarter | 26 weeks ended June 27, 2020 | Prior-year half-year |
|---|---|---|---|---|
| Revenue | $32.7 million | $50.7 million | $77.7 million | $102.3 million |
| Gross profit / margin | $8.5 million / 26.0% | $12.8 million / 25.3% | $19.3 million / 24.9% | $25.3 million / 24.8% |
| Operating income (loss) | ($1.2 million) | $2.2 million | ($8.9 million) | $3.8 million |
| Net income (loss) | ($1.0 million) | $1.3 million | ($6.9 million) | $2.7 million |
| Diluted EPS | ($0.08) | $0.10 | ($0.54) | $0.21 |
For the first half, operating results included an $8.4 million charge related to a major-utility arbitration and associated receivables and fees. The income tax benefit was $2.6 million for the half-year, versus $0.2 million of tax expense in the prior-year period.
Segment performance and material changes
- Engineering: First-half revenue fell 25.1% to $28.2 million. Gross margin improved to 29.1% from 26.5%, but segment operating results swung to a $7.4 million loss, principally due to the arbitration-related charge. Lower client spending, project timing, competition, and COVID-19 also weighed on revenue.
- Specialty Health Care: First-half revenue declined 30.8% to $32.9 million, largely because school closures reduced school-service revenue to $23.2 million from $35.8 million. Gross margin fell to 20.0% from 23.0%, and the segment recorded a $1.3 million operating loss versus $2.0 million of income.
- Information Technology: First-half revenue declined 3.0% to $16.6 million. Higher gross margin partly offset lower revenue, but the segment recorded a $0.3 million operating loss.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $17.8 million, compared with $2.5 million used in the prior-year period. Cash generation included a $12.2 million cash inflow from lower receivables and a $7.9 million provision for receivable losses; management attributed some working-capital changes to payment timing and deliberate payment deferrals.
- Cash was $1.6 million at June 27, 2020. Current assets were $43.6 million and current liabilities $21.2 million, producing working capital of $22.5 million. Total assets were $70.2 million, down from $96.2 million at year-end 2019.
- Revolver borrowings were $17.4 million, down from $34.8 million at December 28, 2019; $25.9 million of additional availability remained under the $45 million facility, subject to its terms and covenants. The company reported covenant compliance. The facility is secured by company assets and expires August 2023.
- The company also issued a $2.2 million unsecured subordinated note to finance its June share repurchase. It bears 9% annual interest and matures August 2023.
- First-half investing cash use was $0.1 million; financing cash use was $17.8 million, primarily reflecting net revolver repayments.
Outlook, risks, and unusual items
- Management expected positive cash flow for at least the next two quarters and believed liquidity would meet needs for at least 12 months. It cited flexibility to reduce costs, but gave no assurance that the credit line would remain available. No revenue or earnings guidance was provided.
- Management expected COVID-19 to continue negatively affecting results and financial position through at least the second half of fiscal 2020, possibly longer; the impact could not be reasonably estimated. Modified or remote school operations were expected to materially pressure Specialty Health Care revenue.
- In April 2020, an arbitrator awarded the company $7.4 million and denied the customer’s $10.3 million counterclaims. RCM recorded an $8.4 million charge, including $6.7 million of disputed receivables not awarded, $0.7 million of other receivables written off, $0.8 million of fees, and $0.2 million of transit receivables.
- On June 2, RCM repurchased 1,858,139 shares for $2.2 million, or $1.20 per share, using the 9% note rather than cash. The company said the transaction was not under a repurchase plan and that no plan was open.
- The board adopted a stockholder rights plan that may dilute an unapproved acquirer reaching 10% ownership; it was scheduled to expire May 22, 2021 unless redeemed earlier.
- Other risks include customer concentration and collection exposure, staffing and labor costs, competition, foreign-exchange fluctuations, contingent acquisition payments, and ordinary-course legal claims. No accrual was recorded for other asserted claims. Management also estimated a future $1–$2 million cost to upgrade or replace its financial reporting system, with timing undetermined.
Important facts for investors to verify
- Whether the $7.4 million arbitration award was collected and whether any related receivables remain exposed to collection risk.
- School reopening and service arrangements, and the resulting revenue, utilization, and margins in Specialty Health Care.
- Whether operating cash flow remains positive after the unusually large receivable reduction, provision, and payment deferrals.
- Revolver availability and covenant compliance under continued COVID-19 pressure, including the effect of the subordinated note and deferred payroll taxes.
- Customer concentration, receivable aging and allowances, and progress in replacing reduced backlog with new work.