RCM Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 7 speakers on the call.

Operator

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 in 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.

Operator

Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward looking statements and the risks and uncertainties and other factors to which they are subject, Please see the periodic reports on Forms 10 ks, 10 Q and 8 ks 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 Veasey, Executive Chairman, to provide an overview of RCM's operating performance during the quarter.

Speaker 1

Thanks, Kevin. Good morning, everyone. Consistent with our prior update, the business cadence continues to accelerate as we move through the year. As such, The Q4 will be our strongest and we expect to exhibit EBITDA growth year over year. Also of note, The outlook for 2024 and beyond is bright.

Speaker 1

Our ability to parlay our high value capabilities into long term partnerships where we continue to deliver increased value into strategic accounts has taken hold. We believe our collection of high value capabilities is unique to the marketplace, serving as a key differentiator for which to land and expand. Internally, We continue to build on our unique structure that fosters innovation and increased depth of penetration within each of our end markets, While increasingly strengthening points of collaboration between groups. Our ability to continue to execute this strategy Will increasing with increasing success will further fuel growth future growth into our secular end markets for years to come. Since we last spoke, progress has been made across each of our divisions that I am excited to discuss in more detail, starting with our Healthcare division.

Speaker 1

The school year is off to a strong start for our Healthcare team. Notably, we continue to add new school accounts while growing our presence within our existing client base. We attribute ongoing success The goodwill we continue to build upon in this end market underpinned by our commitment to supplying highly qualified healthcare professionals to education institutions and other healthcare facilities nationwide. Behavioral Health continues to drive our business at an increasing rate, And we believe we are in the early innings of this much needed upgrade to our nation's social infrastructure. Also, With increased demand for behavioral health services comes the opportunity to further service our clients with other critical healthcare needs, Cementing our status as a partner, not just another vendor, which is core to the RCM business model.

Speaker 1

RCM Healthcare's tailored staffing solutions coupled with a rigorous selection process have bolstered our reputation in the education domain, Solidifying our status as the leader in this segment of the market and the gold standard for treating our nation's youth. As we move forward, we remain committed to sustainable growth, innovation and the highest standard of service. We anticipate further expansion into new markets and the development of cutting edge staffing solutions that meet the evolving needs of the healthcare industry. Our dedication to improving the quality of healthcare services positions us to continue exceeding the expectations of our stakeholders, Driving value for our shareholders and positively impacting healthcare and education in the years ahead. The ability to build Good businesses, while serving a critical need in society and strengthening our communities, resides at the core of our company's values.

Speaker 1

Our Life Sciences and Information Technology Group continues to emerge as a shining star in the portfolio. Though the macroeconomic landscape in information technology was challenging in 2023, including budget reductions across several sectors from high-tech Financial Services, our decision to continue investing in market segments demonstrating secular growth has paid off. The group's overall EBITDA contribution is up nearly 50% year over 55% year over year. As we continue to double down on the winning formula, just this last quarter, we have expanded our life sciences practice in regulatory compliance, ERP Design and Implementation. We are building out our organizational Change management practice, which will further allow us to support our clients across their entire business landscape, while providing improved value through our current delivery models.

Speaker 1

We continue to see positive trends entering the last leg of 2023 have a positive outlook for 2024. In Engineering, Energy Services' strong execution demonstrates Increasing leverage in the model, highlighted by continued delivery of milestones on time for several world class projects, resulting in client satisfaction and solid gross margins. Technical highlights include successfully completing site acceptance tests As part of an E House high voltage application utilizing the IEC61850 protocol. In addition, We were approached to pursue an offshore high voltage GIS substation with a large international operating OEM as part of a potential long term partnership. Also, several vital deliverables were executed on time for Critical infrastructure project with a major utility client in New York.

