RCM Technologies, Inc.
Q4 2021 Earnings Call Transcript

Published: 1 Apr 2022

[Kevin Miller:]

Good morning, and thank you for joining us. This is Kevin Miller, Chief Financial Officer at RCM Technologies. I am joined today by Brad Vizi, RCM’s Executive Chairman. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and assumptions and information currently available to us and these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q and 8-K that we file with the SEC as well as our press releases that we issue from time to time. I will now turn the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM’s operating performance during the fourth quarter.

[Brad Vizi:]

Thanks, Kevin. Our fourth quarter results serve as a nice bookend to 2021. As I reflect on our transformation plan dating back prior to the pandemic, I am proud of the team’s execution. The results speak for themselves broad-based strength across each of our divisions. Before we get into the numbers, I want to reflect on the year and why we are even more optimistic about the future. We entered 2021 with the foundational pillars in place to support RCM’s next wave of growth. 2020 was clearly a year of recovery. We refined our processes and focus, upgraded our leadership ranks and we’re opportunistic in deploying capital driven by our improved balance sheet. As a result, we entered 2021 in a position to capitalize on the foundation we built and worked to fortify through the pandemic. It was time to leverage the infrastructure that we had put in place and to tangibly demonstrate all the progress we have made and how it translates into material bottom line results. First, our refined focus and commitment to process led to numerous improvements across our business. Consistency and scalability are what we strive for. And over the course of 2021, we took the next steps in getting there. Our decision to sell Canadian Power Systems unit was the direct result of our desire to streamline our focus on the right end markets, the right clients and the right solutions. We believe simplifying our business will lead to greater consistency of focus. We also took tangible steps to ensure we can scale our next wave of growth will productively and efficiently even before. We augmented our commitment to our processes with investments in new technology. Our teams are upgrading our front-end and back-end systems that will translate that RCM into driving not only more business but doing so more profitably in the future. Through the primary phase of our modernization effort, including upgrade of the company’s CRM, ERM and marketing infrastructure will continue through 2022. We are already starting to see results. Furthermore, this process has provided further enhancement to our company culture from one that was content being more of a fast follower to one that strives to be an industry leader. Constant innovation throughout the organization is essential to gain on the competition in today’s dynamic environment. Second, our right-sized balance sheet gave us the flexibility to play offense, both operationally and financially. From an operational perspective, we leveraged this flexibility to reinvest in our people and upgrade our leadership ranks. I never felt more confident about the team we have assembled and believe we are positioned well to navigate the opportunities of the future. Third, we are clearly taking share in many of our end markets. I do not remember a time where we were able to displace as many incumbents as this year. I believe the pandemic exposed the deficiencies of our competition leaving us in a position to capitalize as a result of significant investments made in the enterprise, its talent and fostering a culture with a maniacal focus on delivering first-class solutions for our clients. All of these efforts have translated into a step change in performance for RCM Technologies. I will share more highlights before Kevin dives deeper into the numbers. As mentioned, our fourth quarter and 2021 results were strong across the board. Revenue contributions from life sciences and information technology, healthcare and engineering were all robust with each division demonstrating growth both on a year-over-year basis and sequentially. In total, RCM Technologies increased revenue to $203.9 million in 2021, a 36% increase above 2020 results. Profitability also increased materially in 2021 with the company generating adjusted EBITDA of $11.1 million, compared to $1.1 million in 2020 and $8.2 million in 2019, representing an increase of 944% and 35% respectively. As we look to 2022 and beyond, the future of RCM Technologies has never been brighter. Now I will highlight just a few secular trends that bode well for our business in the future. We have the team, the infrastructure and the strategic direction to assist our clients in solving some of the most difficult problems facing society today. Starting with the great talent shortage and many industries are experiencing as of late. This problem is one that cannot be solved overnight. To illustrate the scale of this dilemma, consider the following

[Kevin Miller:]

