Transcripts
RCM Technologies, Inc. (RCMT) Q1 2023 Earnings Call Transcript
Operator
[Operator Instructions] And it does look like we got at least one question in so far from Alex Rygiel from B. Riley Financial. Your line is now open.
Alex Rygiel
Thank you, Kevin. Just – and thanks for the added guidance there. As it related to your comment about Specialty Health sequentially being down a little bit, it sounded like you suggested that 2Q sequential down would be basically offset by the Engineering team. So I wanted to confirm that first?
Kevin Miller
Yes. I mean sure. Obviously, we don’t know what the exact revenues are going to be in Q2, but we are – like I said, we’re optimistic that the two will offset each other.
Alex Rygiel
Great. And then Brad, bigger picture here, very bullish comments from a macro standpoint, your capital allocation, share repurchases in the first quarter would suggest your confidence kind of heading out. You referenced a number of new customers, and it sounds like, therefore, backlog is growing. I know you don’t disclose backlog, but can you help us to sort of understand maybe how backlog has changed year-over-year sequentially and how do you see that growing throughout the year?
Brad Vizi
Yes. Backlog is certainly building. But what’s probably more encouraging is pipeline activity and the level of confidence that we have, not only is it broadening across the portfolio, but the size of the work and the level of involvement with our clients is also increasing. So again, as we continue – as the business continues to mature, and we have increased confidence in cadence, we’re certainly willing to share that. Inevitably, given the project-oriented orientation of some of what we do when you start in kind of precise guidance, it becomes a little bit more difficult, particularly when you’re balancing growth versus profitability?
Alex Rygiel
Very helpful. Thank you very much.
Operator
And with that, there are no further – We just got another question, Bill Sutherland of Benchmark. Your line is now open.
Bill Sutherland
Thanks. Hey, guys. So as you try to think about the timing of the projects coming on in Engineering, does it feel like it’s going to be not just a back half weighted year, but maybe even more in the fourth quarter? Or would it be more evenly distributed?
Kevin Miller
Hard to say exactly, Bill, because some of the timing of the projects is difficult to project, but I think that we’ll see Q3 should be significantly better than Q2 and Q2 should be significantly better than Q1. And I think Q4 will be better than Q3. So I think we’re good. I think both Q3 and Q4 would be strong as we sit here today and forecast the backlog rollout and the realization of pipeline, but Q4 should be better than Q3 as well. So we’re optimistic we’ll see [indiscernible] each quarter as we head out.
Bill Sutherland
And you typically get a seasonal Q1 seasonally off at least a little bit from Q4, just because of the projects that get wrapped up, and you have to start new ones.
Kevin Miller
Typically, yes. Every year is a little different, but we often see that. One of the things that impacted us in the Q1 in addition to some major projects ending is one of our major aerospace clients lost a contract, and we had about 30 people come off building, which is fine. These types of things happens when you’re in the business of filling gaps for clients, you’re going to wind up with some gaps yourself, but we’re seeing that rebuild and we think the second half for aerospace is going to be dynamite. Brad mentioned that we have a whole bunch of new clients that we’ve never worked with in the past that we think we’re going to close. And we’ve added several new clients in the beginning of this year. They’ll take a little while to ramp and then we have five to seven more that we think we could close between now and the end of the year. So we’re really, really excited about what we have going on in the Aerospace group despite not going up in the Q1 number.
Bill Sutherland
Yes. And then when you look at the clients that you’re onboarding in education in the fall for this coming school year. Do these tend to have contracts to kind of start September 1ish or do you have some that are a little off the traditional education calendar? Just curious…
Kevin Miller
The contracts are kind of a bit all over the map, but a lot of the newer contracts that we’re getting are general M&As, right? And if you win an MSA with a school client in April, you may or may not be able to place some people with that client at the end of the current school year. Sometimes we can add a few people. Sometimes you win a contract and it’s okay, we’re gearing up for September of 2023. But we’re optimistic that when the new school year rolls around and some of our clients start in August, some of them start in September, we’re really optimistic about a lot of the new contracts, either contracts that are new, and we’re not – and we don’t have a lot of providers there or contracts potentially that we could win between now and the 2023-2024 school year because we’re talking to a whole bunch of schools that we feel good, that we can close sometime over the summer so that we can get some people in there in September. And then you’ve got school contracts that we won for 2022, ‘23, you don’t always go in there and put 30 people in. In the first year, you might put in 10 and then the next year, maybe you get up to 30 and then next year, maybe you get up to 40 or 50 if the school is big enough to support that many people. So it’s really kind of all over the map. But I think the bottom line is we’re very optimistic about when we look at the new schools that we’ve added and the pipeline schools that we haven’t added yet that we think we can add, we’re really excited about ‘23, ‘24, and we won’t see that impact until September, end of August. So that’s the main reason we talk about Healthcare having a great Q4. That’s why we think we’re going to have a really good Q4 for Healthcare.
Bill Sutherland
Got it. And then Brad, on capital allocation, you guys have repurchased 1.2 million shares through the end of 1Q or…
Kevin Miller
No, through to-date.
Bill Sutherland
Through to-date, okay.
Kevin Miller
Through to date, right. So if you want – I know you always like to get our share count, I’ll be happy to give it to you.
Bill Sutherland
Yes. Absolutely.
Kevin Miller
So our share count as of today, and this is without dilutive shares, is 8,269,332. So that’s our share count as of today without dilutive shares. And the dilutive shares in Q1 were about 229,000 shares.
