Earnings Call Transcript - RCMT Q3 2025

Kevin Miller, CFO

Good morning, and thank you for joining us. This is Kevin Miller, Chief Financial Officer of 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, 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 quarter.

Bradley Vizi, Executive Chairman

Thanks, Kevin. Good morning, everyone. As we exit our seasonal third quarter, we are entering Q4 from a position of strength, demonstrating record 2026 engineering backlog as of the end of October and continued momentum in healthcare. Penetration of existing clients continues to increase, while commercial discussions start to crystallize with future flagship clients. I attribute increased traction to growing brand awareness in our end markets, fortified by our employees' commitment to quality and reliable delivery. Also of note, as our visibility increases, so is the strength of our talent pool. We have seen a noticeable change in the number of highly qualified candidates reaching out to RCM, providing further fuel for the flywheel. We will continue to invest behind the business, while many of our peers remain on their heels. Despite excess medical costs to the tune of approximately $1.8 million year-to-date, with Q3 hit particularly hard, our financial results remain resilient. Kevin will provide more granularity into our financial performance later in the call, giving further visibility into our fundamental strength led by healthcare and engineering. I will now provide an update on the progress of each of our business units, starting with Healthcare. We entered the 2025, 2026 school year with momentum, seeing strong growth across our portfolio, driven by our commitment to quality, innovation, and client satisfaction. Our roster of new school partners is expanding, and we are equally encouraged by the commitments from our existing clients to broaden our role in staffing their schools. Though competition in certain markets has increased, it simply has not mattered. Our share in these same markets increased regardless, a testament to the commitment of our team and the trust we have built as a preferred provider in the K-12 end market. To put it differently, doubling down on caring is good for business. Despite tracking to close 2025 with our strongest financial performance outside of COVID, we already have an eye toward 2026 as we anticipate seeing the benefits of a record foreign recruitment pipeline that we have invested heavily in the last several years. The future of RCM Healthcare remains bright. Now I will transition to Life Sciences Data and Solutions. In Life Sciences, the industry is seeing a significant shift as it deals with a variety of changes due to tariffs, favored nation drug pricing, and process automation. Each has caused momentum shifts with many of our clients from the negative of workforce reductions to the positive of capital investment in manufacturing. Structural industry shifts often present opportunities for RCM. We are capitalizing by partnering with an AI-driven computer software validation and equipment qualification company that has allowed us to streamline compliance protocols and reduce turnaround times across manufacturing sites. The creation of a dedicated life sciences engineering group will further differentiate RCM in the market. As it pertains to data and solutions, meaningful progress has been made in AI and analytics, particularly as applied to Life Sciences. These efforts continue to unlock actionable insights from predictive forecasting to real-time monitoring. The updates reflect how technology is being leveraged not just to optimize operation, but to fuel innovation at the core of the business. As we move into Q4, we feel that our efforts are positioning us for growth. Life Sciences will benefit from ongoing digital transformation, further integration of AI-driven compliance, and scaling of the new engineering group. These efforts are expected to drive efficiency and enhance our value proposition to pharma partners. Data and Solutions will continue to expand our managed service offering. We are building the use of AI analytics into our process with a focus on generating deeper insights and supporting innovation across the enterprise. The emphasis will be on predictive capabilities and real-time data to support operational excellence and strategic decision-making. HCM will see growth beyond our foundational managed service efforts in building our direct and BPO business as our pipeline continues to mature. Transitioning to engineering, starting with Energy Services. Energy Services delivered another strong quarter in Q3 in addition to securing record backlog for 2026, reinforcing RCM's leadership in modern grid infrastructure and advanced energy solutions. Our integrated engineering and EPC model continues to gain momentum as utilities and data center developers seek partners with the technical depth, safety, culture, and scalability to execute complex multidisciplinary projects and tangible client outcomes. We advanced major programs in substation modernization and energy resilient infrastructure with significant contributions from our civil, structural, mechanical, and protection and control teams. We have made great strides growing within our core utility client base, each project reinforcing our reputation for technical precision and execution reliability, solidifying our position as engineer of choice and Tier 1 preferred partner. The business continues to outpace expectations, reflecting the strength of our integrated strategy and increasing market demand. Our engineering teams are designing and executing major programs across North America and internationally, while deepening strategic partnerships with OEMs to strengthen procurement agility and mitigate equipment lead time constraints. In a market challenged by labor availability and resource bottlenecks, RCM leverages our hybrid resourcing model, combining domestic expertise with global engineering design excellence centers, best-in-class digitalization and 3D BIM to ensure continuity, scalability, and cost-effective execution. This flexible approach enables the company to mobilize skilled manpower quickly for time-sensitive and mission-critical infrastructure projects. RCM's combination of specialized expertise, digital innovation, and operational discipline is positioning the business for sustained growth. Our teams are designing and delivering infrastructure that enhances grid reliability, integrates renewables and build resilience into the critical systems powering our communities. Our guiding philosophy remains constant, engineering excellence that sets the standard in energy infrastructure. Aerospace and Defense continues to gain momentum in existing program support and increased demand across new clients, primarily in engineering, manufacturing, and supply chain areas. When compared to Q3 2024 year-to-date, revenue has grown almost 45%, gross profit by approximately 49%, and EBITDA by 110%. Though the third quarter is historically slower when compared to other quarters due to increased PTO and headcount continued to increase through Q3 2025. As projected, we have realized an increase in gross margin and EBITDA in Q3 2025 and subsequently quarter-over-quarter throughout the entire year. Our vertical lift and technology innovator customers doing business with the U.S. government continue to spearhead our progress thus far in 2025 with multiple opportunities on the horizon in 2026 and beyond. As anticipated, success in our new service areas and expertise in supply chain manufacturing and quality engineering with current and new clients has impacted 2025 with a positive outlook for 2026. The awards in our aftermarket arena with 2 existing customers at the start of 2025 continue to contribute to our success in delivering to our aftermarket clients. RCM Aerospace and Defense attributes our latest award as Bell Flight's Best New Supplier in 2025 to our sales and recruitment team, which continues to build trusted valued relationships throughout the client and candidate base. Our investment in new schools and technologies continues to keep our team at the forefront as the go-to stated publicly by many of our clients when they are having challenges with quality resources. Credit to our operations team for helping build a client we added to the portfolio in 2024 into one of our largest clients in 2025. This is just one example of our ability to land and expand quickly, leveraging our core capabilities within RCM. We anticipate growth to continue as we close 2025 and more opportunities are realized in the aerospace and defense environment buying for American companies who can hold clearances up to the secret and top secret level. Where we sit today, we believe many of the aerospace and defense programs are in their infancy, and we look forward to setting a new baseline in 2026. Now I will return the call to Kevin to discuss the Q3 2025 financial results in more detail.

