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RCM Technologies reported mixed results for Q4 2024, with earnings per share (EPS) of $0.49 falling short of the forecasted $0.81, while revenue slightly exceeded expectations at $76.91 million compared to the forecast of $76.27 million. The stock reacted negatively, dropping 15.02% to $15.16 in after-hours trading, reflecting investor concerns over profitability despite solid revenue figures. According to InvestingPro data, the company trades at an attractive P/E ratio of 7.2x, suggesting potential value despite recent challenges. Two key InvestingPro Tips highlight management’s aggressive share buybacks and analysts’ upward earnings revisions, with 10 additional insights available to subscribers.
Key Takeaways
- RCM Technologies missed EPS expectations by 39.5%.
- Revenue exceeded forecasts by 0.84%, reaching $76.91 million.
- Stock price fell by 15.02% following the earnings release.
- Strategic initiatives in AI, ML, and energy services show growth potential.
- Increased SG&A expenses and reduced adjusted EBITDA impact profitability.
Company Performance
RCM Technologies’ overall performance in Q4 2024 revealed a challenging quarter, particularly in terms of profitability. While revenue growth remained robust, operational challenges, including project cancellations and increased expenses, impacted earnings. The company is focusing on strategic initiatives such as AI and energy services expansion to drive future growth.
Financial Highlights
- Revenue: $76.91 million, up slightly from forecasts.
- Earnings per share: $0.49, missing the forecast by $0.32.
- Adjusted EBITDA: $6.3 million, down from $8.9 million in Q4 2023.
- Fiscal 2024 gross profit: $79.8 million, up from $76.7 million in 2023.
Earnings vs. Forecast
RCM Technologies reported a significant EPS miss, with actual earnings falling short of expectations by 39.5%. However, revenue slightly exceeded forecasts, indicating strength in sales despite profitability challenges. The EPS miss is notable compared to the company’s historical performance, highlighting operational difficulties.
Market Reaction
The stock’s 15.02% decline reflects investor disappointment, particularly regarding the EPS miss. This movement positions the stock closer to its 52-week low, underscoring the market’s concerns about profitability and cost management.
Outlook & Guidance
Looking forward, RCM Technologies remains optimistic about 2025, targeting low double-digit quarterly adjusted EBITDA growth. The company is focusing on strategic market segments, including AI and energy services, to capitalize on emerging opportunities and drive future growth.
Executive Commentary
- Brad Veasey, Executive Chairman, expressed optimism for 2025: "We enter 2025 with considerable optimism."
- Kevin Miller, CFO, emphasized growth targets: "Our goal for all quarters in fiscal 2025 is at least double-digit growth on adjusted EBITDA."
- Miller also noted the company’s commitment to hitting targets: "If we don’t hit those numbers, then it’s a failed quarter."
Risks and Challenges
- Ongoing cost management issues, particularly in SG&A expenses.
- Potential impact of project cancellations on future earnings.
- Competitive pressures in core markets such as energy and aerospace.
- Uncertainty in macroeconomic conditions affecting client demand.
Q&A
During the earnings call, analysts inquired about the one-time tax rate increase and the impact of project cancellations. The company clarified that the project cancellation was client-specific and not politically motivated, and noted no direct impact from recent tech industry workforce reductions.
Full transcript - RCM Technologies Inc (RCMT) Q4 2024:
Kevin Miller, Chief Financial Officer, RCM Technologies: Good morning, and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I am joined today by Brad Veasey, RCM’s Executive Chairman. Our presentation and this call will contain forward looking statements. The information contained in the forward looking statements is based on our beliefs, estimates, 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 eight K that we filed 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 Veasey, Executive Chairman, to provide an overview of RCM’s operating performance during the quarter.
Brad Veasey, Executive Chairman, RCM Technologies: Thanks, Kevin. Good morning, everyone.
