RCM Technologies, Inc. (NASDAQ:RCMT) Q1 2019 Earnings Conference Call May 9, 2019 10:00 AM ET
Bradley Vizi - Executive Chairman
Kevin Miller - CFO
Conference Call Participants
William Sutherland - The Benchmark Company
Daniel Drawbaugh - B. Riley FBR
Good morning and welcome to the RCM Technologies, Inc. earnings conference call. Your host, Bradley, you may now begin.
Good morning, everyone. This is Bradley Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2019 first quarter earnings call. I'm joined today by Kevin Miller, our Chief Financial Officer.
Kevin will begin with the legal disclaimer, and then I will summarize the operating results for each of our business units before opening it up for questions. Kevin?
Good morning, everyone. 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 filed with the SEC as well as our press releases that we issue from time to time.
Thanks, Kevin. We are pleased with our first quarter and fiscal 2019 results relative to recent expectations. More importantly, we continue to believe we are poised for strong second half performance in fiscal 2019. I will discuss each division separately.
Our Specialty Health Care staffing group set another quarterly record with $24.2 million of revenue, growing by 6.8% over the first quarter of 2018. The major driver of 2019 growth was our school business. We generated $18 million in the first quarter of 2019 from all of our school contracts versus $15.1 million in the first quarter of 2018, growth of 19%.
We expect growth to continue to be robust throughout 2019. Our HIM practice also performed well of $1.4 million in revenue, approximately 16% growth over the prior year. Our engineering revenue of $19.1 million declined by approximately 11% as compared to fiscal 2018.
As we discussed in our last earnings call, our engineering segment saw some softness this quarter, in large part due to timing of certain anticipated contract awards and a particularly strong start to 2018. We have no change to our outlook to report since our last call. That we anticipate project timing to be a challenge through the second quarter, we expect a steady increase in financial performance as the year progresses with the potential for a material uptick in the second half of 2019.
Specifically, we are currently in final stages of contention for 2 $50 million EPC contracts with major U.S. utility clients. Larger projects are inherently longer duration, providing enhanced visibility and operating leverage to P&L. We are optimistic recent investments made in people, infrastructure and technology will pay long-term dividends.
Our Information Technology group demonstrate a continued strong growth with revenue of $8.4 million in the first quarter of 2019, 24% growth over the prior year, while gross profit grew 34%. Several different business units contributed to the growth. We expect to see continued progress in our Information Technology group. On a consolidated basis, we expect to have a strong 2019 compared to 2018. We continue to invest in new talent and technology to position the business for long-term success.
This concludes our prepared remarks. At this time, we will open the call for questions.
Our first question will be coming from Bill of Sutherland.
I wanted to just dig a little bit into health care, if I could. I know that permanent placement is the one piece -- I know it's small, but it's a gross margin driver. And if you're -- how are you feeling about that as you look forward into the rest of the year?
Yes. Bill, this is Kevin. Well, we're excited about the group that we have. We have some -- we have a half dozen recruiters that have been very, very successful with RCM, several for over 10 years. But the market is a little bit soft, particularly in some of the areas that we're focused on, but we do expect that to turn. We did not have a good first quarter for perm placement revenues.
Just to give you some context, we did about $265,000 in perm revenues in Q1 of 2019 as compared to about $455,000 last year during the same time period. So that business unit is continuing to struggle putting up some of the numbers that they put up in the past, but we're certainly optimistic that we'll get a turnaround in the near term.
Great. And on the school business, as you look forward, is the growth just adding pairs and other clinicians to existing contracts? Are you...
It's all involved, Bill. It's -- we've been adding head count in both New York City and Hawaii, and we've also had some bill rate increase and it's kicking in as well. So it's really both. Not so much Chicago. Chicago, we have not been adding people, but we've been adding people in both New York and Hawaii.
Okay, good. And the -- if you could provide a little color on the gross margin outlook for both engineering and IT. I know engineering is going to be dependent on the awards that's in the pipeline, but in directionally looking at your next mix in IT, do you think it's -- this is a good -- that you're in kind of a good place here at 26%?
Yes, yes. Obviously, there are always things that can happen in any given quarter in terms of utilization issues if we have sort of a project canceled or delayed or -- but certainly, around 26% in IT, I think, is about the right number. Obviously, we'd like to drag that up a little bit, but I think that's a pretty good number.
And I think as far as health care is concerned, where the numbers are right now are a good indication. I think they can come up a little bit as we progress through the year. And as you properly pointed out with engineering, that's the one that we tend to see the biggest swings in since we have little a large fixed-cost workforce.
So when -- so you'll tend to see those jump quite a bit as revenues jump. Obviously, we're not really happy with the gross margin in the first quarter for engineering, but that's more a function of the revenues than anything else. So as -- and so hopefully, the revenues will increase as we go out, so will the gross margin.