Speaker 1

This project represents a significant milestone in the clean energy transition in the Northeast In Europe, our newly established office in Germany received recognition as a strong technical partner to support turnkey projects that will transfer the power supply to a carbon free electric grid. We are in the late stages of negotiation for our 2nd major Project award demonstrating increasing client confidence. To serve the increased demand for EPC projects in 2024 and beyond, Energy Services will further expand its EPC capabilities in Europe and North America. We believe the recent addition of a high profile industry veteran to RCM Energy Services leadership team will accelerate the award and execution of EPC projects in the United States and further enable us to prudently evaluate new regional areas such as South America. RCM Thermal Kinetics continues to execute detailed engineering contracts for distillation, evaporation and dehydration technologies employed in the carbon capture and sustainable aviation fuel markets.

Speaker 1

On the equipment side, The office is currently executing 3 concurrent projects for a 0 carbon chemical manufacturing customer, primarily using evaporation and crystallization technologies. The main driver for successfully awarding the orders to RCM Thermo Kinetics is the advanced Energy integration techniques utilized in the design. The RCM Thermo Kinetics engineering expertise Related to energy integration of extensive chemical processes has an obvious tie in to these environmentally responsible projects. It is why customers are standardizing on RCM Thermal Kinetics as their process design and equipment supplier. We recently opened RCM Thermo Kinetics testing facility is beginning to gain traction.

Speaker 1

The coming weeks, 2 purchase orders are expected from clients requesting process feasibility and product profile testing. The office has greatly strengthened ties to local universities to support staffing of the testing lab through chemical engineering internships. The customer support offered through process testing has a track record of receiving additional project orders. It provides the benefit of process risk reduction for both the client and RCM Thermo Kinetics. We expect lab utilization to ramp up in 2024 for new customers and testing related to existing customer projects.

Speaker 1

In addition to our lab, the engineers are now working on the design of a 30 gallon crystallization pilot plant. RCM Thermo Kinetics receives a large number of crystallization inquiries. More than any other technology, crystallization projects benefit from The ability to conduct robust piloting trials to produce product samples for our customers. The current schedule Would have this pilot testing service ready for client use in May of 2024. RCM Thermal Kinetics recently presented at the Advanced IEO Leadership Conference in San Francisco.

Speaker 1

The team has been a member of ABLC for many years and benefits from Building relationships with emerging companies interested in developing new processes that require our technologies. Many of our customers today were cultivated from ABLC meetings over the past 10 years. The sales team has also attended the Aluminum USA show. RCM Thermokinetics has successfully to aluminum production plants in the United States. The team remains focused on Continuing its emergence as a responsible and sustainable chemical process design market leader.

Speaker 1

As for our Aerospace team, The growth and recovery we expect midyear has begun to materialize in the 3rd quarter with 9 new clients, resulting in our weekly revenue rate and headcount increasing, Nearing our historical numbers, we still believe we have the potential to close 3 more new clients before the end of the year, totaling 12 for 2023. We also continue to increase the number of hires quarter over quarter with a total of 40 In the Q3 compared to 30 in the Q2 of 2023. This continued expansion includes new clients in defense, Including sea vessels, land vehicle programs and new vertical lift customers. Expanding existing and new clients with our core expertise and new arenas provides us much desired depth and breadth of the organization and firmly positions us for 2024. As the management team within some of our existing clients continues to change, We have utilized our long term relationships, reputation and expertise to stay relevant.

Speaker 1

We believe we will see traction on one of our most significant awards for a design center well into 2026. We continue to market our digital conversion and methodology within aftermarket and our model based design prowess, which now expands across multiple clients throughout the United States. We have multiple contracts with large OEMs finalized and executed in 2023. We also await a large all encompassing RFP from 1 of the largest defense contractors providing a vehicle to This client across all engineering and aftermarket disciplines. We will continue to expand our reach with these clients and prioritize these types of engagements in 2024.

Speaker 1

We continue to market the S factor, which broadens our reach beyond S1000D publications into S2000M Material Management, S3000L Logistics Support Analysis, S4000P Maintenance and S5000F in service data feedback. We are happy to report that we have our first launch client, which we will support in these expanded areas beyond technical publications. We have reorganized the aftermarket arena to provide opportunities in other areas for our team members, We have increased our business development team for the first time in 2 years. We are excited about the opportunities that this team has already uncovered. Before turning the call to Kevin, I would like to reiterate the financial expectations provided during the Q3.