Kevin Miller, Chief Financial Officer, RCM Technologies: Yes, Kevin. We demonstrated strong
Brad Veasey, Executive Chairman, RCM Technologies: top line momentum as many of our strategic initiatives gained traction. Though our profitability in Q4 was a disappointment, there is a clear delineation of discrete items that materially impacted the quarter and are not indicative of earnings power. Kevin will walk you through the details to help provide a better sense of a more normalized figure that is in line with our expectations for the business. Perhaps most important, the internals of the business are in very good shape. Despite the tragic wildfires in Los Angeles and a number of school closings, we are witnessing a resumption of growth in hours and increasing activity throughout most of the business.
Though the economy is migrating through a period of increased macroeconomic uncertainty, we take great care in working to insulate the business from these forces. In fact, we enter 2025 with considerable optimism due to the continued effort of our devoted employee base to position the business for secular success. I will now provide an update on the progress of each of the business units. RCM Healthcare closed 2024 on a high note that includes the resumption of growth in hours as we lap the strategic de emphasis of a slow paying long term care client. Our existing school district partnerships continue to deepen with increasing client penetration and a growing number of providers.
Additionally, we headed to 2025 with a robust pipeline of new school districts and clients positioning us for continued expansion. Many of our long standing contracts, which have matured into well established business lines, are also experiencing good growth. The continued expansion within these accounts reflects both the strength of our relationships and the quality of our services. Forward to our strategy, with increased value we deliver to each of our strategic accounts comes commensurate share gains and increased defensibility. A key driver of our growth in K-twelve has been the surging demand for behavioral health services.
Schools across the country are facing an unprecedented mental health crisis among students with an estimated one in five children experiencing a mental health disorder and the demand for school based behavioral health services has continued to grow. School districts increasingly prioritize mental and behavioral health support, leading to a surge in demand for specialized providers, including school psychologists, social workers, paraprofessionals and behavioral therapists. As a result, our ability to rapidly deploy highly qualified professionals has positioned us as a leader in addressing this critical need. We are also excited about the strong performance of our corrections clients. We demonstrated impressive growth in 2024.
This sector remains a key area of opportunity and we anticipate further expansion in the year ahead. Consistent with the strategy we employ throughout the company, we aim to benefit from the success of our initial accounts and leverage our learnings to tailor solutions that will allow us to further penetrate the market segment. As we move into 2025, we remain committed to smart growth, operational excellence and delivering unparalleled service to our clients. We look forward to capitalizing on the exciting opportunities ahead and building on the strong foundation we have established. In Q4, financial indicators for our Life Sciences, Data and Solutions division continued to show improvement as we delivered continued positive growth of our managed service contract portfolio.
Q4 revenue projections were in line with our expectations, exceeding GP and NOI targets for the quarter. Fourth quarter managed services growth also reflects further cost savings measures, including offshore delivery and productivity tools. In our HCM division, we continue to exceed quarterly quotas by utilizing advanced quality improvement techniques and creation of support utilities. We continue to deliver successfully on our managed solution initiatives and secured three new clients. Furthermore, RCM was awarded a multiyear renewals for three of our managed service engagements demonstrating client loyalty and consistent quality delivery.
Overall, our Q4 performance reflects the efforts the division has invested in securing long term extended managed services contracts. 2025 will see a dramatic shift in our primary markets. Traditional IT services of business analysis and application development will be replaced by deployment of AI and ML tools that support key process automation. We have positioned ourselves to assist our clients to adopt these new paradigms and create opportunities for competitive advantage. Transitioning to engineering, starting with energy services, Demonstrating robust annual growth, 2024 was another year of strong performance.
Energy services’ customer oriented mindset was key to promote this growth and to meet the requirements of the power and utility industry. The continuation of professional high quality service execution was well received by major energy utilities in North America, resulting in further negotiations for upcoming large scale projects. These include the grid modernization of The U. S. And increased demand for data center developments serving as a rapidly emerging driver of growth for RCM.
