R C M Technologies Inc (RCMT) 2004 Q1 法說會逐字稿

Good morning and welcome to your RCM Technologies first quarter earnings release conference call. At this time, all parties have been placed on a listen-only mode, and the floor will be open for questions following the presentation. I would now like to turn the floor over to your host, Leon Kopyt. Sir, the floor is yours.

Thank you. Good morning and welcome to the first-quarter conference call for RCM Technologies. I am joined by three of colleagues colleagues this morning, Brian Delle Donne, Stanton Remer, and Kevin Miller. We will follow our usual format of presentation of financial statement sector analysis as well as some background on the operations and look forward.

Stanton, would you begin with your presentation?

Thank you, Leon. And thank you, ladies and gentlemen, for joining us. 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 to add two changes to our product offerings; our concentration on high margin service areas; our pursuit of strategic alliances, partnerships, clients and acquisitions; the increasing propensity of existing and potential clients to outsource IT and engineering functions; and anticipated operating performance and financial conditions. The statement reflects 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 or uncertainties materialize, or if our underlying assumptions are incorrect, actual results may vary significantly from our 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 the 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 reports on Forms 10-K, 10-Q, and 8-K that we file with the SEC. We will be happy to send you copies of these documents to you at your request. Otherwise, we encourage you to review the documents as they appear on the RCM Technologies Inc. website, under Investor Relations. Thank you.

We reported revenues for the quarter, the three months ended March 27, 2004, comparing to March 29, 2003 as a comparable period. Revenues were 41,300,000 compared to 50,700,000. Gross profit was 10 million compared to 10,800,000. Selling, general and administration was 8,400,000 compared to 8,200,000. Depreciation and amortization was 300,000 compared to 296,000. Other expense was 116, which is principally interest expense, compared to 19,000.

Income before income taxes was 1,200,000 compared to 2,300,000. Income taxes were 380,000 compared to 936,000. Net income was 796,000 compared to 1,400,000. Earnings per share on a basic and fully diluted basis where $0.07 for the three months '04 compared to $0.13 in the previous comparative period last year.

Cash and equivalents at March 27th were 2,500,000 compared to 5,200,000 at December 27th, 2003. Accounts Receivable 37,300,000 compared to 36,300,000. Working capital was 24,000,800 compared to 23,900,000. Intangible assets were essentially the same, 38 million compared to 38 million. Total assets were 97,700,000 compared to 100,400,000.

Bank debt, also known as senior debt, was 5,500,000 compared to 7,300,000. Total liabilities were 29,800,000 compared to 33 million. Shareholders equity was 67,900,000 compared to 67,200,000.

The net debt at the end of March was 3,045,000 compared to the net debt at the ended of December of 2,100,000. Cash flow from operations was a use of cash of 740,000. The tangible net worth was 29,900,000 compared to the 29 million at the previous period -- at the 12/31 period.

There were no deferred consideration payments during the quarter, and none are projected, but we have none going forward. The CapEx, capital expenditures, for the three months ended were 94,000, 800,000. EBITDA was 1,600,000.

I'll turn it over to Kevin Miller for sectorial information and other analysis. Kevin?

Hello, everyone. Thank you for joining us. As Stanton said, the total revenues for the quarter were 41,273,000, which breaks out as follows -- For information technology, 22,584,000. For engineering, 13,434,000. For our commercial services group, 5,255,000.

The blended gross margin was 24.3 percent. For information technology, the gross margin for the quarter was 26.2 percent. For engineering, the gross margin was 24.1 percent. And for commercial services, the gross margin was 16.5 percent. One item that I want to make sure that we alert everyone on the call to, and just remind everybody that RCM follows a 52-53 week year, which is similar to a lot of retailers. Essentially, we end the year at the closest Saturday to December 31st. In most years, we have exactly 52 weeks in a given year. For instance, 2003 was 52 weeks. Every seven years, we wind up with a 53-week year. And low and behold, 2004 will be a 53-week year for RCM.

Typically our quarters have 13 weeks in them. In 2004, Q1 is a 13-week quarter. Q2 will be a 14-week quarter. Q3 and Q4 will be a 13-week quarter. One other sort of quirk for 2004 is that in the fourth quarter of 2004, because of where most companies are recognizing -- at least we believe most companies are recognizing and when RCM is recognizing -- January 1st, 2005, which lands on a weekend. We will be recognizing that holiday on Friday, the last Friday of 2004. So it'll actually fall in RCM's calendar year 2004. So essentially, net-net, when you compare 2004 to 2003, we will wind up with four extra billing days, five extra billing days in the second quarter, and then we will actually have one less billing day in the fourth quarter because we're going to have an extra holiday in the fourth quarter. But, net-net, there will be four extra billing days when you compare 2004 versus 2003. That's all I have on the sectorial data. And now, I will turn it over to Brian.