Kevin Miller, CFO

Thanks, Brad. Regarding our consolidated results, consolidated gross profit for the third quarter of 2025 was $19.4 million, which grew 8.8% over Q3 2024. Adjusted EBITDA for Q3 '25 was $5.5 million as compared to $5.6 million for Q3 '24 for a slight decline of 1.4%. Adjusted EPS was $0.42 for both comparable quarters. As for our segment performance in the third quarter of 2025, in Healthcare, gross profit for Q3 '25 was $9.0 million compared to $8.3 million for Q3 2024, growing 8.5%. Gross margin for Q3 '25 was 30.0% as compared to 31.2% for Q3 2024. School revenue for Q3 '25 was $24.4 million compared to $20.2 million for Q3 '24, growing 20.7%. Non-school revenue for Q3 '25 was $5.6 million compared to $6.4 million for Q3 '24, declining 11.3%. Our Healthcare group experienced a slow start to Q3 due to lower summer session revenue than we normally see. However, our September gross profit for all of healthcare grew over 20% September versus September 2025 versus 2024. Furthermore, billable hours for the first 4 weeks of October 2025 increased by 18% as compared to the same period in 2024. So we're off to a nice start in Q4, and we're excited to see how those results come in. In engineering, gross profit for Q3 '25 was $6.9 million compared to $5.9 million for Q3 '24, growing 17.3% and our best engineering gross profit in a quarter in our history. Gross margin for Q3 '25 was 22.0% compared to 24.4% for Q3 '24. We are very excited about where our Energy Services backlog stands. At this time, last year in 2024, our backlog for 2025 was $21 million. Our backlog today for 2026 is just over $70 million. While we are still growing our 2026 backlog, we are now very focused on 2027 and beyond. In our IT, Life Sciences, and Data Solutions group, gross profit for Q3 2025 was $3.5 million compared to $3.7 million for Q3 '24, decreasing by 4.2%. Gross margin for Q3 '25 was 39.5% compared to 38.0% for Q3 2024. It is worth noting that our SG&A expense includes $800,000 of costs for medical claims over budget in the third quarter alone and $1.8 million year-to-date. Regarding our balance sheet, frankly, we were disappointed with cash flow from operations in Q3 '25. We again experienced administrative collection issues with 2 of our large school clients. We are optimistic we will see good cash flow in Q4 and expect the cash flow from operations for fiscal '25 will approximate net income. We reiterate that we expect Q4 to yield our highest quarterly gross profit and our highest adjusted EBITDA in fiscal 2025. We believe we have strong momentum heading into 2026. This concludes our prepared remarks. At this time, we will open the call for questions.