Additionally, Energy Services EPC Group developed a teaming agreement with a major construction company for executing large upcoming turnkey projects. RCM Europe continues to demonstrate strong progress With a third EPC project awarded and several new projects in negotiation, we are looking forward to our German office providing a healthy contribution in 2025. We are particularly pleased with the quality of the talent we have been able to secure in a talent constrained environment. RCM’s reputation as a thought leader and significant contribution to internationally recognized projects is paying dividends. Particular’s care and scaling up our core team of professionals helps ensure solid project execution and lays the foundation for RCN to become a long term trusted partner for Europe’s energy transition as we add a second large utility in Germany to our world class client list.
Energy services continued to contribute with active leadership roles in major technical associations such as IEEE PES and SF6 and Alternatives Coalition hosted by NEMA. The team will participate in the Segre Colloquium twenty twenty five and will be a sponsor and main contributor to the IEEE PES substation meeting in New Orleans in May. In Process and Industrial, the RCM Thermal Kinetics office has successfully designed and launched a new plant expansion program, primarily focused on the ethanol industry. The next campaign has already resulted in an equipment order for $3,500,000 The project expands a plant from 85,000,000 gallons per year to 100,000,000 gallons per year. The team has received several quality leads from marketing and client outreach efforts.
The office expects two to three additional engineering orders in Q1 and Q2 for next projects. We believe the twelve to eighteen month ROI our solution targets for clients will result in additional equipment orders following our front end engineering efforts. Also of note, Thermal Kinetics has completed an engineering order to develop novel solution chemistry for a customer planned lithium facility in The U. S. A several month pilot campaign at the Teekay Test Center is expected to begin in Q1 utilizing brine extracted from U.
S. Base wells. The equipment for this facility is scheduled for purchase in late twenty twenty five. This project is a great example of the strength that Thermal Kinetics Test Center brings to the team. We believe the ability to prove the simulated chemistry greatly improved the likelihood of our selection as a process engineering lead for the project.
The test center also concluded a challenging evaporation test for a U. S. Based client for an expansion project in Mexico. This is another example of utilizing testing capabilities as a route to market. The $7,500,000 equipment order associated with this test is planned for early Q3.
Thermal Kinetics is continuing efforts to finalize an expanded partnership agreement with a U. S. Based client. Teekay has been an exclusive vendor utilized for the past seven years to support this customer’s proprietary CO2 capture and conversion plants. The team remains focused on continuation of their emergence as a market leader in responsible and sustainable chemical process design.
The Aerospace and Defense Group continued to win business on new programs with existing and new clients in Q4 twenty twenty four, which allowed us to consistently grow our resource base. Headcount has increased an additional 20% in Q4 twenty twenty four over Q3 twenty twenty four, which was already a significant increase over the first half of twenty twenty four. As projected, we have realized a healthy increase in EBITDA for 2024 compared to 2023, and the weekly run rate continued to increase an additional 65,000 in Q4, which amounted to a top line increase of $1,300,000 quarter over quarter. As previously mentioned, the RFIs, RFQs and MSAs that were finalized in 2024 have allowed us to realize an aggressive increase in headcount revenue and profit, which we expect to continue to increase through 2025. Our vertical of customers and technology innovator customers doing business with the U.
S. Government and Tier 1s has reinforced our expansion across air, land, sea, space and cyber. We have also experienced growth throughout new design programs in engineering as well as established long term supported products in manufacturing with increased aftermarket demands as well. All anticipated requirements throughout our customer base in Q4 twenty twenty four have now been surpassed as we begin 2025 in a much better place than years past. The recruitment team continues to build trusted, valued relationships throughout the client and candidate base, which has allowed this team to exceed all hiring expectations in 2024.
We continue to embark on new tools and technologies to maximize the reach and efficiencies of this team. One of our newest awards have just begun to gain traction and we expect these new multi year contracts to drive and expand our model based expertise, software, systems, logistics, avionics and aftermarket expertise throughout 2025 and 2026. We expect to continue to grow with all our aerospace and defense clients in 2025 and beyond as we are the cost effective, flexible and high quality workforce solution that is needed in this environment. We look forward to solidifying additional clients and program wins in 2025. Now, I will return the call to Kevin to discuss the Q4 twenty twenty four financial results in more detail.
