R C M Technologies Inc (RCMT) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the RCM Technologies-sponsored year-end earnings report conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Leon Kopyt. Sir, the floor is yours.

Thank you. Good morning and welcome to our year-end call.

I am joined this morning by my colleagues, Stanton Remer, Brian Delle Donne, and Kevin Miller, who will give their respective views on financial performance, analysis, and operational activities, and then we'll open the floor, as usual, for questions and answers.

I would like to ask Stanton to begin with the financial presentation, followed by Kevin and Brian.

Thank you, Leon. Thank you, everyone, for attending our call. Just a moment so I can read our script for the -- previous to this earnings release.

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 and engineering 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 through outsource IT and engineering functions; and anticipated operating performance and financial conditions.

The statements 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 operations, competitive factors, and shifts in market demand. If any of these risks and 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; 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. he other factors we consider most pertinent are referred to in periodic reports on forms 10(K), 10(Q), 8(K), that we file with the SEC. We will be happy to send you copies of these documents at your request. Otherwise we strongly encourage you to review the documents as they appear on the RCM Technologies website under Investor Relations.

Thank you.

We are reported for the year ended 12/31/03, 206.6 million compared to 186.7 million of the previous year. Our income from continuing operations was $3.9 million, compared to the previous year of a loss of $27.8 million. Included in the income from continuing operations for the '03 year was a charge for compensation -- equity compensation expense for a stock tender offer of 6.7 million.

Our net income in 2003 was $2.8 million, compared to a loss in '02 of $24.1 million. For the three months ended December 31, '03, our revenues were $45.5 million, compared to the comparative period of $45.3 million. Our income from continuing operations was a loss of $4 million, which was inclusive of the $6.7 million equity charge, compared to a net income from continuing operations in the '02 year of $37.8 million.

Our net loss in the fourth quarter, which, again, is inclusive of the equity charge, was $2.3 million, compared to a $29.4 million loss. Our earnings from continuing operations -- earnings per share for the continuing operations was 26 cents compared to two-point two eight -- $2.28 loss on the comparative period. For the three months ended December, '03, the earnings per share loss was 21 cents, compared to $2.77 loss.

On the balance sheet side, we ended up up the year with cash equivalent of $5.2 million, compared to $2.8 million of the previous year. Our working capital was $23.9 million, compared to $16.6 million. Our shareholders' equity was $67 million, compared to $59 million, and our senior debt was $7.3 million compared to $7.4 million.

Our adjusted EBITDA was $1.10, compared to $1.26 for the full year, compared to the previous full year. And our three months ended EBITDA was 28 cents, compared to 19 cents. Some [inaudible] features from our balance sheet, our working capital at the end of December was $23.9 million, compared to the previous year of $16.5 million, it was a $7.3 million increase.

The senior debt at the end of the year, as I explained earlier, was $7.3 million, at the beginning of the year was 7.4, it was a decrease of $120,000. Our net debt at the end of December was $2.1 million, compared to the net debt at the opening period -- opening of the year was $4.6 million.

Our cash-flow from operations was $2.9 million for the full year. Again, our net worth was $67.2 million, which was a $7.9 million increase. Our tangible net worth at the end of the year was $29 million, compared to a tangible net worth at the beginning of the year of $22.5 million, which was a $6.6 million increase.

Our Capex for the year was 432,000. Our projected Capex in '04 is 500,000. Our days sales outstanding for the year-to-date was 62 days; in the fourth quarter it was 71 days.

Now I'd like to turn it over to Kevin Miller for some statistical analysis.

Okay. I'll break out the revenues by sector.

I will start with the fourth quarter. We had total gross revenues of $45,512,000. That's comprised of information technology, $23,703,000; in our engineering group, we did $16,820,000, in our commercial services group, we did $4,989,000.

The blended gross margin was 23.84%. The gross margin for information technology was 28.7%. Gross margin for engineering was 17.6%. And the gross margin for commercial services was 21.6%.

Of the $16,820,000 for engineering sales, $1,529,000 of that was pass through subcontracted revenues on our major contract in Canada that concluded at the end of 2003. So on a adjusted basis, or what we would call the net sales in engineering, was $15,291,000. The net sales for the company were $43,983,000.

The restated gross margins after adjusting for the subcontracted revenues and engineering was 19.35%. And the gross margins for the Company as a whole after adjusting for the subcontracted revenues was 24.66%.

The same numbers for the entire year, we did on a gross basis, revenues of $206,606,000. That's broken out as follows: information technology, $100,873,000; gross revenues in engineering of $86,696,000; revenues in commercial services of $19,037,000.

The all-in gross margin on a gross basis was 21.58%. Information technology was 27.93%. Engineering was 14.3%. Commercial services was 21.16%.

