Slide 1: RCM Technologies—A Case For Change
RCM Technologies—A Case For Change (NasdaqGM:RCMT) November 12, 2013
Slide 2: About IRS Partners and Legion Partners
About IRS Partners and Legion Partners • IRS Partners No. 19 L.P., periodically referred to herein as “IRS Partners”, is the largest shareholder in a group consisting of IRS Partners; The Leonetti/O'Connell Family Foundation; M2O, Inc.; Legion Partners Asset Management, LLC; Michael F. O’Connell; Br
Slide 3: Purpose
Purpose • IRS Partners is: – Nominating two candidates for election to the six-member RCM Technologies, Inc. (“RCM” or “the Company”) board of directors – Proposing that the Board adopt a policy that the Chairman be an independent director • We believe that RCM’s valuation has been adversely impacte
Slide 4: Our Nominees Will Seek To
Our Nominees Will Seek To*: • Make operational improvements – Improve returns on invested capital (“ROIC”) – Promote a culture of profitable revenue growth • Promote appropriate management oversight and accountability – Improve management accountability and link pay to performance • Review strategic
Slide 5: Business Overview
Business Overview • RCM is a provider of information technology, engineering, and specialty healthcare services • RCM has three operating segments: Information Technology Services (“IT”), Engineering Services (“Engineering”), and Specialty Health Care Services (“Specialty Health”) • RCM offers its s
Slide 6: Why Change Is Needed
Why Change Is Needed • Dismal Financial Performance - The Board has presided over a period of steeply deteriorating financial performance and led a failed acquisition strategy resulting in the write-off of approximately $150mm in goodwill and other intangibles since FY2000 – Over the last five years
Slide 7: Why Change Is Needed (cont.)
Why Change Is Needed (cont.) • Poor Compensation Practices - Dramatic improvements in alignment, particularly compensation practices, are necessary to demonstrate to the market that RCM is serious about creating long-term value and is shareholder friendly – $8 million of parachutes payments to the C
Slide 8: RCM – Rampant Underperformance
RCM – Rampant Underperformance 8
Slide 9: RCM – An Underperformer
RCM – An Underperformer • RCM share price was underperforming its peer set and benchmark until it got a boost from CDI Corp.’s unsolicited buyout offer on June 3, 2010 • Subsequent buying by IRS Partners and share repurchases by RCM helped support the increased share price 5-year TSR 1-day prior to
Slide 10: Favorable Exogenous Factors Have Helped Support RCM’s Share Price
Favorable Exogenous Factors Have Helped Support RCM’s Share Price • Share repurchases by RCM and accumulation of stock by IRS Partners have accounted for a significant portion of the trading volume • We believe without strategic interest and activist involvement RCM’s share price would more closely
Slide 11: Absent Exogenous Support, RCM’s Share Price Has Underperformed Its Peers
Absent Exogenous Support, RCM’s Share Price Has Underperformed Its Peers • Despite management’s claims of “record” performance, RCM’s total shareholder return (“TSR”) has lagged its peer group and the benchmark index since end-1Q2013 – a period during which the Company has announced three quarterly
Slide 12: RCM’s Attempt To Mislead Shareholders
RCM’s Attempt To Mislead Shareholders • In two press release dated November 1, 2013 and November 5, 2013, RCM stated that “our [RCM] share price has increased by approximately 587% during the five years ended October 30, 2013.” We believe this statement provides critical insight into Board’s desire
Slide 13: Without Support, RCM’s Share Price Tends To Underperform