Kevin Miller, Chief Financial Officer, RCM Technologies: Thank you, Brad. Regarding our consolidated results, consolidated gross profit for fourth quarter of twenty twenty four was $21,600,000 flat as compared to the fourth quarter of twenty twenty three. Consolidated gross profit for fiscal twenty twenty four was $79,800,000 compared to $76,700,000 for fiscal twenty twenty three. Adjusted EBITDA for the fourth quarter was $6,300,000 as compared to $8,900,000 for the fourth quarter of twenty twenty three. Adjusted EBITDA for fiscal twenty twenty four was $25,900,000 compared to $26,600,000 for fiscal twenty twenty three.
Adjusted EPS was $2.03 for fiscal ’twenty four as compared to $2.04 for fiscal twenty twenty three. During Q4 ’twenty four, we had several material expenses move in the wrong direction. In our engineering group, a significant industrial process equipment order was abruptly canceled midway through the project. Also, our technical publications group experienced significant rework on a large project with one of our aerospace clients. These two items caused an approximate $900,000 reduction in gross profit in Q4.
Additionally, our self insured medical plan had abnormally high medical costs that increased SG and A expenses by about $1,250,000 from what we would normally expect. We settled a class action lawsuit regarding California wages in 2023, but the judge denied the initial settlement in 2024 and sent it back to the attorneys. We had to go back to mediation. We now have an approved settlement agreement, but it added about $450,000 in SG and A expenses between the increased settlement costs and the additional legal fees. As for segment performance in the fourth quarter of twenty twenty four, in engineering, gross profit for the fourth quarter of twenty twenty four was $5,200,000 compared to $6,100,000 for the fourth quarter of twenty twenty three.
Gross profit for fiscal twenty twenty four was $22,500,000 compared to $20,600,000 for fiscal twenty twenty three. Gross margin for the fourth quarter of twenty twenty four was 19.7% compared to twenty seven point zero percent for the fourth quarter of twenty twenty three. Gross margin for fiscal twenty twenty four was 23.4% compared to 24.3% for fiscal twenty twenty three. Gross margin in the fourth quarter of twenty twenty four was very low, primarily due to the two expenses mentioned earlier, but also because we had a high mix shift of lower margin work in Q4. Our engineering gross margins can be very volatile, but we generally expect them to land between 2428%.
In IT, life sciences and data solutions, gross profit for the fourth quarter of twenty twenty four was $3,900,000 compared to $4,500,000 for the fourth quarter of twenty twenty three. Gross profit for fiscal twenty twenty four was $14,700,000 compared to $16,200,000 for fiscal twenty twenty three. Gross margin for the fourth quarter of twenty twenty four was 40% compared to 38.7% for the fourth quarter of twenty twenty three. Gross margin for fiscal twenty twenty four was 37.5% as compared to 38.2% for fiscal twenty twenty three. We generally expect IT, life sciences and data solutions gross margins between 3640%.
In healthcare, gross profit for the fourth quarter of twenty twenty four was $12,500,000 compared to $11,000,000 for the fourth quarter of twenty twenty three. Gross profit for fiscal twenty twenty four was $42,500,000 compared to $39,900,000 for fiscal twenty twenty three. Gross margin for the fourth quarter of twenty twenty four was 30% compared to 29.8% for the fourth quarter of twenty twenty three. Gross margin for fiscal twenty twenty four was 29.8% as compared to 29.3% for fiscal twenty twenty three. We generally expect healthcare gross margins to be between 2830%.