Speaker 1

We continue to anticipate EBITDA growth during the Q4, a resumption toward our long term objective, which is also in line with our expectation for 2024. I also want to reiterate that as a general policy, we do not give guidance. However, we felt a more granular expectation as we close the year would be appropriate given the advanced macroeconomic noise in the marketplace. I will return the call to Kevin to discuss the Q3 2023 financial results in more detail.

Operator

Thank you, Brad. Regarding our consolidated results, gross profit for the Q3 was essentially flat year over year with $17,300,000 in Q3 'twenty three versus $17,400,000 in Q3 'twenty two. Healthcare gross profit in Q3 'twenty three was $7,500,000 versus $9,000,000 in Q3 'twenty two. There were primarily two reasons for the quarterly decline in healthcare gross profit. First, we believe that Q3 'twenty three was our Q1 where we derived 0 COVID related revenue.

Operator

To give this perspective, if we remove the estimated impact of COVID, we saw our school revenue grow by approximately 25% in September 2023 compared to September 2022. We experienced Similar results in October 2023. COVID also impacts our non school revenue comp. 2nd, We deliberately called the services provided to a multi location continuing care client in the 5 boroughs of New York City and Long Island. At the beginning of COVID, we acted as an emergency VMS to this client.

Operator

As the gross margins from the non direct revenue shrunk Post COVID, we decided that the contribution margin on that revenue was insufficient for our return model. On a year over year basis, our quarterly revenue decreased by $2,100,000 from this client. If we compare Q3 'twenty three To Q2 'twenty three, this client decreased by $1,000,000 sequentially. The decrease in this low margin business helped us grow sequential gross margin to 30% in Q3 'twenty three versus 27.6% in Q2 'twenty three. We grew engineering gross profit in Q3 'twenty three by 5.2% over Q3 2022.

Operator

The growth in gross profit was primarily driven by increased project in our Energy Services Group and getting our engineering gross margin closer to target levels. Our gross margin in Q3 'twenty three was 20 5.0%, a significant sequential improvement from Q2 'twenty three gross margin of 22.9%. We continue to see outstanding results from our Life Sciences and IT group with 38.4% Quarterly growth and gross profit year over year. We are seeing fantastic results as we drive more revenue through our high value, high margin managed service offerings. We hope there is another gear we can get to in Q4 'twenty three.

Operator

As we look to our Q4 of 2023 and our fiscal 2024, we expect all three segments to show good results with growth in adjusted and consolidated adjusted EBITDA. We estimate adjusted EBITDA in Q4 'twenty three between $7,600,000 $8,200,000 Also in Q4 'twenty three, we estimate consolidated revenue between 70 point $1,000,000 $74,000,000 was with a similar gross margin profile to Q3 'twenty three. More granularly, we estimate life sciences and IT revenue between $11,000,000 11,500,000 We estimate engineering revenue between $21,500,000 $23,000,000 We estimate healthcare revenue between $37,500,000 $39,500,000 Since we have discussed some variability and seasonality in our Healthcare segment, We thought it would be helpful to discuss our weighted average school days in 2023. Q1 'twenty three was approximately 55 days. Q22223 was approximately 45 days.

Operator

Q33323 was approximately 27 days. Q4 'twenty three is estimated as about 51 days. So that's about a 7% decline in School Days when comparing Q4 'twenty three to Q1 'twenty three. While we haven't penciled our first budgets yet, We expect a similar cadence to School Days in 2024, except 1 or 2 days may shift from Q1 to Q2. We'll give 2024 estimates on our next call as we have our budgets ready for the year.

Operator

As for fiscal 2024 adjusted EBITDA, we will be highly disappointed if we don't see at least low double digit growth. Our internal goals will undoubtedly reflect a much higher percentage. We are optimistic about growing all three segments in fiscal 'twenty four and beyond. This concludes our prepared remarks. At this time, we will open the call for questions.

Speaker 2

Our first question is going to come from Alex Rygiel with B. Riley. Your line is open.

Speaker 3

Thank you, gentlemen. Very nice quarter and appreciate the added guidance there. Super helpful. A couple of quick questions for you here. First, As it relates to healthcare, what was your revenue from schools in the Q3?

