R C M Technologies Inc (RCMT) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the RCM Technologies Inc. third-quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following today's presentation.

It is now my pleasure to introduce your host, Mr. Leon Kopyt.

Good morning and thank you for joining us this morning on the conference call. I'm joined by my three colleagues as usual, Stan Remer, Brian Delle Donne and Kevin Miller, who will provide some detailed explanation of the performance in the third quarter and give a little bit more color to the current and future business.

I'm going to turn over the conference call in a moment to Stan, who will present you with the financial results for the third quarter.

Thank you, Leon. Thank you, ladies and gentlemen, for joining our call. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and assumptions and information currently available to us. The forward-looking statements relate to matters such as estimates used for developing pro forma financial information, the general health and direction of the market for IT services, our intentions as to changes to our product offerings, our concentration on higher-margin service areas, our pursuit of strategic alliances, partnerships, clients and acquisitions, the increased propensity of existing and potential clients to outsource IT functions and anticipated operating performance and financial condition. The estimates reflect our current views with respect to future events and are subject to a variety of risks, uncertainties and assumptions relating to operations and results of operation, competitive factors and shifts in market demand. If any of these risks or uncertainties materialize, or if our underlying assumptions are incorrect, actual results may vary significantly from expected results.

The following factors will specifically affect our ability to achieve expected results -- unemployment and general economic conditions associated with the provision of Information Technology and engineering services and solutions and placement of temporary staffing personnel; our ability to attract, train and retain qualified personnel who possess the skills and experience necessary to meet the staffing requirements of our customers and future customers; our ability to achieve and manage growth and selecting suitable acquisition candidates, analyzing their businesses accurately and integrating acquired businesses into our company; and other risks of our acquisition strategy.

Many other factors will also affect our ability to achieve expected results. The other factors we consider most pertinent are referred to in the periodic Forms 10-k, 10-Q and 8-K that we file with the SEC. We will be happy to send copies of these documents at your request. Otherwise, we encourage you to review the documents as they appear on the RCM Technologies' Web site under Investor Relations. Thank you.

We are reporting for the nine months ended of 161 million compared to 133 million of the previous period. The gross profit was 33.7 million compared to 36 million in the previous period. The net income was 5.1 million for the nine months, compared to 5.2 million for the previous period. Net income on our earnings fully diluted basis were 48 cents, compared to 48 cents in the previous period.

For the three months ended September, the third-quarter revenues were 55.2 million, compared to 43.7 million. The net earnings were 1.8 million, compared to 966,000 in the previous quarter -- comparative quarter. The net earnings per share on a fully diluted basis for the third quarter were 17 cents, compared the 9 cents.

At the end of September 30th, our working capital was 21.9 million; it was a 5.3 million increase for the year. For the quarter, working capital increased 3.1 million. Our debt at the end of September was 7.3 million. Our current debt today is 6.4 million. Our net debt at the end of September was 2.5 million. Our net debt at the end of December 31, '02 -- the beginning of the current calendar year -- was 4.5 million. That was a decrease of 2 million.

The cash generated for operations for the nine months was 2.7 million. For the six months, it was 2.3 million. It was a $500,000 increase.

Our net worth at the end of September was 65.3 million, compared to net worth at the beginning of the year of 59 million. That's a $6 million increase. Our tangible net worth at the end of September was 27.2 million, compared to tangible net worth at the end of December of 22.5 million. That's a $4.7 million increase.

Our CapEx expenditures for the quarter was 95,000; year-to-date was 275,000.

Our EBITDA for the quarter was 3.2 million, the second quarter was 3.1 million and the first quarter was 2.6 million. For the year-to-date, EBITDA of 8.9 million.

Kevin, do you have anything you'd like to add to that?

Yes, just about the sectorial data. Hello, everyone. The revenues for the quarter, as Stan said, were 55,224,000, and it breaks out as follows -- Information Technology was 25,104,000p; engineering was 25,307,000; our commercial services was 4,813,000. As Stanton said, the blended gross margin percentage was 20.9 percent for the quarter. That breaks out as follows -- Information Technology was 27.8 percent; engineering was 14.0 percent; Commercial Services was 21.1 percent.

Also, as we disclosed the last couple of quarters, we have a large subcontractor -- engineering contract that had revenues for the quarter of 8,314,000. As you know, the gross profit on that is marginal; there is very little gross profit in those numbers. If you sort of normalize the engineering revenues for the quarter -- and you're looking at engineering revenues of 16,993,000, that's without -- that's just simply subtracting the 8,314,000 of subcontractor revenue. If you restate the gross margins of 14 percent without the subcontractor revenues, you're looking at margins of 20.44 percent for engineering. If you looking at the margins for RCM as a whole, you're looking at 24.45 percent.