On the -- to restate the engineering revenues for the year, as I said before, the gross was $86,696,000. We had subcontracted revenues of $24,166,000, which gives us net revenues in engineering of $62,530,000. The restated gross margins for the year in engineering were 19.37%. And the restated gross margins for the entire company were 24.29%.

That's it.

Brian?

Good morning. Thank you for joining the call.

I'd like to share a few of the salient operational features of our last quarter with you that I think might be of interest. During the course of last year we had been working on the development of a solution to apply a Distributed Development environment to the benefit of our clients, looking to get the benefit of international pricing through outsourcing.

During the fourth quarter we had branded a unique solution for implementing distributed development, which we refer to as our Smart Shore. And through the end of the year we have been investing in program management, in partnership development, and methods development. We have brought on dedicated sales resources and we have a dedicated direct marketing effort underway.

Towards the end of the year, leading into the beginning of this year, have been success at procuring several contracts in this Smart Shore model, which encourages us that we have a good solution which is ringing true with our clients. It is our objective to have about 10 percent of our total revenues being achieved through the Smart Shore model in the near term.

In addition to Smart Shore, we've had some strong activities through year end in the life sciences with the award of one substantial contract and several others that have been proposed on, which we expect to execute in the near term. Additionally the commercial banking and mortgage sectors have been strong for RCM, as we have been helping a number of mortgage lenders with application development testing and helping them service the increased demand for their services.

There's a fair amount of optimism in the regions coming into the close of the year, and this is being acted upon. RCM has plans to open several new office locations. Our healthcare business opened a new presence in Philadelphia during the fourth quarter. And during the first quarter we'll be opening a new presence in the Washington, D.C. market.

Our IT services have opened a presence in St. Louis, and during the coming quarter we are evaluating presence in Phoenix and establishing a presence in Puerto Rico to service our pharmaceutical client base there.

We have been seeing an increase in proposal activity. We're pleased that we've seen a bit of stabilization in the pricing. And as I said, the optimism on activities levels is running strong, and we hope to be able to convert that into revenues in quarters going forward.

This concludes my formal statements. I guess we can turn it back to Leon.

I would like to supplement a couple of areas.

As Brian has indicated, IT and spent a couple of minutes on our engineering services. I'm encouraged by the prospects and the strength of our pipeline in engineering. There's been a number of activities both in the aerospace, as well as in the utility sectors. We feel quite optimistic.

A lot of the decisions will be made by our clients, probably between April and September. But the strength of our pipeline, which is about 200 million, represents a flurry of activities that we have been involved in, in a number of areas in the utility sector.

As you know the strength that we have right now is in the power generation, in power systems, which primarily involves the conversion, the upgrades, the restarts and some of the regulatory compliances. We have a collaborative relationship with a couple of firms with respect to the transmission and distribution part of the services, which will complete our continuing in the utility sector. There's a number of opportunities that we are participating right now, relating to the transmission and distribution, not only to the power generation.

All in all, although we're starting out the year with the two contracts that have completed at the end of the year, but I think on the strength and diversity of our pipeline, we are encouraged going forward, especially in the remaining quarters of this fiscal year.

I will ask you, Vince, to turn it over to our guests for a question and answer period, please.

Thank you. The floor is now open for questions. [Caller Instructions].

We will take the first question from Jerry Well [ph] with U.S. Bank.

Good morning.

First of all I want to compliment you on focusing the last few years on the EBITDA. I think that is good that do you that and do the adjusting for me. I think that is helpful.

My question relates to, how are you seeing foreign competition affecting your business on a direct basis? Obviously you are coming up with the Smart Shore model to try to do some additional revenue for you, but are you losing much of your old traditional business to foreign competition?

This is Brian Delle Donne. Let me respond to that. The staffing business has been affected by the foreign competition. As you may recall previously through the H-1 [ph] program, we were importing that talent into this country. You may not be aware that the H-1limits have been reached now, and so for the rest of this government's fiscal year through September, there'll be no more H-1 issued.

So work is going to flow through where the low cost resources reside. And so the flow to Indian and eastern European providers is ongoing. I would say -- saying that we lose business to these providers, I would say that the available market is diminished by work that we take they take away. It's not typical that there's a competition with a domestic offering with an outsource offering. The typical competition is out outsourcing compared to outsourcing alternatives, but the available market is diminished by large portions of client work having been exported. So it leaves less available market for domestic servicing.

Just to supplement, our Smart Shore solution is not driven primarily by the laborer arbitrage, but by bringing an accretive capacity and capabilities to our solutions, rather than just purely by labor differential.

Okay. Thank you.

Thank you. We will take the next question from Nelson Obus with Wynnefield.

Hi. I wanted to follow up on a little EBITDA analysis. When you look at 2003 EBITDA numbers, the small shortfall that took place in regard to 2002, what were the components that made that happen?