Operator

Schools was 17,400,000

Speaker 3

Thank you. And then your balance sheet is incredibly strong and you talked a bit about So maybe Brad, you could go a little bit deeper on that.

Speaker 1

Yes. Look, as alluded to in the prepared remarks and been pretty consistent with our dialogue the last couple of years, we have these businesses at a point where We have a lot of confidence in a number of places in the portfolio. So we're in a position to be opportunistic with respect to deployment of capital And expansion into new adjacencies. We're not looking to go greenfield into any new Various per se simply because there's plenty of opportunity to build on the core of what we do. So naturally, the first Inclination is to do it organically by bolting on talent.

Speaker 1

And to the extent that there's opportunity inorganically With respect to M and A, we're going to react opportunistically and would anticipate it being more of a bolt on than any type of A major transformational platform type acquisition. So I don't know if that answers your question sufficiently.

Speaker 3

Definitely does. And then as it relates to the engineering segment, can you talk a bit about the backlog there and The outlook for 2024?

Speaker 1

Yes. We feel pretty good about what's going on in engineering. We have increasing momentum with respect to the metric that we track. It's almost like a hybrid pipeline and backlog metrics Given that we feel is appropriate given the mix of our business, it continues to grow. So We're anticipating good things, but engineering inevitably given the nature of the project work.

Speaker 1

It could certainly deviate, but we don't do not Anything substantial, it's a question in our minds as to whether or not it's going to be a pretty good year to Very nice increase year over year.

Speaker 3

And then lastly, as we think about the Q1 of 2023, you mentioned that there were 55 school days And then you mentioned that in the Q3, there were 27 and you had no sort of COVID related revenue. I guess my question here is as we think about the 4th quarter Being 51 days and that's down 7% from the Q1, in the Q1, was there any COVID related kind of Legacy revenue in that Q1?

Operator

Yes, certainly. Yes, but I think we gave pretty clear pretty good guidance for Q4, right? So we do not Expect any COVID related revenue in Q4. And so far, what we've Seeing at least in October is if we look at our schools, okay, which is our core business in healthcare, obviously, we do a lot of work outside of schools, but at the end of the day, We're a healthcare school business, that's our core business in healthcare, right? That grew 25% in September and it grew 25 in October.

Operator

And we think we can we really think we can build from there.

Speaker 3

Great. Thank you very much.

Speaker 2

Our next question is going to come from Ben Andrews from Andrews Capital Management. Your line is

Speaker 4

open. Hey, good morning, guys.

Speaker 1

Hi, Brad.

Speaker 4

A couple of Balance sheet type questions, if I may. Understanding the transit account, I always Thought it was subcontractor related. Is that have a specific industry or segment Well, Eyre, is that your engineering segment or primarily what is that tied to?

Operator

Yes, you got it right. It's tied to engineering and mostly to EPC contracts. So we have several large EPC contracts where we do the E and the P, but we don't do the C. We don't take inventory of the equipment. The equipment we purchase the equipment, but it goes straight from the OEM to the client.

Operator

So we never take inventory of that equipment. And so a lot of that is advanced payments for equipment and Construction.

Speaker 4

Okay. And so what this ballpark Is the revenue stream going to those subcontractors?

Operator

Well, in terms of the It's pretty significant, right? So we have but it's all passed through.

Speaker 4

Right. So that doesn't show up in your income statement, but Then their liabilities or their equipment will show up on your balance sheet?

Operator

No, not the equipment. The equipment never hits our balance sheet, Ben. Essentially, because we never take inventory of it, it's never our equipment, it's at all stages, it's owned by our client. So we're basically moving the equipment and paying for the equipment, but we don't own it. So the equipment itself never hits our balance sheet.

Operator

We get a payment in from the client, and then we get like milestone payments essentially. And we certainly manage those contracts so that we're paid upfront, so we're not putting out huge sums of money for equipment and construction. So the money comes in, We order the equipment, we do the work and then eventually we pay for it. And then more money comes in because these are typically multi year contracts that go from anywhere from 2 to 5 years.

Speaker 4

Okay. So a liability then would already be Revenue earned by that subcontractor?