We did 8,314,000 this quarter as opposed to 8,702,000 last quarter of subcontractor revenues. We will continue to see a little bit of subcontractor revenues in the fourth quarter but at a substantially lower level than the 8.3 million. Then we would expect that those subcontractor revenues -- that we would have very little, if any, in 2004.

That's all I have.

Brian?

Good morning and thank you for joining us on this call. My comments will be very brief, since so little has changed since the second quarter.

We have seen some continued strengthening in client requests. Limited and small projects are being tendered. Competition, however, is extremely aggressive. Our strategy is to be at market and to maintain share.

The next few quarters will be challenging. In Q4, we expect to see some contracts winding down and the percentage of our work now set in companies that take holiday shutdowns makes up a greater percentage of our mix today.

Our calendar this quarter has a lower number of billing days and of course the soft days around the holidays, so we definitely have our work cut out for us.

At this point, I guess we would like to open it up the questions.

Yes.

Operator, we can open it up for questions now.

(OPERATOR INSTRUCTIONS). Paul Sankin of Hummingbird Valley Funds.

A few questions -- one is, I was wondering if you could talk about stock repurchases or possible dividends?

Second would be if you could talk about acquisitions and what the acquisition pipeline looks like.

The third thing is, could you tell us about any new opportunities? I believe, last quarter, you spoke about global pricing and barcodes. Then in the previous quarter, you were talking about mail services, network architecture and Life Sciences. So, if you could talk about any particular areas that there are new opportunities in.

Paul, I will take the first two questions -- the stock repurchase and acquisition -- and I will turn over to Brian the new opportunities status report.

We do not have any plans for stock repurchase or dividends at this particular time. We do continue to look at a number of acquisitions in the sector. I believe there are a number of companies that are prime for consolidation, so we continue to look but we are cautious and as we always do something that is accretive and makes strategic and technological sense for the Company.

Brian, go ahead with the description of the barcodes an --.

Paul, the things that we had touched upon in prior calls all continue to be in play. The global trade identification number, the move to address the sunrise date of January, 2005 has been a market that's been fairly slow to materialize. We have been doing a lot of missionary work to help retail and distribution type companies to get aware of what the issues will create, and we continue to work on building a pipeline.

The way the work is playing out is it's often preceded by an assessment, which is a fairly low value -- high value to the customer but not a lot of revenue -- and then hopefully leading to some remediation work if that is what the situation warrants. So, we have had a lot of missionary work going into this, and we see some regions showing a little more promise than others, but slower than expected.

On the global, RCM has a branded strategy which we have called our Smart Shore (ph), wherein we are allowing our clients to have development work done either on-site, in our locations domestically, in our Canadian development centers, and then through partnerships at locations in India and elsewhere. So, this offering has been refined and is now in the marketplace. We have hired some senior management to help build this practice area for us, and I would say that by Q2, we should be seeing some traction from those efforts.

The other areas, of network -- you know, we continue to believe that as demand in the marketplace -- as spending starts to resurface, it will be around revitalizing companies' investments in their networks or consolidating networks, as companies may have merged during this downturn.

The Life Sciences continues to the strategic initiative of ours to try and make sure that all of the offerings that we have, both our engineering, our IT and our quality and validation offerings are being brought to bear across the entire Life Sciences sector. We're taking some steps to strengthen the convergence of those three offerings into that space. We're starting to see some positive signs of life is a result of those efforts.

There has been some articles recently about RIFD and Wal-Mart is going to require their suppliers to put these tracking chips on boxes. I guess is that a new opportunity for you? Is that something within these areas that you're currently working on? Is it just hype?

The RIFD is really -- it's a piece of technology that fits into the broader data synchronization model, which is being unrolled. It is taking the likes of a Wal-Mart to go out and demand that the vendors comply in order to be credible trading partners for them. The selection of RIFD or barcodes -- you know -- they are all manifestations of the same initiative, which is to better synchronize data from the place where it is manufactured, packaged, shipped and then finally sold. So RIFD is a bit of a chip that is placed and servers similar purposes to barcodes; it just does it with radio frequencies. We don't focus on that as a particular niche, but recognize that it's part of the larger data synchronization play that's unfolding.