You want to take that, Kevin?

I mean, we certainly have not compared the EBITDA in 2002 versus 2003, and tried to sort of break out the difference. I mean, there's just so many factors, and if I'm understanding your question correctly, there's just so many factors going both ways that we just don't really look at it that way. As you look at -- you compare the overall income statement in 2000 and 2003, obviously a big impact there is that the margins have come down some slightly from last year to this year. And that obviously has a big impact on the operating income.

The revenues were basically flat and the margins, the gross margins are down some. So I think that's really the biggest component as I am trying to answer your question is that our margins are down, and our margins are down simply because the world was a more competitive world in 2003 versus 2002. And the primary decrease in margins was in our engineering, and that's just because we took on some large contracted work.

We won some large contracted work where we needed to be more competitive on our margins in order to get that work. On the information technology side, the margins were essentially flat, but that's just because we shifted our business some to get the higher margin work, even though the margins in the industry -- industry-wide contracted from 2000, when you compare 2003 to 2002.

Okay. That's helpful. That's helpful. A follow up, what sorts of things would have to happen in 2004 for you to have a better EBITDA comparison versus 2003? And how confident are you that that could happen?

Let me say this: It's really pretty simple. We have to win more business.

In order to beat the operating income for 2003 and 2004, we're going to have to have higher revenues. And we think that we have a good chance of doing that. More so in the second half of the year as opposed to the first half of the year because, as you probably gathered from our press release, and as people that participate on these calls know that our major contract that we had $45 million in gross revenues and $21 million in net revenues, our major Canadian contract concluded at the ends of last year. We also had an $11 million contract on the IT side that concluded at the end of the year as well.

So we're starting 2004 a little bit behind the eight ball because of these two large contracts that ended. But that being said, we've already made up some of that revenue, and we think that in 2004 we have an excellent chance of beating revenues from last year. And as Leon mentioned, we have 200 million backlog in engineering, $200 million pipeline in projects that we're bidding on right now. If we win the share of those projects that we feel we're going to win, then we think we can have a really nice 2004.

Okay. Thanks. I will ask one other question and get out of the way. Is there any reason specific to the utility industry why your pipeline is so strong there?

It's a combination of utilities and aerospace, but predominantly it's utility, that's where a lot of the activities are. There's a recognition of the power shortage and shortcomings with the transmission and distribution, and power conversion and restarts. So we are taking advantage of that, having the capabilities that we have developed over the years.

Okay. Thanks.

Thank you.

Thank you. We'll take the next question from Jason Crawshaw [ph] with Braid Specialized [ph].

Good morning, guys, a couple quick questions here.

The first, I think you mentioned that you are going to be opening some new offices in 2004. Can you give us a sense of what offices you are going to open, what you might close, what are we going to see for headcount, are you going to add headcount for 2004, are you going to decrease headcount, what are we going to see on that basis?

Right now we have already opened a presence in St. Louis. We are going to, in all likelihood, re-establish a presence in Phoenix. We are looking at Puerto Rico, which will probably be in the second half.

At this time we have no plans of closing any offices and the headcount on the delivery side of the business, not the consultants themselves, but the selling and recruiting and overhead management, we're expecting to only have a slight increase in the number of salespeople, otherwise all else is flat in terms of overhead headcount.

Okay. All righty.

Next issue would be, if I'm just looking at the two major contracts that concluded, one of those was very low margin, correct, that 1.2% processing fee and a subcontractor basis. Is that right?

No, it's not right.

Okay.

There's a portion of that contract, that's basically a pass through revenue. So the total revenue in 2003 as it pertains to that contract was 45 million.

Okay.

What we call the net revenues, or what I'll say, what are the real revenues, were about 21 million.

Okay.

So 21 million of that is real revenues at competitive margins.

Okay.

That contract concluded in 2003. We did win a much smaller contract with that same client for 2004. And we are, of that 200 million pipeline, about 100 million or so are for projects with that same client that we hope to win in 2004.

Okay. That's helpful. Next issue would be, what do you think 2004 on a quarterly basis by revenue, sort of break even number, will need to be if you were going to break even an X sort of run rate, what do you think that number is?

We really haven't played around with that calculation just for the simple fact that we don't think we are going to be in a situation where we're going to be breaking even. I think it's probably -- would be a pretty easy calculation to do, however. If you're running SG&A at about 8 million a quarter, it's a pretty easy calculation for you to do yourself.

What I will tell you is we have looked at the first quarter, and we believe that our revenues in the first quarter will be somewhere between 41 and 42 million, roughly, and we will have operating income of somewhere between 1.5 and 2 million.

It is our expectation that we will grow sequentially from there, and it's our expectation that we will grow significantly, particularly at the EBITDA line because as you probably can tell from our financials, that we get quite a bit of leverage from any revenues that grow from the 41 to $42 million that we are going to do in the first quarter.