And then the last, Kevin, if you could touch on cash flow and touch on capital allocation.
Sure. As far as cash flow is concerned, Q1 was certainly a disappointment. Obviously, we had decent revenue particularly in the health care group, but we were very disappointed with where we ended up on receivables. We also got lots of receipts, some large late checks in the quarter. It unfortunately didn't clear which is why we have such a big cash balance. We don't typically have that kind of cash balance at the end of a quarter, but unfortunately, we weren't able to use that to take -- pay down some of the debt.
But what was driving the poor cash flow in Q1 was mostly related to administrative issues on school contracts, which, unfortunately, tend to flare up from time to time. We just -- well, from time to time, running to some bureaucracy, for lack of a more detailed explanation in some of the schools. And in particular, in Q1, we had our New York City receivables spike by over $5 million. So that was a big driver of the poor quarter-end receivables. We do expect most of that to turn around in Q2, so we should see a much better quarter in Q2 compared to Q1, and then we'll see an even better quarter cash flow lodging in Q3.
And then as far as capital allocation is concerned, this is something where we discuss, headlines in every board meeting. But right now, we're just pretty much focused on paying down the debt because it's a little bit higher than we'd like to see right now.
Our next question will be coming for Dan Drawbaugh.
So just to start, could you update us on Thermal Kinetics, how that may be contributing and the performance you're seeing there in that business unit?
Yes. Thermal Kinetics set a nice quarter. It contributed about $2.6 million in revenues for the first quarter. Their -- that business, and we discussed this in the past, that business historically is very lumpy because they typically have one to three major projects going on at one time and maybe two, three, four small ones going on. So that tends to be a bit lumpy. But we had a nice fourth quarter, and we had a nice first quarter.
The business performed very well. They're -- it's not expected that they'll contribute nearly as much in the second quarter, but we believe that they're potentially poised for a really strong second half/fourth quarter for this year. So we might see a little bit of a trail in their contribution in the near term.
Okay. Understood. And then aside from these 2 large projects that you're seeing in the engineering pipeline, can you provide us a little bit of color, some -- or generally, what sort of strength in that kind of market is for you? What does the pipeline more broadly look like?
Our pipeline in Energy Services is very strong. We have a lot of interesting opportunities, several of which are very big. So -- and some of the smaller ones -- even some of the smaller ones that we have in that pipeline are potentially pretty high margin. So our pipeline in both Energy Services and industrial processing is really strong with a lot of big or -- and/or high-profile opportunities. The pipeline is not as strong in aerospace and our Canadian nuclear operations. But we're optimistic that we'll be able to turn some of this really attractive pipeline into backlog.
Okay. Got it. And then from an OpEx standpoint, you guys have done a pretty good job over the last couple years keeping that in check. Do you have any thoughts on whether there's any kind of incremental savings or spending, things that we should expect over the course this year aside from the usual seasonality in the third quarter?
Well, we're always keeping a very close eye on our SG&A and pruning unnecessary spending. So that's something that is a bit of a religion around here in terms of really sharpening our pencils every quarter and looking to see where we can trim SG&A. Typically, we'll look to reinvest most that in sales-generating activities. We brought on several, several sales -- high-profile sales resources into our -- particularly in engineering in the first quarter alone. So we are reinvesting a lot of that.
In terms of what the SG&A will look like going forward, at these revenue levels, it probably will look pretty similar to where it was in the first quarter. But as we see bigger revenues hopefully, particularly in Q3 and Q4, you'll probably see a little uptick in SG&A just because as we're realizing better gross profit and better operating income, then people will start to get into the bonus zones on their incentive-based comp plans. So we'll probably -- assuming that we see a nice uptick in revenues, particularly in the engineering, we'll probably see a little uptick in SG&A as well. But at this current revenue level, this is -- our SG&A is set pretty well, I think.
Okay. Great. And then could we perhaps dig a little bit into the IT growth? I mean up 24% year-over-year, that's accelerating from the growth in 4Q and then even more so from 3Q. Can you provide a little more color on what's driving that and where you see that going for the remainder of the year?
Well, I think what's driving it is we really kind of transformed the group over the last 9 months, and we're starting to see the results from new and better management that we had in place during its decline. Where we're seeing some of the growth is in our staffing operations and our life sciences. That's where most of it's coming from. And also our solutions unit in Long Island is also performing well. So most of the individual groups we have in IT performed well in the first quarter, and we expect to see that continue as we go forward.
[Operator Instructions] We have no more callers in queue for questions.
Thank you for attending RCM's first quarter conference call. We look forward to our update in August.
Thank you, ladies and gentlemen, for joining today's call. You all may disconnect at this time and have a great day.