Bill Sutherland (ph) of Benning (ph) and (indiscernible).

Good morning, everybody. Brian, could you go back to your comments again on the -- I guess you were mostly addressing the fourth quarter -- with -- in IT in particular -- the impact of the days?

Then I guess apart from that, what the mix issue is, particularly the kinds of customers that have more of a seasonal impact on their IT needs? I didn't quite get that.

Well, in the past several years, as the economy has been weak, plant shutdowns were occurring sometimes sporadically by people just trying to conserve funds and save operating expenses, so they would send home their consultants and their full-time staffs.

As I look at our mix of business, we have a broader participation now in the manufacturing areas and you know, in the absence of the service companies that we used to provide a bulk of our work to, like the telecoms and financials services -- which are not seasonally affected by plant equipment manufacturing cycles -- today, we're working in aerospace; we're working in defense; we're working in automotive and pharmaceutical -- all physical plant locations which tend to take shutdowns during this time of year. So our mix of those kinds of clients is higher that it had been in the past.

I understand. Is there, on top of that, this year, more of an impact just the way the holidays fall, do you think? Or is it just these guys shutdowns no matter how the days fall?

They have been shutting down no matter how they fall. This year looks about as bad as last year and last year was ugly. I think this year is going to be the same, the ways the days fall.

Okay. Not knowing exactly all the pieces and how they moved around last year, the revenues were sequentially kind of flat, Q3 to Q4, but that's not necessarily indicative is what you're saying?

No, it's indicative of what we see as a pretty stable, flat level of demand. That's what we're experiencing.

Bill, if I can just add something to that -- I think you know, in the fourth quarter, we have one less billing day, as opposed to the third quarter, but then you've also got the major holidays in the fourth quarter, which we kind of call the days around the major holidays "soft days" (sic) because you just tend to get a lot more vacation and a lot more time off in December than you do other months.

In addition, I mentioned that the 8.3 million in engineering subcontractor revenues that we have in the third quarter -- a good portion, or the majority of that is going to go away in the fourth quarter. Now, that will not have much of an impact on the operating income, but it will have a big impact on the top line.

So you know, we just want everybody to know that our revenues in the fourth quarter will definitely be down as compared to the third quarter, because when you take away, say, maybe five or $6 million in the subcontractor revenues, obviously we're not going to make that up in other types of revenues from other clients. The fact that you have one less billing day and more soft days in the fourth quarter -- even if you assume that our core revenues are flat on a billing-date basis, you know, we would expect them to be down.

You know, it's our feeling that we could have flat operating income, fourth quarter to third quarter, but clearly, the revenues will be down. If we have flat operating income as compared to the third quarter -- which we're hoping to have -- that would be a real decrease -- I mean a real increase -- given the fact that you just have less billing days and more soft days.

It would be a margin increase, you mean?

(multiple speakers) -- get a little bit of a margin bump because you're hitting statutory rates, but you also have more time off and you have more risk in the fourth quarter, in terms of margin erosion, because of paid time off. So you know, the fourth quarter historically for us has been our most difficult quarter to project.

You know, we feel that we should have roughly flat operating income but basically, what we're trying to tell everybody is that it's a difficult quarter to project with all of the holidays and that it would not be shocking to see operating income down some as compared to the third quarter.

Right. The outlook into '04, both IT and engineering -- anymore sense of that taking any shape?

Bill, if you look at the respective sectors, the manufacturing sector driving initiatives are essentially to extend their ERP and supply chain management (inaudible) limitation, some application work and server consolidation. They are also there also looking for some future Web services and expansion of their enterprise architecture, so I think those are the manufacturing initiatives that we see for '04.

The financial services -- I think there's some cautious spending there with some future work for consolidation. The retail and wholesale sector I think is still lagging in the IT spending. I think there continue to be (indiscernible) phobic but hopefully there will be some bright signs.

Utility focuses on enhancement of the existing system and business-process improvement, customer service, so I think we see some bright spots in that area.

of course, the Communications sector is extremely selective in their spending; it's primarily in network security and consolidation of the databases. So, I hope that some of these sectors will regain their composure for spending and we will benefit from it, but I haven't seen any sustainable signs of that.

nothing broad-based?

Nothing broad-based, right.

Joseph Marubio (ph), a private investor.

Hi, Leon, Stanley and guys. My question relates to this -- I think Brian mentions this global initiative that I guess he's pioneering, and you mentioned that a senior management was hired recently to take care of this sector. Who is that person?

