RCM Technologies, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says 2010 Q3, but the filing itself is for the 13 weeks ended October 1, 2011, with comparable periods ended October 2, 2010. Year-to-date figures cover 39 weeks. Amounts below are in millions, except per-share data.
Business context and period
RCM provides information technology, engineering, and specialty health care services, including consulting, project solutions, and staffing. The company says its market is cyclical and sensitive to economic conditions. Its interim statements are unaudited; management cautions that year-to-date results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Revenue | $33.6 | $37.5 | $108.8 | $125.6 |
| Gross profit / margin | $9.1 / 27.1% | $10.6 / 28.3% | $30.6 / 28.1% | $35.4 / 28.2% |
| Operating income / margin | $0.7 / 2.2% | $1.9 / 5.0% | $4.8 / 4.4% | $6.7 / 5.4% |
| Net income | $0.7 | $1.2 | $3.1 | $4.7 |
| Diluted EPS | $0.06 | $0.09 | $0.24 | $0.36 |
| Operating cash flow | Not stated separately | Not stated separately | $9.8 | $15.7 |
Q3 cost of services was 72.9% of revenue versus 71.7% a year earlier; year-to-date it was 71.9% versus 71.8%. SG&A fell year over year in dollars, but increased as a share of revenue: 24.1% versus 22.4% for Q3 and 22.9% versus 22.0% year to date.
At October 1, 2011, cash and cash equivalents were $32.6 million, total assets $93.9 million, current assets $80.5 million, and current liabilities $22.5 million. Stockholders’ equity was $71.2 million. The company had no revolver borrowings and reported $14.1 million of additional borrowing availability, net of outstanding letters of credit. No outstanding funded debt balance is reported. Cash flow included $2.4 million from the net timing difference between transit payables and receivables; management expected this to reverse in Q4.
Material changes versus comparable periods
- Revenue declined 10.5% in Q3 and 13.4% year to date. Management attributed the main decline to weak Information Technology sales execution and reduced spending by major Engineering clients.
- Information Technology revenue fell 26.6% in Q3 and 26.5% year to date; its operating result was a $0.2 million loss for Q3 and only $0.1 million income year to date.
- Engineering revenue was approximately flat in Q3 but down 5.9% year to date, reflecting project timing and lower demand from some large clients. Specialty Health Care revenue rose 11.5% in Q3 and 5.4% year to date.
- Year-to-date operating cash flow decreased to $9.8 million from $15.7 million. Net income and working-capital contributions were lower; current-period cash flow also benefited from transit-account timing.
- Year-to-date net income declined despite the absence of the prior-year discontinued-operations loss. The prior-year comparison also included a nonrecurring tax benefit related to the Oracle business liquidation; current-period tax expense included a $218,000 discrete benefit from an amended prior-year return.
- The company repurchased 396,539 shares year to date for approximately $1.8 million. Outstanding treasury shares totaled 445,936 at quarter-end.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management described the expected economic and market recovery as potentially slow or tenuous, and was cautious about the remainder of 2011.
- Management expected cost of services as a percentage of revenue to remain broadly comparable to the year-to-date rate, adjusted for Q4 holidays and vacation, and expected SG&A dollars to remain generally consistent absent material revenue changes.
- The $15 million revolving credit facility was amended after quarter-end to extend its maturity to November 30, 2011. The company intended to seek an extension or replacement if aligned with its financing needs. The short remaining maturity is a key liquidity item to monitor.
- Potential near-term spending included an ERP-system upgrade in late 2011 or early 2012 and approximately $0.5 million of Engineering equipment purchases. Management said capital resources were sufficient for obligations over at least the next 12 months.
- Asserted legal claims sought approximately $7.3 million; recorded legal-loss provisions were approximately $0.4 million. The company warns that an unfavorable outcome could materially affect results, liquidity, or financial position, although the timing and ultimate exposure are uncertain.
- PSG acquisition deferred consideration could total up to $396,000 through 2013; additional earnouts are not predictable. Management reported no goodwill-impairment triggering events during the 39-week period.
- Principal risks include economic cyclicality, competition and pricing pressure, staffing and retention, workers’ compensation and insurance claims, client spending and project timing, litigation, and access to financing. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: the filing is for Q3 2011, notwithstanding the request metadata’s 2010 Q3 label.
- Track whether IT sales execution improves and whether the segment returns to operating profitability.
- Monitor extension or replacement of the credit facility before its November 30, 2011 maturity.
- Assess the sustainability of operating cash flow, especially the expected reversal of the transit-account timing benefit.
- Review subsequent developments in legal claims, PSG contingent consideration, and planned ERP and equipment spending.