School revenue for the fourth quarter of twenty twenty four was $34,900,000 compared to $29,800,000 for the fourth quarter of twenty twenty three. Non school revenue for the fourth quarter of twenty twenty four was $6,200,000 compared to $6,900,000 for the fourth quarter of twenty twenty three. However, if we remove a large long term care group where we deliberately reduce services, revenue would be $5,600,000 in 2024 versus $5,500,000 in the fourth quarter of twenty twenty three. Regarding our trade accounts receivables, we made some headway this quarter going from 114 DSOs for the third quarter of twenty twenty three to 92 DSOs for the fourth quarter of twenty twenty four. We had two balances at the end of fiscal twenty twenty four, both of which were cleaned up in the first quarter of fiscal twenty twenty five.
First, a large school client stopped payment early in the fourth quarter due to administrative issues unrelated to the company. The company estimates that this school client’s 12/28/2024 accounts receivable balance exceeded normalized levels by about $6,000,000 An IT, life sciences, data and solutions client stopped making payments while we negotiated change orders and a two year contract extension. The company estimates that the client’s ’28 excuse me, 12/28/2024 accounts receivable balance exceeded normalized levels by approximately $3,800,000 Our goal for DSOs is to get to under $80,000,000 by the end of fiscal twenty twenty five. Our goal for all quarters in fiscal twenty twenty five is at least double digit growth on adjusted EBITDA, and we are very optimistic about 2025. We’ll give more guidance as the year progresses and we’ll have another call in May, which is not too far away.
This concludes our prepared remarks. At this time, we will open the call for questions. All right. We do have a William Duberstin. Your line is now open.
William Duberstin, Analyst: Hey, guys. Nice to talk to you again and thanks for all that detail on the extra costs. You went through a bunch of line items and I might have missed this, but it looks like you’re was any of that realized in the tax rate? Because it looks like the tax rate was over 50% this quarter. I’m not sure.
Kevin Miller, Chief Financial Officer, RCM Technologies: Yes. Sure. So, Bill, the tax rate obviously in the fourth quarter is a function of the tax rate for the year, right? So, you really can’t look at the tax rate in the quarter. You need to look at the effective tax rate for the company overall.
And the effective tax rate is 34. When we file the 10 ks later, you’ll see a rate reconciliation. Certainly, if you have any questions on it, feel free to give me a call. But I’ll just say that the 34 effective tax rate is very, very high for us and very abnormal. And what is driving a big chunk of that is permanent differences having to do with truing up deferred tax liabilities, right?
So it doesn’t impact your cash taxes, but it impacts your GAAP taxes. So about 5% of that is stuff that we don’t normally that we don’t normally see. So the upshot of it is, absent anything I’m not aware of, we should not see a tax rate anywhere near 34% next year at effective tax rate. It should be well below 30%.
William Duberstin, Analyst: Do you have a range of what so called normal tax rate might
Kevin Miller, Chief Financial Officer, RCM Technologies: Sure, sure. I would say normal a range would be 26% to 29% and probably the midpoint of that is probably a pretty good guess. The more we make the more pretax we make, obviously that rate is going to come down some because your permanent differences have a lower impact on your rate. But in a normal year, we don’t typically have big, big permanent differences. So if you ignore permanent differences altogether, our rates are around 26.5%.
But if we were above 27.5% next year, it would surprise me on an effective tax rate basis.
William Duberstin, Analyst: And for the specific costs on engineering, I think you called out an order being
Kevin Miller, Chief Financial Officer, RCM Technologies: $900,000 The $900,000 Total for the two items that occurred. And that’s an increase to direct costs essentially. It’s a combination of increased direct costs and essentially lost revenue that we expected to get in the fourth quarter. So you wind up with a little bit lower revenue and higher costs and the end result is about $900,000 in lower gross profit than we would have had absent those two items.
William Duberstin, Analyst: Right. So sorry, was one item resulting in lower revenue and one item increased cost?
Kevin Miller, Chief Financial Officer, RCM Technologies: No, they’re both resulting in lower revenue. Obviously, the canceled order reduced revenue. And then when we have people doing rework, they’re essentially working with hours that would normally be billable and would normally generate revenue, and you’re not generating any revenue because we’re doing work for free essentially. So in that case, it’s you’re losing revenue on people that normally would be generating revenue. So it’s both.