The gentleman's name is William Chickland (ph). Bill comes to us after about 20-plus years in project management in the IT sector and has actually built development centers in India for a number of banking clients prior to joining RCM, so has been building the delivery side of this model for specific companies like the DLJ and a couple of other large institutions like that.

My second question is there seems to be a lot of emphasis on how many days there are in the last quarter versus the third quarter and things like that, which to me indicates that a large portion of the population is still in the staffing mode. I wonder if somebody could give me a breakdown as to how many are in the staffing mode and how many are in the home office engineering mode, and then how many are in the value added services mode, which are other than engineering?

Joe, we don't have that information in front of us. Quite frankly, that's not information that we release. What I can tell you is that the holidays and billing days have a large impact on the consulting side and the staffing side. You know, we do some fixed-price billing, but the majority of our billing -- whether it's pure consulting or staffing -- is time and materials. Quite frankly -- (multiple speakers) -- working, if they're home or if they are taking off or if they are at holidays, if there's no time then there's no billing, and that has a pretty big impact on your revenues. This is something -- anybody that's our industry understands that holidays and high-vacation months will have an impact on your billing.

Now, three years ago when everything was going up 30 percent a year, you know, that kind of got mashed, but in a more normalized demand market or in the market that we're in now, you know, it can have a pretty big impact on your top line and obviously the bottom line as well. We are just cautioning people to let them know that the fourth quarter is historically our most difficult quarter because of the lower billing days and the high vacation and high holidays and it's historically the most difficult to predict.

You know, as I said before, our expectation is that we will have flat operating income from Q3 to Q4, but it's been a much more difficult quarter to budget and we wouldn't be shocked if there was some decline, not on a billing-day basis but on real dollars.

I understand. It also looks to me, from the numbers, that cash is really kind of going to be king in the next couple of months because your cash flow is not exactly wonderful at this point, although there is cash flow. You're going to be needing it in the fourth quarter, especially if you're fortunate enough to increase work.

Joe, let me answer that. Cash flow -- obviously it's slowed down. Our receivables went up because there was some billing near the end. Also, as sales flatten out, the cash flow should improve with the collection of the receivables.

Yes?

Don't forget, we continue to reduce the debt and also at the same time fund the working capital for the internal growth that we had over the last several months.

No, I think it's been a very admirable passion of the management team is to lower the debt (LAUGHTER).

We're still in that mode.

I think that's good.

Joe, we expect, on a going-forward basis, that -- I don't really depend on what (indiscernible) with the sales, but if you assume flat to sort of low-growth sales, we think our cash flow will be very good. If, in 2004, we're able to get a nice increase in sales, then cash flow won't be so good. But obviously, that's what we hope happens and we have plenty of borrowing capacity if we have a nice increase in sales. So, funding any increase in sales is not going to be any issue at all.

Just a last question, and it's for my education -- on one of the sheets that you issued, it says there's an item called Restrictive Cash. Is that something that has to do with the bank borrowing?

No, Joe, there was litigation that we had, as previously footnoted and disclosed in previous financial statements. We had to post a surety bond, so that was posted and that is shown as restricted cash.

Okay. That's all my questions.

Jason Crausha (ph) of (indiscernible) Specialized.

Solid job on the quarter. A couple of quick questions here -- The first would be, if you take out the (indiscernible) contract revenue for Q3 and compare it on a sort of year-over-year basis, what would have been sort of the organic growth of revenue, excluding subcontract business?

What quarter to what quarter are you asking about?

Q3 to Q3, Q3 2003 to Q3 2002.

If you restate Q3 of '02, we had versus 44.657 million, versus 46.11 million, divided by -- it's about 5 percent growth.

Okay, great. The next issue is, if we look at the Accounts Receivables, how much of that is tied up to the subcontract business? Do you anticipate, with the subcontract business being down certainly in Q4, that you'll start getting some of that cash?

In the receivables of 42 million is approximately 7.5, $8 million of subcontract revenue.

As far as the timing of getting paid for that, does that differ from other business or is it pretty similar?

They pay regularly. It comes in around the 15th of the month. It's never been a problem.

So as the subcontract business winds down, you should be releasing quite a bit of cash out of receivables into cash, correct?

When we collect that money, as it pertains to just the subcontractor revenue, we collect the money from our client and we pay our subcontractor, so the amount of money that's in there when we collect it -- it does not have a big cash -- (multiple speakers).

I'm with you. Obviously, you've got to pay it out.