And last question. Following the tender offer, what's, sort of, the shares out going to look like, maybe by 2004 year end and into 2005? What share base should we work off?

The current shares outstanding are 11,300,000.

We don't expect that to change.

No change there. The only change that you will see there if the stock price rises, which obviously we anticipate and hope will a happen in 2004, you'll you see that share count come up some because of outstanding stock options, but you are not going to be looking at huge increases to that number, even if you see at a pretty big increase to the share price.

Thanks, guys.

Thank you. We will take the next question from Meg Cayman [ph] with Epsilon Management [ph].

I'm sorry. I have no questions.

Well take a follow-up question with Jerry Well with U.S. Bank.

Yes, I'm just wondering if internally if you look at yourself compared to some competitors internally to measure how you're doing, you know, gross margin, returns, so forth, could you give me a couple of names?

We really don't track ourselves against other companies. Obviously we look at other companies but we just, we don't track ourselves against other companies. And really follow our company that way.

There's just so many competitors out there and we feel like there aren't -- there really isn't one or two or even three companies that really look like RCM. Because if you look at our competitors they are all just so different.

Just to give you an example, if you would look at CDI margins, their margins for the year 2003 were 24.2%. MPS group, 26.2%, Spheron was 23.2%, but the average in the similar group was about 24.8%, which is right around the number that we have.

Right. If you adjust for subcontracted revenue.

Right. Sure.

All right. Thank you very much.

You're welcome.

Thank you. The next question is coming from Bill Sutherland with Boenning & Scattergood.

Thank you, good morning, everybody.

That last question really should have been directed to you, Bill.

I was off the call briefly I got disconnected so I apologize if this has been covered. You've talked about the sales pipeline, Leon, in engineering. Did does that include restarting the two[inaudible] [inaudible]?

Yes, it includes the next phase of the restart of units in Canada, that's correct, that decision is to be made sometime next month, next month, May at the latest.

Okay. Brian, on Smart Shore can you give us a little more color on that, if you haven't already in another question? In other words, how are you actually operationally doing this?

Operationally we have, well, we've a hired program manager domestically and our model is one where we leverage -- strongly leverage the on-site presence of the RCM consultants to program management and then specific project management. And then we use the expertise of our partners, which we have two in India we have one in eastern Europe and we have our Canadian facilities in a near shore capacity up in Canada, and those partners bring various skill sets that give us an expanded bench.

What we do is we receive statements of work from the client and our domestic people work with our partners to put together integrated proposals, which are then delivered to the customer and then teams are formed. The teams typically made up of on-site presence by RCM employees, and then our back office, if you will, which does the development work in the distributed environment is done at a partner shop, and usually follows strict adherence to high SCI CMM ratings, like level five development work in the Indian case and Iso [ph] 9001 developments environments in Canada and in our eastern European partner's case.

And then when the work is delivered to the client, we are usually in a capacity to do on-site testing and overall system integration testing as we deliver the work. So we've got several contracts underway which are demonstrating this flow. We've been working out the kinks and the customers in both cases are proving very happy with the delivery.

Is this applications development work?

In one case it's applications development work, in another case it's large scale testing of production applications.

Okay. You said 10% of revenue, did you mean IT or total?

I am using a total basis. I don't think that's too big of a number. When you look at the work that's available to go through this model putting about $20 million through that pipeline should be an achievable goal for us.

Healthcare has opened up in Philadelphia?

Yes, they have.

Other plans for healthcare?

Well, healthcare is seeing a strong demand for the services they provide, some of it driven by state legislation, and also the aging population. So the presence in Philadelphia looks a lot like the exact business mix we have in New York.

We're opening a presence in metropolitan DC, which will look a lot like just a nursing component of the New York business and not have necessarily the therapy and the occupational physical therapy components that we have in the New York metro area.

And then we see states like California, which have implemented regulations which specify nurse-to-patient ratios in the hospitals there, and right now most hospitals are out of compliance.

So we're looking at markets that have these kind of drivers as additional areas to expand in.

Okay. I think that's all I had.

On the acquisition front I think you discussed, Leon, that you had some interests there. Are you -- it sounds like you're going in more of an internal growth direction at this point?

Yeah, the emphasis is clearly on the internal growth, but there are a number of areas. As I indicated before, the transmission of distribution which we do not have internal capability and we feel it's more expedient and probably more suggestive in making an acquisition.

For the moment it's a collaborative effort to get that accretive capacity capability, but I think eventually it will probably be an acquisition.

Okay. Okay, guys, thanks a lot.

Thank you, gentlemen. There appear to be no further questions.

All right. Thank you very much and we will see you again in the first quarter.

Thank you very much. This does conclude today's conference. You may disconnect your lines and have a wonderful day.