Operator, Operator

And first up, we do have Bill Sutherland of The Benchmark Company.

William Sutherland, Analyst

I am interested in the foreign candidates joining the healthcare group. Can you provide an estimate of their potential impact and the timing for that?

Kevin Miller, CFO

Well, we certainly can't predict the timing, Bill. It's all dependent on visa retrogression. According to some information we've received, we believe the dates are likely to change sometime in the fourth quarter. Even if they shift by a couple of months, we probably have 50 to 60 nurses we can bring over if they move, say, 3 or 4 months. That may or may not happen, but we have at least 300 nurses in our pipeline who have passed all exams and are ready to come if we can secure their visas. Furthermore, we have many more in the pipeline who are in the process of passing various exams to qualify for coming over. It's an area where we make significant investments. We know many of our competitors have reduced their efforts due to the challenges of bringing nurses into this country right now, but we believe the situation will eventually improve, and we'll be prepared for that.

William Sutherland, Analyst

Okay. I guess there's no way to predict excess medical costs. Do you feel like this is kind of a level that we should just pencil in for 4Q?

Kevin Miller, CFO

Yes, I don't anticipate any significant changes in the fourth quarter. We've implemented some long-term measures to slightly reduce those costs, but their impact is likely to be minimal until 2026. It's been a challenging year for medical expenses. After having three or four great years, 2024 and 2025 have been particularly difficult.

William Sutherland, Analyst

You can't predict it, I know, it's...

Kevin Miller, CFO

It's hard to predict due to a lot of headwinds from inflationary pressures, with hospitals and insurance companies increasing costs. Our insurance costs have risen significantly in 2025 compared to 2024. At least we know what to expect heading into the year, allowing us to budget accordingly. However, with medical claims, you can only make your best budget, and unfortunately, it can be quickly overshadowed by unexpected developments.

William Sutherland, Analyst

So last one for me, Brad, when you were going through the engineering groups, on Industrial Process, I wasn't clear kind of how that's doing and kind of how that's booking for next year.

Bradley Vizi, Executive Chairman

Part of Industrial Process continues to perform well. We're hiring and demand is strong. The second unit is a work in progress, and some strategic and personnel changes are being made. The positive aspect is that it's our smallest unit, which has potential for growth. However, whether this year turns out to be decent or mediocre, it's unlikely to have a significant impact overall. Regardless, it is a priority for us. I would say that out of all our businesses, this one needs to shift to a different trajectory, but it remains stable for now.

Kevin Miller, CFO

Yes, it's pretty small, as you know, Bill. But I will say this, I believe we have some pretty exciting projects in our pipeline that we're pretty bullish on, particularly along our next campaign. And we just got to close them. And we think that group will have a good 2026, but we don't have the backlog that we have at our 2 other engineering businesses. And I'm talking relative to the size, but it has good potential, and we're excited to realize some of this pipeline. So hopefully, on our next call, we'll have some good news for you around our P&I business.

Operator, Operator

Next up, we have William Duberstein of Stone Oak Capital.

William Duberstein, Analyst

I wanted to discuss Energy Services. It appears to be experiencing the fastest growth and represents the largest growth opportunity. Current trends indicate increased utility growth and independent power producer growth. There are also behind-the-meter deals occurring with data centers. I would like to know how you view the market evolving, whether you are maintaining relationships with traditional utility partners, if there are any new entrants in the business, or if you are considering new partnerships. Additionally, I would appreciate if you could elaborate on the digital capabilities you mentioned and what you are observing in that area.