I guess the last issue is, just on the legal situation, is there any sort of timetable that one can look at, sort benchmark of what -- not the result but just at least a timing of what's going to happen when?

You're referring to the current litigation?

That's correct.

I would say that we should not see any resolution within the next 9 to 12 months.

Nothing within the next 9 to 12 months?

I think the legal calendar is slated for approximately 12 months from now for the appellate court hearing.

Just lastly, if we look at the workforce that you have in place and the capacity, what do you think your sort of top line total revenue number could be if demand were to pick up without having to increase sort of, you know, headcount?

I think the best way to answer that question is that if you look at our two infrastructures -- one is a corporate infrastructure and one is the field service delivery infrastructure. The corporate infrastructure has enormous capacity for sales increase without any significant cost increases. I venture to say it's a minimum of two times.

If look at our sales and delivery infrastructure, we can easily handle a 50 to 75 percent increase in sales without any significant increases in our sales or recruiting force. (multiple speakers) -- demand.

Okay, so the long and short of this -- if we do get a pickup on the demand side, there should be a lot of operating leverage in this model and then you really see some opportunities on the bottom line?

Precisely.

Mike Warner (ph) of Kennedy Capital.

Could you clarify again for me what your -- do you, on a regular basis, provide annual guidance, or is it just more of a general outlook on trends on your specific sectors that you serve?

I think, in this current environment, we just give you pretty much our indication of the sector demand and the feeling without giving any specific guidance for the future quarters.

Will that subcontract work finish in the fourth quarter, or will it just wind down to a certain point and then finish in the first quarter? Do you anticipate any other work like that, going forward? Because it seems to hurt your consolidated margin levels.

The subcontractor work should be completed in the fourth quarter. We have a number of initiatives with the current and other clients in the similar work; that is to (indiscernible) some of the units. The work connected with the restart had to do with the basic restart. There are other opportunities for upgrading of the power of the current units (sic) from 7 to 20 percent and also increasing the lifecycle. It's called a lifecycle extension project. There's a number of initiatives and there's two other units that we're hoping to participate in sometime in Q4 as well. But the current work is winding down and should be completed by the end of this year.

But the new -- I guess I don't quite understand the nature of that business. I mean, you have -- you're doing work basically with no margin, excuse my ignorance. Is the word that you're (indiscernible) you might get starting in the fourth quarter at any type of margin or profitability level?

No, we're talking about a contract that is well over $100 million, and only probably 25 or 30 percent of that is subcontract work. But we needed to have the subcontract participation in order to be successful with this contract. So, there is significant revenue that came with this contract at much, much higher margins. Our margins there are in the 30-plus percent -- (multiple speakers).

(Multiple Speakers) -- contractor on this particular contract (indiscernible) contract (indiscernible) we are not capable of doing ourselves, and we were selected as a general contractor with the client knowing that we had the capabilities in place to handle this particular aspect of the contract.

I think, to answer your question more specifically, we don't have any anticipation of having major subcontractor revenues next year, but if we're faced with the opportunity to get a contract similar to the one that we won two years ago and we need to have a subcontractor on it, we absolutely will do it. You know, if it dilutes our gross margins some, then you know, so be it, but because we won a contract that wound up being 100 million Canadian, 25 percent of which approximately we needed to outsource, which does bring down our margins -- but the 75 million in Canadian dollars of work that we did ourselves with our own consultants was at nice margins and we will take that kind of contract any day of the week.

A follow-up coming from Bill Sutherland.

Thank you. Kevin, I was just doing the math on the growth in net revenue for the quarter, and I was getting net of a hair under 17 million for engineering.

Yes, 16.993.

With the collapse in the subcontract revenue in the fourth quarter, is there any sequential expectation we should have for net revenue in engineering -- directional?

We have not -- you know, we don't have any sequential -- we haven't released any sequential expectation. It's certainly our hope that revenues will be, on a billing-day basis, you know, flat to maybe up some. The revenues for the quarter -- if you just compare Q3 to Q4 and forget about the billing days -- but our expectation it would be flat to maybe down a little bit, given the billing days.

But again, as Brian mentioned, there are a lot of factors that play into the fourth quarter that makes predictability tough. So you know, we expect to have, on our core revenues and our core operating income or our operating income overall, we expect it to be around flat for the fourth quarter as compared to the third quarter. But as we said, it's very difficult to project.

There are no further questions at this time. I will turn the floor back over to you for any further remarks.

All right, thank you very much for joining us on this quarter and we will see you at the end of the fourth quarter and fiscal year. Thank you very much. Bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.