Thanks, Brad. Regarding our consolidated results, revenue grew $19.4 million sequentially over Q3 2021 and $23.8 million on a year-over-year basis compared to Q4 2020. After removing the impact from our now exited Canada Power Systems Group, we grew by $27 million or 71% as compared to Q4 2020. It is worth reiterating the broad-based strength in revenue contributions we saw from each segment as they all meaningfully grew both sales and contribution operating profit sequentially and year-over-year. Gross profit expanded to $17.8 million, a 46% increase from Q3 2021 and a 66% increase from Q4 2020. Adjusted EBITDA in Q4 2021 was $5.3 million, representing a sequential increase of 192% and $4.6 million or 400% increase over Q4 2020 adjusted EBITDA. Our profitability metrics all demonstrated material improvement and illustrated the significant operating leverage we have in our model, despite the $2.5 million year-over-year increase in SG&A expense driven by the hiring of new staff and rewarding our employees for strong operational performance in 2021. Turning to our Healthcare segment. The group generated revenue of $34.8 million in Q4 2021, which represents an 87% increase on a year-over-year basis and a 77% increase sequentially. Performance within the Healthcare segment was broad-based. Our Life Sciences and Information Technology segment also performed well, with revenue and profitability, both up sequentially and year-over-year. On revenue, we generated $11.9 million in Q4 2021 compared to $8.2 million in Q4 2020 and $9.3 million in Q3 2021, growing 46% versus prior year’s performance and 27% sequentially. The level of client interest in our managed service solutions remains robust as the group’s leadership team continues to execute well on their transition to a stickier revenue model. Lastly, turning to our Engineering segment, we generated revenue of $18.3 million in Q4 2021, growing both sequentially and year-over-year. After removing the impact of Canada – of our Canada Power Systems Group, our revenue in Q3 2021 and Q4 2020 was $16.0 million and $11.2 million, respectively, growing 14% sequentially and by 63% year-over-year. The division also generated a material improvement in its profitability metrics, demonstrating a sizable increase in contribution operating income both sequentially and on a year-over-year basis. At the unit level, the new additions to our aerospace team have hit the ground running and have made significant inroads transforming the business. In 2021, we established commercial relationship with multiple new OEM clients, including making strong inroads into the burgeoning space ecosystem. We look forward to sharing more about their progress with you as we move through 2022. Our Energy Services team also performed well. The unit’s investments in its leadership team and systems are paying dividends as the group’s business pipeline and overall client activity levels continue to develop. Lastly, our Process and Industrial unit performed well in 2021, and we are very encouraged by the level of business activity that we’ve seen thus far in 2022. Collectively, as strong as our performance was in Q4 2021, we’re equally optimistic about the future of our company. We truly believe we are building something unique and special that is set to capitalize on the long-term secular growth markets of tomorrow. This concludes our prepared remarks. At this time, we will open the call for questions.

[Operator:]

And our first question is coming from Alex Rygiel from B. Riley. Alex, your line is now open.

[Alex Rygiel:]

Congratulations on a really strong quarter and year gentlemen. A couple of quick questions here. So first, can you quantify the share gain in some way within the specialty health care segment?

[Brad Vizi:]

Hi, Alex. Though we can’t specifically quantify the share gain what I will say is just generally speaking, is we believe we’ve taken share in all three businesses with very specific displacement of incumbents. So health care is certainly a bright spot, but I wouldn’t necessarily limit the statement to health care.

[Alex Rygiel:]

And just to help us to sort of think about and model the health care segment, sort of going forward 12 months, can we use the fourth quarter as a good baseline for let’s just say sort of like 100% of activity level, everybody is back at work or is back to school. And sort of that’s kind of a normalized quarter and then layer on seasonality over the next four quarters and layer on kind of future growth or gains. Is that how we should think about this most recent fourth quarter? Is that a good baseline?

[Brad Vizi:]

Yes. So though we don’t give guidance, what I will say is we certainly intend on growing the health care business. And there are a number of initiatives and programs in place that not only show promise, but frankly they’re crystallizing as we speak. So I wouldn’t necessarily point to this past quarter as being a static run rate. So if that answers your question without giving guidance.