Bradley Vizi, Executive Chairman

Our approach in this business has been to concentrate on our strengths to create a distinct reputation with leading clients, specifically the largest utilities in the country. While there is a broad range of vendors, the list of top-tier providers is quite limited. These key players are often quickly shortlisted as preferred options. The investments we've made over the past few years are beginning to yield results, and we're significantly enhancing our presence in the market. We're pleased with the progress we've made, but we also want to be careful. There is plenty of activity in the sector, and we are mindful of managing risks and not overextending ourselves. We feel that our team is advancing to the next stage. Along the way, we are making various investments and adjusting our infrastructure and personnel. Overall, the outlook is promising. Regarding data center activities, our primary strength lies in the utility market. Any direct involvement with data centers is an incremental addition for us. However, there are ample opportunities with our core clients, which is a stable base we are committed to serving and growing within. Additionally, we recognize selective opportunities in the data center sector. One clear opportunity is the need for interconnections, as major data centers require substations, which falls directly within our expertise. In summary, we are focused on maintaining our reputation while responding to client demand. Even adding one or two key clients each year can significantly impact our business. Major utilities have historically invested billions in capital expenditures, and those amounts are rising, with significant portions going toward improving the electrical grid. It’s an exciting time, but we are also cautious not to extend ourselves too far. Overall, we are enthusiastic about the direction we’re headed.

William Duberstein, Analyst

That's great. You mentioned that you're attracting a new level of talent and you're pleased with what you see in terms of talent coming your way. Is this talent related to the energy services area? Are these individuals part of your unique strengths, or do they represent an opportunity for you to expand horizontally or with complementary services?

Bradley Vizi, Executive Chairman

That's a great question. One of the advantages of our services is that when you connect with even just one skilled individual, you can integrate their talent into your platform, which creates clear opportunities for growth in related areas. So the answer to your question is that it’s definitely a combination of both. This is largely due to our intentional efforts in investing in our brand overall. At a fundamental level, this includes our website, digital presence, LinkedIn, and so on. The difference compared to 18 or 24 months ago is significant. What’s beneficial about the current times is the capability to effectively reach similar individuals in a targeted and cost-efficient way. If you have someone skilled in these methods, the associated costs are quite minimal. Therefore, the investments we've made over the past few years in our technical foundation and establishing a strong market reputation have positioned us as a credible player, and it's fair to say we are now firmly in the Tier 1 category. It's essential to remain prominently visible to our target candidate pool and enhance our digital presence in this regard.

William Duberstein, Analyst

That's all good information. I wanted to touch on a couple of minor housekeeping items. You mentioned that summer was a bit slow for healthcare, which often happens seasonally with schools. Given the sluggish start that has since improved, was this related to the non-healthcare segment of the business, or was it more about schools gradually determining their needs for the new year?

Kevin Miller, CFO

Bill, it’s mainly due to the summer session when schools have fewer students compared to the primary school year. Our business doesn't completely stop in July, even though many schools are closed. Some begin to reopen in early to mid-August, while others close as early as May and remain closed through late June. This leads to a dip in performance during June, July, and August compared to the other nine months. However, schools continue to use our services, depending on how many students are enrolled in summer sessions, which can vary significantly each year. Given our current level of operations in terms of personnel and contracts, we anticipated higher revenue from our school clients during July and August than we actually received, which I believe can be attributed to randomness. Once the school year began in mid-August and really took off in September, we experienced great results. Overall, the performance in Q3 for healthcare was somewhat lower than our expectations because we had hoped for greater growth in September, which did occur, but we anticipated revenue to be higher in July and August than it ended up being. Does that make sense?

William Duberstein, Analyst

Yes. Got it. So there are basically fewer students than you thought in your client schools over the summer.

Kevin Miller, CFO

Fewer of our students and our schools just needed less people than we thought. It's a combination of fewer of our students that we had the previous year and maybe fewer people taking off of the summer at the schools, but it just wasn't as great as we thought it would be.

William Duberstein, Analyst

Got it. That makes sense. And then final thing, just back to the healthcare costs. Are you guys self-insuring now? And just given the last 2 years, would you think of maybe changing strategies just given the size of the company? I think you're looking to maybe change something with the strategy there. So I just wasn't sure.