Bill Sutherland
Wait, you…
Kevin Miller
Well, so let me just say you’re not confused. As of today, our share count without dilutive shares is 8,269,332 but let me – I’ll give you the Q1 as well because I know you like to get those, some additional confusion, hold on, let me just flip to the Q, which I expect to file at the end of the day to our footnote here. So our share – our diluted average share count for Q1 was 9,401,867. And that includes 229,356 of dilutive shares for Q1.
Bill Sutherland
I understand Okay. Okay. No, I understand what you’re saying. And then you’re just kind of an opportunistic posture in the authorization is how big at this point?
Kevin Miller
As of today, $23.5 million we have left for potential purchases.
Brad Vizi
Yes, I think the one thing I’d add to that, Bill, is we’re not capital constrained whatsoever and we have a high level of confidence in the business that we’re building here and the teams that we brought on and have filled out and are increasingly enhancing and the activity that they’re generating. So we obviously have done a good job converting cash flow over the last few years. We anticipate to continue to generate significant amounts of free cash flow. We actively evaluate bolt-on opportunities that we feel like we can grow materially as part of the RCM platform. So with kind of the stock trading at the current levels, it’s – the decision tree is relatively straightforward. What we like to do in terms of capital and the high-return projects we like to target, they’re not mutually exclusive. It’s kind of the ones that make sense, we’ll move forward. We have plenty of capacity to deploy capital where it makes sense.
Bill Sutherland
Got it. Okay, thanks, guys. Appreciate the color.
Operator
Alright. And next up, it looks like we have Frank Kelly, a Private Investor now on the line.
Unidentified Analyst
Hey, gentlemen. Good mooning. How are you, Brad? How are you Kevin?
Kevin Miller
Good.
Brad Vizi
Hi, Frank.
Unidentified Analyst
Great. I was looking at AR, our DSOs are considerably up year-over-year, I think they’ve got to be pretty incredible. And then I turned around and I look at interest expense on our line, would it be – what do we have to say about that? And it looks like it’s the $9 million in increased line that we’ve used. We could save $0.5 million in interest versus collecting that cash. What do you guys think on the DSO? And what’s happening there?
Kevin Miller
Sure. I mean the DSOs are definitely up in Q1 and certainly above a level that we’ve been accustomed to for the last 2 years. As you know, Frank, they can fluctuate for all kinds of reasons. We often see a spike in Q1 just because I think we usually see a lot of our clients push to get cash out the door at the end of the calendar year. And then sometimes they take a little pause in the first quarter. So it’s not unusual to see a spike in the first quarter. But I would tell you that, frankly, they’re a lot higher than in Q1 than I’d like to see them. And I think they’re higher than what we expect to see going forward. I think if we look at the last year, those are quite good. But the Q1 of 2023, they were not good and when we expect them to come down. As far as DSO is concerned, obviously, obviously, a decline in DSOs will – assuming no big increase in revenue, will help us to decrease our debt, and that would obviously help decrease our interest expense. But the main driver of the debt is obviously the repurchase program, which we will take that trade-off and the share count versus a little bit of interest expense all day long in terms of the EPS and having a leverage ratio [indiscernible].
Brad Vizi
Yes, Frank, just to put a fine point on the interest expenses is under any sort of reasonable assumptions, we don’t see kind of after-tax interest expense to be much more than $1 million. We don’t anticipate significant leverage relative to our earnings power or anything like that. We have a great relationship with our bank. So – but your point is well taken. It wasn’t our best collections quarter. The finance team is on it. We anticipate a good free cash flow in Q2 as we would have seasonally anyways. But there’s also opportunity to improve DSOs from where we’re at.
Unidentified Analyst
Great. Great. Great. I’m sure you guys are on it. The other question, could you shed some light on the gain of sale of assets, which kind of a one-off extra $400,000 this quarter. What was that as related to?
Kevin Miller
So as I’m sure you’re aware, we sold our Canada Power Systems Group in 2021 and that – there were some escrow funds associated with that. And the accounting on that is you don’t recognize the gain until the cash comes in. That was just a matter of us collecting the last amount of escrow funds. We – it was like a one-third, two-thirds collection. We collected some last year, which is what I think it was in the fourth quarter or the third quarter, it was recognized maybe. That was a smaller amount because that was a portion of the escrow and then the balance of it was paid out this year. And there’s no more funds that deals done, the escrows will return to us.
Unidentified Analyst
Great. Great. Just the extension on that was about 2 years, right?
Kevin Miller
18 months, Frank, which was – which, frankly, was a rough negotiation, but we got it in 18 months.
Unidentified Analyst
Great. Great. Last question on the capital allocation, the program that the company is currently pursuing, do we see that to continue throughout the rest of – the remainder of 2023?
Brad Vizi
Yes, certainly through the remainder of 2023. We continue to be open-minded. Look, as the business continues to strengthen, we continue to grow EBITDA, right, and share count is lower. I mean that just further opens up the field. Like I said, we’re not ruling anything out. Like I said, I don’t think that it’s fair to anticipate any type of a distribution or dividend this year, but going forward, we’re not completely opposed to it. It’s something that we do talk about.
Unidentified Analyst
Great. Appreciate it. Keep up the good work.
Kevin Miller
Thank you.
Operator
With that, gentlemen, we no longer have any questions in queue. [Operator Instructions] And at this time, I’m seeing no further questions in queue.
Kevin Miller
Thanks, everyone.
Brad Vizi
Thank you, everyone, for your time today. We look forward to our next update in August.
Operator
Alright. Ladies and gentlemen, that does conclude your call. You may now disconnect your lines, and thank you again for joining us today.