[Alex Rygiel:]

No, that is helpful for sure. And then is there any chance you could update us on backlog or maybe sort of maybe talk about, how bid opportunities or some sort of backlog measure that you look at internally has maybe changed over the next 12 months and how that gives you good visibility into 2022?

[Brad Vizi:]

Yes. Backlog is very strong. Activity has picked up markedly as we referenced in prior calls in all three of our Engineering businesses and that is converting to backlog. And again, the pipeline continues to refill. So ultimately, we expect good things going forward from our Engineering businesses.

[Alex Rygiel:]

Thank you very much.

[Operator:]

Our next question is coming from Bill Sutherland with The Benchmark Company. Bill, your line is now open.

[Bill Sutherland:]

Thanks. Good morning guys. Tremendous job. So curious about what you’re seeing in terms of pricing across your three segments? And maybe I’m thinking particularly about health care, realizing your focus is not like the guys with big travel nurse businesses. But whether as you look forward, there’s any rate normalization that you think could be occurring this year.

[Brad Vizi:]

Yes. No, that’s a good question, Bill. And I think you’ve been tracking the space. And I think there’s a perception that some of the elevated bided rates of late have been directly the result of COVID. But I would – we think about it a little bit differently. We simply respond to the environment, and that environment continues to be tight. So rates have been resilient. We anticipate them continuing to be resilient. That being said, we will react to the market. But we have not seen any material changes.

[Bill Sutherland:]

Okay. And then with all the opportunities on your plate, how are you thinking about your capital deployment strategy for this year?

[Brad Vizi:]

Yes. You followed us for a while, Bill. We tend to be pretty balanced in our approach, as you know, whether it’s returning capital to shareholders via share buyback, dividend or opportunistically pursuing acquisitions. I’d say we’re getting to a point where our balance sheet gives us a great deal of flexibility moving forward, particularly in light of our EBITDA trajectory. So what I’ll say is we take a lot of pride in our capital allocation discipline and our track record. We’re going to continue to do that. And frankly, we look forward to being a very enviable position with respect to our ability to react to opportunities that we frankly haven’t been in the recent past. So we’re agnostic. We are going to allocate capital where we think the returns are. So while rewarding shareholders along the way, of course.

[Bill Sutherland:]

So growth will not diminish the recent return strategy you’ve had for shareholders?

[Brad Vizi:]

We are comfortable with our capital structure. And again, we will balance flexibility of it with returning capital to shareholders as we’ve done historically.

[Bill Sutherland:]

Okay. Good. Kevin, just a couple of number questions. Noticeably, very strong gross margins in Engineering and IT in quarter. Should we think about those as sustainable? Were there any special factors?

[Kevin Miller:]

Yes. No, I think you definitely should look at them as sustainable. I mean as you know, we’re going to have variability from quarter-to-quarter, right? That’s not going to change. But I think when you look at the range, like a range of where we were in the fourth quarter; I think that’s a pretty good range. If you sort of look at that compared to some other quarters. But there’s nothing going on in the fourth quarter margin that is unsustainable or a onetime event.

[Bill Sutherland:]

Okay. And then last – okay. And then the effective tax rate was much lower than that happened. Is there something in the quarter?

[Kevin Miller:]

Yes. I mean – there’s a few things going on there, but we had some decent contribution from Serbia – we had a few adjustments in there as well. When you see the K, you’ll see the rate rec. But it’s – the tax rate is probably a little bit low in 2021 compared to where we’re going to see it going forward. I think if you’re assuming like maybe 28%, 28% to 28.5% is a safe number. Hopefully, we can beat that through tax planning and whatnot, but that’s probably a decent assumption for your model.

[Bill Sutherland:]

Okay. Well, I’ll follow up with you later, a few details. Thanks gentlemen, great job.

[Operator:]

There are no more questions in queue.

[Brad Vizi:]

Thank you for attending RCM’s fourth quarter conference call. We look forward to our next update in May.

[Operator:]

Ladies and gentlemen, this concludes your call. You may now disconnect.