Without Support, RCM’s Share Price Tends To Underperform • RCM’s share price was clearly underperforming its peers and the Russell 3000 Index prior to CDI’s $5.20/share offer which represented a 1-day premium of 49% • The CDI offer together with IRS Partners’ purchases, RCM’s buyback program and spe
Slide 14: Failure To Grow Revenue
Failure To Grow Revenue • Core revenue since 2007 has declined by approximately $66mm, or 29%, despite tuck-in acquisitions contributing to top-line 300.0 Revenue Contribution Analysis 250.0 +$26.8 -$17.6 +$5.0 200.0 $214.2 RCM has lost apprx. $66 million in revenue since FY2007 US$mn 150.0 $161.9 1
Slide 15: Poor Performance In Growing End-Markets
Poor Performance In Growing End-Markets • Since 2009, the IT and Specialty Health peers have significantly outperformed RCM’s respective business segments. This suggests RCM’s failure to capitalize on improved end market demand. Revenue Change 2009 to LTM (30 June 2013) 80% 68.1% 60% 40% 20% 17.0% 1
Slide 16: Lagging EBITDA Margin
Lagging EBITDA Margin* • Higher LTM revenue has been accompanied by lower gross profit margin, which has resulted in muted EBITDA margin gain • While LTM revenue of $162mm is nearly equal to the level achieved in FY2010, the LTM EBITDA Margin has declined by 23% to 4.9% compared to FY2010 • It appea
Slide 17: Suboptimal ROIC and ROA
Suboptimal ROIC and ROA • RCM has failed to generate acceptable ROIC and ROA, suggesting complete failure to create shareholder value ROIC and ROA 12.0% 10.0% 9.7% 8.0% 8.0% 7.4% 6.1% 6.0% 5.5% 5.1% 4.9% 3.8% 4.0% 2.0% 0.0% -2.0% -2.6% -4.0% -3.4% -6.0% 2009 2010 2011 2012 LTM (30 Sept. 2013) ROIC R
Slide 18: Inability To Manage Business Segments
Inability To Manage Business Segments • The Board has failed to address declining or stagnant performance in two of three business segments. Despite spending $11mm on acquisitions** for IT (NuSoft and MBH) in FY08, IT revenues have declined by 48% since • Meanwhile, Specialty Health* revenues have i
Slide 19: Failure To Explore Strategic Alternatives For Underperforming Segments
Failure To Explore Strategic Alternatives For Underperforming Segments • While the Engineering segment has witnessed better revenue growth than IT and Specialty Health, it is important to note that revenue growth has come at the cost of much lower operating margin • Declining ROA and lackluster reve
Slide 20: Lowest Segment EBIT Margin
Lowest Segment EBIT Margin* • RCM has the lowest segment operating margin compared to its peers in those respective business segments. Such subpar profitability is indicative of Board’s failure to formulate and implement a credible operating strategy for the three business segments Comparative EBIT
Slide 21: Management’s Failed Operating Plan
Management’s Failed Operating Plan • Management’s operating plan has centered around diversifying the business across multiple industries under a holding company structure • Such a strategy presents multiple problems for shareholders: – Being involved in three disparate businesses makes it hard for
Slide 22: Corporate Governance
Corporate Governance 22
Slide 23: Questionable Governance Track Record
Questionable Governance Track Record • Almost all the governance reforms undertaken by the Board have been in response to pressure from Legion Partners. The Board has a history of ignoring shareholder rights Board’s Claims Reality Responsive to shareholder - Declassify and majority vote standard wer
Slide 24: Poor Corporate Governance Continues
Poor Corporate Governance Continues • Board failed to call 2013 Annual Meeting for 18 months • 80% threshold to call special meeting of stockholders • Unanimous consent required to act by written consent • Supermajority vote requirement to remove directors (2/3 vote) • Stockholders cannot fill vacan
Slide 25: New Religion On Governance?