Operator

Not necessarily. Some of it may be earned, but some of it may not be.

Speaker 4

Okay. So you can book out further than 12 months?

Operator

Yes, obviously, we're not booking any revenue until we actually earn it, right, based on the progress of the contract and based on the amount of engineering that's been done, right? So we do make a small percentage on the equipment and the construction as well. And that also hits our income statement as revenue. Okay.

Speaker 4

Regarding share issuance, it looks like there was a fairly large share issuance in the quarter, maybe 10% of the market cap. And it was clearly larger than any vesting schedule of what was already out there in your queues. What went on in the quarter?

Operator

Yes, I don't know the exact share numbers in front of me, Ben, but I believe that we had about 100,000 Shares issued to probably 20 employees under long term time based restricted share awards. Maybe

Speaker 4

I read it wrong then because I thought it was 800,000 shares.

Operator

No, definitely not.

Speaker 4

Because you finished last quarter a little under 8,000,000 shares and I thought I saw 8,800,000 shares out right now.

Operator

No, it's 7.8, Ben.

Speaker 4

Oh, Okay. I'm sorry. I misread it. Yes. Okay.

Speaker 4

Sorry.

Operator

I have the no problem. I have the queue In front of me, as of yesterday, we had $7,830,293,000 outstanding.

Speaker 4

Okay. Thank you guys for all your hard work.

Operator

Appreciate it. Thank you, Ben.

Speaker 1

Thanks, Ben.

Speaker 2

Our next question is going to come from Bill Sutherland with Benchmark. Your line is open.

Operator

Hi, Bill. Hi, Bill. Hi, guys.

Speaker 5

Hey, following up on Ben's question on the shares. Is that still at the top of the capital deployment list for you guys going forward?

Speaker 1

Yes. Look, Bill, I mean, we always Pretty much anticipate having some form of a buyback in, right? Naturally, as we take in shares and volume decreases, The magnitude has buyback is inevitably going to wane. However, as you see, we continue to be active. We continue to be quite optimistic about our ability to deliver value at the company.

Speaker 1

And so it's safe to assume we're very much committed Deploying capital through that medium.

Speaker 5

Okay. It's It's certainly been very effective. Fred, zooming out a little bit on engineering Thinking about aerospace, getting back on its feet and the just the opportunities, particularly as you broad it out Into defense, but the other areas as well. I mean, how should we think about the kind of Intermediate growth for that group overall, engineering?

Speaker 1

Yes. We're quite optimistic About the future of engineering and you almost look at all three segments, all three units. And with respect to Energy Services, We continue to gain traction. We have a number of very large long term partners as we continue to build confidence project after In some instances, it's a matter of how much we can take on. So really going back to the core of that strategy, leading with technical capabilities that we think are very much differentiated in the marketplace with respect to Kind of our track record and the talent that we've assembled.

Speaker 1

And from there, naturally, as you become a preferred partner, The attachment of incremental work is it can be very substantial. So what you're really seeing there in the case of Our Energy Services group is really years of comp, we're at a bit of a tipping point with respect to Compounding of years of goodwill and kind of earning that trust. So we actually have very high expectations going forward for that business. With respect to Aerospace, Again, a very strong growth orientation to it. Had a bit of a setback very late last year, last 2 weeks or so of the year.

Speaker 1

I'm very happy with how the team dealt with it and rebounded, adding incremental clients, several of which are very significant and present Meaningful opportunity to expand within those accounts. So again, in terms of the upside in that business, we're quite optimistic in 2024 and beyond. And then finally, with respect to process, again, Very, very strong technical capabilities and team. We've clearly invested in that business, making sure they have all the tools that they need To continue to build on their reputation and ultimately, the financial performance of that business, Inevitably, there will always be an element of lumpiness there. Yes, that will be difficult to forecast.

Speaker 1

However, it is a very IP intensive

Operator

Part of our

Speaker 1

portfolio and we have paid for that intellectual property. And so it's an Economically very attractive model. So with respect to saying this quarter is going to be an excellent quarter versus call it Q3 or Q4, that one's probably the most challenging. However, the returns are very robust. The team is as strong as it's been.

