RCM Technologies, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says “2015 Q2,” but the filing is for the 13 and 26 weeks ended July 2, 2016, compared with periods ended July 4, 2015. The filing was signed August 11, 2016. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
RCM provides engineering, information technology (IT), and specialty health care services, including consulting and staffing. Its three reportable segments are Engineering, IT, and Specialty Health Care. The company notes that its market is cyclical and sensitive to economic conditions. These unaudited interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | 13 weeks ended July 2, 2016 | 13 weeks ended July 4, 2015 | 26 weeks ended July 2, 2016 | 26 weeks ended July 4, 2015 |
|---|---|---|---|---|
| Revenue | $45.4 | $45.3 | $92.6 | $93.3 |
| Gross profit / margin | $12.1 / 26.7% | $12.1 / 26.7% | $24.8 / 26.8% | $25.4 / 27.2% |
| Operating income / margin | $1.5 / 3.4% | $1.2 / 2.7% | $3.3 / 3.6% | $3.6 / 3.8% |
| Net income | $0.9 | $0.7 | $1.9 | $2.1 |
| Diluted EPS | $0.07 | $0.05 | $0.15 | $0.16 |
- Cash flow: First-half operating cash flow was $7.7 million, versus cash used of $2.5 million in the prior-year period. Investing used $0.6 million; financing used $7.8 million. Cash declined by $0.8 million to $0.2 million.
- Debt and liquidity: Revolver borrowings were $14.9 million at July 2, down from $21.0 million at January 2, 2016. The $35 million facility had $19.4 million of additional availability; letters of credit totaled $0.7 million. The company reported covenant compliance. Effective borrowing cost, including unused-line fees, was 2.3% for the first half.
- Balance sheet: Total assets were $70.7 million and total liabilities $36.7 million. Stockholders’ equity was $34.0 million. Cash was low relative to current liabilities of $20.7 million; the filing cites revolver availability as a source of liquidity.
- Other items: First-half capital expenditures were $0.7 million. The company repurchased 214,578 shares for $1.1 million during the first half. Estimated future acquisition contingent consideration was $1.1 million.
Material changes versus prior comparable periods
- Second-quarter revenue was up 0.2%; first-half revenue declined 0.7%. Excluding the disposed QAD software business, management said revenue rose 2.0% in the quarter and 1.2% in the first half.
- Specialty Health Care grew strongly: second-quarter revenue increased 47.9% to $15.7 million; first-half revenue rose 48.8% to $31.4 million. Growth included newer offices and service lines, though margins fell as some new-client work carried lower margins.
- IT revenue fell 26.3% in the quarter and 19.7% in the first half, reflecting lost QAD revenue and reduced project work at several large clients that was not replaced promptly. Segment operating income was marginally positive in the quarter and $0.6 million for the first half, down from $1.5 million.
- Engineering revenue declined 5.5% in the quarter and 12.2% in the first half, primarily due to lower activity with major clients and Canadian-dollar effects. First-half segment operating income nevertheless rose to $1.5 million from $1.2 million, helped by improved utilization, project mix, and lower allocated SG&A.
- First-half gross margin fell to 26.8% from 27.2%, while SG&A as a share of revenue improved to 22.3% from 22.7%. Net income decreased to $1.9 million from $2.1 million, despite higher second-quarter earnings.
- Canadian revenue was $12.6 million in the first half versus $16.4 million reported in the segment geographic table for the prior period; management cited reduced engineering activity and a weaker Canadian dollar. The MD&A separately cites $17.1 million at its stated comparison exchange rate.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantitative revenue or earnings guidance. Management expects working capital to be a primary capital use and says resources should cover obligations in the normal course for at least 12 months.
- RCM anticipates that its SAP financial reporting system may need replacement or a major upgrade, potentially as early as fiscal 2017; estimated cost is $1 million to $2 million, subject to change.
- Management highlights economic cyclicality, client spending, competition and pricing pressure, recruiting and retention, reliance on significant customers, foreign-exchange movements, acquisition integration and earnouts, insurance costs, and litigation among key risks.
- Asserted legal claims sought approximately $1.1 million in damages; no liability was accrued. The filing cautions that an unfavorable outcome could materially affect financial position, liquidity, or results.
- Federal tax examinations cover fiscal 2011 and 2012; New Jersey examinations cover fiscal 2009 through 2012. The filing reports no change in unrecognized tax benefits.
- Performance-based restricted stock unit targets were considered unlikely to be achieved at July 2, 2016, and no related compensation cost had been recognized. Goodwill impairment indicators were not identified.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period: the supplied filing covers Q2 and the first half of fiscal 2016, not 2015.
- Track whether IT project revenue stabilizes and whether Specialty Health Care growth produces improved margins.
- Assess cash conversion and working-capital movements, including the timing-related benefit from receivables and transit balances, alongside the very low ending cash balance.
- Monitor revolver availability, covenant compliance, interest-rate exposure, and the cost and timing of the planned SAP upgrade.
- Follow outcomes of legal and tax matters and actual acquisition earnout payments, which may differ from estimates.