New Religion On Governance? • ISS comments - 2012 – “WITHHOLD votes from non-independent director nominee Richard D. Machon are warranted due to the company's lack of a formal nominating committee and for serving as a non-independent member of a key board committee – Only 60 percent of the board's d
Slide 26: Board Has Failed To Respond To ISS and Shareholder Dissatisfaction
Board Has Failed To Respond To ISS and Shareholder Dissatisfaction • ISS has consistently issued unfavorable recommendation for election of directors at RCM ISS Recommendation Actual meeting outcome (of of votes cast) 2012 WITHHOLD from election of Richard D. Machon 39% WITHHELD 66% WITHHELD from Mr
Slide 27: Board’s Dismissal Of CEO’s Suspect Credentials Is Alarming
Board’s Dismissal Of CEO’s Suspect Credentials Is Alarming • Chairman and CEO, Leon Kopyt, repeatedly embellished his academic achievements (that he held an Electrical Engineering degree from Drexel University) not only in RCM’s proxy statements filed in 1996, 1997, and 1998, but in two Company pros
Slide 28: Board Continues To Mischaracterize Settlement Discussions
Board Continues To Mischaracterize Settlement Discussions • Board claims settlement discussions broke down because we insisted the Board be declassified beginning with the 2014 Annual Meeting • The TRUTH: - Declassification was OUR initiative - We were amenable to declassifying the Board at the 2013
Slide 29: RCM Files Frivolous Lawsuit in Act of Desperation
RCM Files Frivolous Lawsuit in Act of Desperation • On November 8, 2013, RCM filed a complaint against us in the U.S. District Court, District of New Jersey claiming we are attempting to influence the results of the 2013 Annual Meeting by advancing false and misleading statements in violation of Sec
Slide 30: Executive Compensation Issues
Executive Compensation Issues 30
Slide 31: Misaligned Executive Compensation
Misaligned Executive Compensation • Compensation Committee has approved over $8 million in parachutes payments to the Company’s top three executives ($6.1 million to Mr. Kopyt alone) • CEO severance agreements are “overly generous” – Board approved 2 severance agreements for Chairman and CEO Leon Ko
Slide 32: Compensation Philosophy Is Neither Transparent Nor Rigorous
Compensation Philosophy Is Neither Transparent Nor Rigorous • RCM does not disclose its peer group • CEO and CFO bonus (and Annual Incentive Plan) is linked to EBITDA with no indication of any performance thresholds. CEO and CFO would earn a bonus if RCM earned just ONE DOLLAR in EBITDA. In fact, in
Slide 33: A Path Forward
A Path Forward 33
Slide 34: RCM Nominees Are Troublesome
RCM Nominees Are Troublesome RCM Nominees Robert B. Kerr • 19 year incumbent • No prior public company Board experience other than RCM • Member of Compensation Committee who approved outrageous compensation agreements for Leon Kopyt • ISS recommended WITHHOLD votes against Kerr in 2010 for approving
Slide 35: Our Nominees Are Better – Roger H. Ballou
Our Nominees Are Better – Roger H. Ballou Significant Industry Experience and Extensive Management Oversight – Previously served as the Chief Executive Officer and a director of CDI Corporation (NYSE:CDI), a company that offers engineering, information technology and professional staffing solution
Slide 36: Our Nominees Are Better – Bradley S. Vizi, CFA
Our Nominees Are Better – Bradley S. Vizi, CFA Vested Interest in Maximizing Stockholder Value – Member of stockholder group, led by Legion Partners, with a combined ownership of approximately 13.3% of the outstanding shares of RCM – Has vested interest to promote greater accountability and maximi
Slide 37: Independent Chairman Resolution (Proposal 5)
Independent Chairman Resolution (Proposal 5) • We believe the practice of combining the Chairman and CEO roles does not adequately protect shareholders • We believe that an independent Chairman who sets the agendas, priorities and procedures for the Board can enhance oversight and improve effectiven
Slide 38: Our Plan
Our Plan • Corporate governance reform starting with the adoption of the separation of Chairman and CEO proposal assuming approval by shareholders—moving closer towards a culture of shareholder accountability • Revamp compensation program to include thresholds for incentive payments at every level o
Slide 39: Our Plan (cont.)
Our Plan (cont.) • Undertake strategic review of all segments, in particular, Specialty Health • Create an operational committee with a focus on the ability of each unit to earn returns in excess of its cost of capital • Thorough assessment of the cost structure of the enterprise as a whole – includ
Slide 40: Conclusion
Conclusion • The Board has presided over a period of deteriorating financial metrics, including declining revenue and EBITDA, and led a failed acquisition strategy resulting in the write-off of approximately $150mm in goodwill and other intangibles since FY2000 – Over the last five years (FY07-LTM13
Slide 41: Conclusion (cont.)
Conclusion (cont.) • RCM suffers from poor corporate governance practices. Additionally, the Board has granted very generous Severance, Termination and Employment Agreements to the CEO – The Chairman and CEO roles should be split • It is unlikely the existing board, given its poor alignment, track r
Slide 42: APPENDIX – Peer Group Selection
APPENDIX – Peer Group Selection • Step1 – Started with Russell 3000 Index – Limited our search to companies with similar business and ideally $500MM in market cap. We raised the market cap limit to $1bn for IT as we could not find two companies with similar business as RCM within the market cap limi
Slide 43: LEGAL DISCLAIMER
LEGAL DISCLAIMER • This presentation is for discussion and general informational purposes only. It does not have regard to the specific investment objective, financial situation, suitability or the particular need of any specific person who reads this presentation, and should not be taken as advice