Speaker 1

The reputation is very much intact. And We believe we continue to build on that. And so we are optimistic for its performance as well. But very specifically, we think that that group has troughed, having finished up a couple of large projects And activity is starting to go in the right direction.

Speaker 5

So is that the thinking As you look at your 4th quarter range, likely range for revenue, it looks like you're quarter on quarter flat to Maybe off a little bit. So is that just the completion phase and Your new work starts to ramp in the Q1 next year.

Speaker 1

Yes. No question there's a little bit of that. But Kevin, do you want to go into very specifically the breakdown within engineering and how we're thinking about that sequential cadence?

Operator

Sure. I mean, it is difficult to project As Brad said, but we believe what we believe we'll see in engineering next year is a slow sequential uptick As we move throughout the year, right, so we would expect Q1 revenue to be higher than Q4, Q2 to be higher than Q1 and so forth. I'm not sitting here projecting any big Giant jumps in any particular quarter, but what I would like to see is single digit sequential growth each quarter, right, with obviously there being some upside depending on what happens with all the different items we As you've been covering us a long time, Bill, so you've seen how engineering can really jump in a quarter and stay up for a while depending on what project we have. But in terms of expectations and what we expect to happen, I would expect to see a sequential uptick each quarter and then obviously hope to see if we can really boost that with a couple of big projects.

Speaker 5

Got you. Okay. It makes total sense. So The let's see what I was going to ask you.

Operator

The and We need to continue to work on our margins because it's not just about adding revenue, right? It's about adding quality revenue and gross profit dollars that are driving our return model.

Speaker 5

Okay. Back to healthcare, just for a second. I was thinking about the comments, Brad, you made about behavioral health Really taking off. Is it I mean, where are you in terms of It's important to you. In other words, is it becoming a meaningful percentage of revenue yet or Were you still just starting that process?

Speaker 1

I think it's the majority of the business at this point. And frankly, we anticipate seeing it accelerate. As you know, we've been pretty excited about And positioned ourselves for it accordingly. The last couple of years, I wouldn't call it on the A bit of an increasing drumbeat. But I think, call it, the last, call it, 9, 12 months, I think you are seeing a meaningful increase, and we anticipate that activity is continuing to go in the right direction.

Speaker 1

I think naturally, you think about some of the drivers of this from a macro perspective. Oftentimes, investment behind this type of these type of social infrastructure initiatives are going to come on a lag. And we think that's exactly what we're seeing. So very exciting part of the portfolio, no question about it. We think that there's plenty of upside there.

Speaker 1

So and we're certainly willing to Keep everybody posted as that continues to crystallize.

Operator

Okay. And if you And I would add to that, Bill, that 3 years ago, our behavioral health revenue 3, 4 years ago was primarily coming from 2 clients. So today, we have well over 30 that we're providing behavioral health services to. And as When I look at this behavioral health market for RCM, we're still in the 1st inning, 2nd at best, right? So we just think there's Amazing potential there.

Operator

We think we can we just think there's so much growth out there. Now obviously, there's a lot of competition. A lot of other companies that are going after this business. But there's just there's a lot of business out there for us to grab. And we think our team is stellar.

Operator

And we're really excited to grab it. There's only so much you can grab in one Because once the contracts are set for that school year, you're not going to typically add like a $5,000,000 client in the middle of school year. But we have a lot of potential to build with the 30 schools that approximately 30 schools that we're providing behavioral health. And then hopefully, when we get the next school year, we'll have we'll add another 20, another 30, we'll see. It's a really exciting business to be in and we're bumping up.

Speaker 5

Roughly, how many schools are you in now total?

Operator

Probably about 70 where we're active, Roughly?

Speaker 5

Okay. Thanks for all the color guys. Good

Speaker 2

Okay. It looks like we have a question from Frank Kelly. Your line is open.

Speaker 6

Good morning, gentlemen. Great quarter.

Speaker 1

Thanks, Brian.