You have higher and you wind up with a real crush to your gross profit dollars and your gross margin.
William Duberstin, Analyst: And the client doesn’t recompense you for the work done to that before the project was canceled?
Kevin Miller, Chief Financial Officer, RCM Technologies: Well, yes. But we certainly cut it off. But the way the contract works, we still lose significant revenue by canceling the order midstream. Had we completed it, we would have delivered equipment that we would and we would have made a lot more money on it than having a canceled order.
William Duberstin, Analyst: Right. And I don’t know if you can go into these details, but did that canceled order have anything to do with sort of the change in administration? Obviously, the election happened during November. I was just wondering if either that was a result of a change in The UK?
Kevin Miller, Chief Financial Officer, RCM Technologies: No. No. There’s no political factors there. It’s just a nuance with a particular client.
William Duberstin, Analyst: Okay. And I guess that led me to wonder if there’s any sort of effect you’re seeing from maybe like Doge or any sort of headlines that are out there, considering some of your clients are government contractors or may receive money from some government agencies?
Kevin Miller, Chief Financial Officer, RCM Technologies: No direct nothing direct. I mean, I think Doge can potentially have some impact on the IT environment in general, not talking about RCM. I mean, we don’t do most of our work for government is working as a subcontractor and most of that work is in the aerospace industry. And we don’t as of today, we don’t expect any major impact. Certainly, if a lot of IT workers are getting laid off because of Doge, that can impact the IT environment in general.
But we don’t see any direct link as of today to any major impact on RCM. And I’m sure Brad probably could expand on this, but that’s what we’re seeing today.
Brad Veasey, Executive Chairman, RCM Technologies: Yes. I’m just really, I’d just echo Kevin’s sentiments. The other thing I see playing out, right, we seem to generally be insulated from when you start to think about services business and particularly ours, the times where you do have blips and material reductions in workforce, inevitably they overshoot, right? And so the first ones actually come back to the big contractors like us, right? So as I see all this playing out just like you do, and we’re again managing the business every single day to continue to move the ball on the field, and we’re not really seeing an impact.
The more I see this play out, the more I think to myself, at some point, these reductions in workforce, when are we going to be on the right end of overshooting, right? So in other words, make these government reductions, you’re bringing people back, right? Those people that you just let go, oftentimes they are dispersed into the broader economy and they find different jobs and you have a gap you have to fill pretty quickly. So it’s too early and there’s too much uncertainty with respect for me to pound the table either way. But it hasn’t been an impact today and we’re optimistic that at some point it may actually be a tailwind.
William Duberstin, Analyst: Okay. That’s encouraging. And sorry, my final thing. It looks like absent those one time charges, you guys would have grown operating income a little over 12%. So, that’s obviously much better.
And did you say you were looking towards double digit bottom line growth every quarter or for the full year? I was wondering if there
Kevin Miller, Chief Financial Officer, RCM Technologies: was a side. Yes, at least that for the full year, right, because we had a disappointing fourth quarter. But we strive to grow our adjusted EBITDA quarter over quarter, every quarter in the low double digits. That’s our goal, okay, is to grow at least in the low double digits. And we don’t see any reason why we can’t accomplish that in 2025.
I mean, Q4 twenty twenty five is sort of a long ways away. I don’t think we’re going to see sort of the hockey stick in numbers that we saw in 2023, and which we thought we might see in 2024 that we didn’t see. But our expectation as a company is to grow adjusted EBITDA low double digits every quarter. And if we don’t, then it’s a failed quarter, frankly. And that’s how we ring it up on the scorecard.
If we don’t hit those numbers, then it’s a failed quarter. So and as we look out at 2025, we’re optimistic. And we don’t see any reason why we can’t hit our goals. So, I’ll just leave it at that.
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