Kevin Miller, CFO

Yes, we are always looking to adjust our medical plans to reduce overall costs, not just for the company but importantly for our employees as well. We can attract more talent when we offer lower-cost options. To answer your question, yes, we are self-insured. If you were asking about considering a fully insured model, the answer is no. Our medical costs over the past two years have been significant, and they would be even higher if we switched to fully insured. While we aren’t a large company, we're substantial enough that the choice between self-insured and fully insured is clear. When opting for self-insurance, insurance companies build risk and profit into their premiums, making it illogical for us to go fully insured at our size. For a smaller company with around 100 covered lives, a fully insured model might make sense. However, since we have around 800 employees, choosing a self-insured plan is clearly the better option.

Operator, Operator

All right. Next up, we have Liam Burke of B. Riley Securities.

Liam Burke, Analyst

On engineering, the gross margins were well within your stated range, but down lower year-over-year. Is that just a larger contribution of engineering where you have lower gross margin, but you make it up on the SG&A line? Or is there anything else in there?

Kevin Miller, CFO

As we mentioned in previous calls, you will notice significant variation in our engineering group's gross margin. This variation is influenced by the revenue mix and the extent to which our subcontractors are involved in a particular quarter. We do not achieve the same gross profit margin from subcontractors as we do from our salaried employees. Additionally, the Aerospace sector generally has a lower gross margin compared to Energy Services or Industrial Processing. Industrial Processing has experienced some unpredictability in its revenue, which also affects the gross margin since it has a relatively fixed direct cost structure. Many factors contribute to this variability, which is why we prioritize gross profit dollars. While there is a connection to gross margin and we aim to enhance it, our main focus is on increasing gross profit dollars in our engineering group.

Liam Burke, Analyst

In Specialty Healthcare, you're gaining more penetration with your existing schools and acquiring new customers. Are there other areas where you can replicate that business model, or does it seem that schools are a good fit for your skill set?

Kevin Miller, CFO

The answer to that question is yes. There are other areas where we can replicate that model, and we spend a lot of time considering this. At our core, we're a school business and we excel at it. We believe we are as proficient as any company, if not better. Therefore, we want to maintain our focus on schools, as we are seeing solid growth there. The advantage of the school business is its tendency to be quite stable; we rarely lose school clients. So our focus will remain on that. However, we are also exploring other areas. When Bill Sullivan asked about some foreign nurses that are coming over, it's important to note that most of them will go to hospitals rather than schools. While some may go to schools, a significant number will be heading to hospitals due to the high demand for screening. We have a competitive edge in that area as we have been recruiting overseas for 25 years and have built a strong reputation and following in those countries. To answer your question, we will always prioritize schools, but we are also investigating adjacent opportunities. One idea we've been discussing is the possibility of supplying substitute teachers to schools, even though it's outside of healthcare, the model is not significantly different. For instance, we have a notable presence in the Philippines, primarily driven by our healthcare group, but we are also looking into potential outsourcing for our U.S. clients for healthcare and other positions. We are continually searching for other growth avenues, and when any of these become significant, we will certainly keep you informed.

Liam Burke, Analyst

Great. And just really quickly on capital allocation. You've got the revolver in place. You've got plenty of capacity. It provides you great financial flexibility. How do you balance available debt with your buyback program?

Bradley Vizi, Executive Chairman

Yes, it's a key topic for us that we discuss frequently. Over the past few years, we've actively engaged in repurchasing shares. Regarding our stock's valuation, it’s difficult to argue that we are anything but significantly undervalued, and I believe that will self-correct. We are in a strong position after reducing 45% of our outstanding shares, leaving us with about 7.4 million shares available. This situation supports a baseline level of shares, especially considering strong insider ownership which allows for better trading flexibility for institutions. We are being considerate about this aspect as we analyze our share valuation. It's a retrospective view now, having reduced 45% of our shares at an average cost of around $850. While we do have a bit of debt, we can manage to reduce it fairly quickly, potentially ending up with no debt and some cash. Overall, we are in a strong position in terms of capital allocation. While we are exploring various options, there’s no immediate action required. We are open to the idea of a dividend. My extensive experience with small and microcap companies leads me to believe there are valid reasons for and against dividends, depending on the market size. It's definitely something we are considering, but for now, we can focus on reducing our debt. We are making sure to approach every decision with caution and prudence.

Operator, Operator

All right. At this time, there are no further questions in queue.

Bradley Vizi, Executive Chairman

Thank you for attending our Q3 conference call. We look forward to our next update in March.

Operator, Operator

And with that, ladies and gentlemen, this does conclude your call. You may now disconnect your lines, and thank you again for joining us today.