Speaker 6

In particular, Life Science is heading to 40%, phenomenal, absolutely outstanding. And Love to see top line growth there and that unit take over. Switching over to the balance sheet On actual trade accounts receivable, what can you shed some light on there? It just seems to See that we're losing significant traction since our last call and since year end Twelvethirty onetwenty 2.

Operator

Sure. I can speak about that, Frank. We talked a little bit on the last call. So the receivables relative to where the revenue right now are just too high, The Chairman Receivables, period. And we're doing a lot of different things to get them down and get our DSOs to a better level.

Operator

But as I think you know, because you fought these battles before in your career, that When you get into Q3, because our revenue is somewhat back loaded into September, right, because of the schools being closed In June July, we're always going to have sort of a wacky looking receivableDSO in Q3 because of the cadence of how the revenue hits the income statement. Obviously, you're not going to have any receivables collected in October relative to September, right, or at least very little. So that's one factor in Q3. If you look if you compare Q3 to Q4, to be really frank with you, we had A little bit of a different revenue composition where we had some clients that just paid a lot faster than we do today. Particularly When you start talking about some of the COVID related revenue, that money was just coming in very, very fast.

Operator

So the DSOs in Q4 are Historically low for us, certainly a goal for us to get back to those levels where we were in Q4, and we're working like hell to get there. But those numbers are historically low. And then if you look at the receivables today and the DSOs today, We have a couple of clients that are really good clients, high margin clients, particularly in the life sciences space that just pay a little Like that industry, it's not uncommon to get contracts where these big companies say, payment terms are 90 days, take it or leave it. If you want the business, you got to wait 90 days, right? And we have a few clients like that, that are fantastic clients, very profitable, Even with the high DSOs, they fit our return model very, very well.

Operator

So that's one aspect that's contributing the higher DSOs. Then when you flip over to the EPC clients, a lot of the EPC clients And some of the utilities are also slow payers. But the overall cash flow effect of those engagements are excellent. It's just that when you look at the trade DSOs, you just see they don't look great, but the overall cash economics Those clients are outstanding. So you've got a couple of factors going on, but I can assure you that we are working very hard to get DSOs at a much lower level where they were in Q2 and Q3.

Operator

Stay tuned.

Speaker 6

Do we Kevin, do we have you said you were talking about DSO numbers, so you know where they Where were they in Q2 and Q3?

Operator

Well, obviously, people calculate PSOs differently, right? But you know how I calculate them. They were 84 in Q2, they were 90 in Q3, they were 79 in Q1, and They were at an all time low in Q4 of $66,000,000 So we need to get some way, somehow We need to get them a lot closer to that team.

Speaker 6

Right. Because I think if we look on the flip side of that on expending capital Against debt, there could be a pickup of as much as over $1,000,000 EBITDA If we collect those and turn them down into against the line, right?

Operator

Well, it's not going to impact EBITDA. It's really The matter of impacting our interest costs, right?

Speaker 4

Well, interest costs, right, which are

Speaker 6

included in EBITDA, right? Am I saying corrected or no?

Operator

Yes, no, earnings before interest. So no, it doesn't impact interest, but your point is a Good one. We are very, very focused on cash flow. And the most important measure when we look at this company is return on equity. Like that's the most important thing and we pride ourselves in having a very high return on equity and this is an important component to it.

Speaker 2

And it looks like Bill Sutherland had a follow-up question. Bill, your line is open.

Speaker 5

Yes, I was Curious, Kevin, about the tax rate in the quarter and what to think about for the year?

Operator

Yes. We had a one time discrete Tax benefit in Q3 that helped us out, but it's just a Q3 thing. I think when you start looking at Q4, you're probably looking at Consolidated taxes 28% to 29% roughly,

Speaker 5

because I think we're going

Operator

to have a discrete item that's going to work the other way. It's going to Bump it up a little bit in Q4. Long term, I think 28% is a pretty good rate for you to use in your model.

Speaker 5

Okay. Thanks again, guys. Have a good one.

Speaker 2

Okay. It doesn't look like we have any more questions. I'll turn it back over to you for any closing remarks.

Speaker 1

Thank you for attending RCM's 3rd quarter conference call. We look forward to our next update in 2024.

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Earnings Conference Call
RCM Technologies Q3 2023
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