Well, good morning. Thank you for joining the call. It's only been six weeks since we were last together, and there really has not been a significant change. So I think we would like to go straight to question and answers at this time. Melinda, could you take us to Q&A?

(OPERATOR INSTRUCTIONS). Bill Sutherland.

Good morning, everybody. SG&A was higher as a percent of revenue. Obviously, revenue lower relative to last year. And just curious what is happening in the SG&A line. I know you try to control it in line with revenue change as best you can.

There are a couple of factors there, Bill. This is Kevin. As you probably noticed in the fourth quarter, the SG&A was lower than the first quarter of this year. That's due to several factors, one of which is just year-end accruals, getting the year-end accruals trued up as of the end of the fourth quarter. In addition -- and if you look at the SG&A, which is rough 8.4 million, it's pretty similar in terms of dollar amounts for Q1, Q2 and Q3. But there are a few factors that are contributing to what we consider to be higher SG&A. One of which is, the biggest factor, which is we are investing in several initiatives that Brian talked about on the last call. Primarily, in our Smart Shore offering. As we talked about on the last call, we've made a significant investment in that initiatives. Of course, we don't expect to see significant revenue generation from that until the second half of this year, and more so in 2005. So that has caused our SG&A to go up quite a bit on a dollars basis.

In addition to that, we have the resetting of payroll taxes for this year. We had significant increase to our medical insurance, which is obviously a problem that is not unique to RCM. And some of the other initiatives that we talked about on the last call is we have also opened several offices. So, while you can expect us to continue the same sort of discipline at the SG&A line, I would say the first-quarter SG&A is more indicative of what you can expect to see for the next couple of quarters on an adjusted basis. Obviously, in Q2 with the extra week, it's safe to assume that the SG&A will be up as compared to the first quarter. And then, assuming no major revenue shifts, I think we would expect SG&A to sort of remain constant throughout the rest of the year. So hopefully that answers your question and your next question.

Jim Clarkson.

Hi, guys. Just checking, in terms of -- we are through the recession now. I know that you're spending some money on potential expanding, using the lower Indian cost. What are the other areas where you see some potential where this company can really start to grow?

Jim, let me take a first cut at that. This is Brian Delle Donne. We have addressed ourselves to some geographic expansion. We have some national accounts that have a lot of decision-making going on in cities where we had not been present, in particular, Phoenix and St. Louis. And so, accordingly, we have opened an office in St. Louis, have a plan to get present in Phoenix. And then, probably before the second half goes too far, we anticipate having a presence in Puerto Rico, wherein we see a large portion of our pharmaceutical client base spending on capital and plant equipment projects. And we expect to participate in that.

We have seen a bit of a strengthening in the pipeline as well in some of the state governments and federal government work. And so we have a number of large proposals that are being submitted right now, and expect those to be working their way through the award cycle sometime during the summer.

Kevin, it's Leon Kopyt. In addition to some of the key initiatives, as you know, our engineering group is enjoying an upsurge in the activities, and primarily in Canada and some parts of the U.S. as well. Conversion of some of those prospects in the pipeline have not been as rapid as we expected, but I think web are still quite optimistic that the second half of this year we will realize a number of opportunities that we have been working for the last several months.

Right. Thank you.

Nelson Olas (ph).

Yes, hi. You mentioned in the press release the coming to an end of two major contracts, which obviously impacted positively the first quarter of last year. I wonder if you could tell us how much lower than 50.7 million revenues would have been a year ago, had we not had the benefit of those two large contracts?

Absolute. The large engineering contract had gross revenues of 6.8 million in the first quarter. And the second contract that is on the IT side was 2.7 million.

Okay. I assume that was Michigan.

Yes.

Okay.

So, it was 6.8 in the first quarter of 2003, that is on a gross basis. A large portion of that in the first quarter was what we call pass-through revenues. Roughly 5.5 million of that was pass-through revenue.

Okay, but the total impact was 9.5 million.

Yes.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Artie Williams (ph).

Hi, it is actually Paul Sankin (ph) with the Hummingbird Value Fund. Where do you stand in terms of acquisitions? Are there things in the pipeline? Is there anything imminent? Are you sort of out of the market?

All of the above. We are looking at various acquisition candidates. We would -- except for (indiscernible) acquisition gain, that's the only thing I would say is not accurate. We are interested in making some selective accretive acquisitions this year. As you know, that's a bit opportunity-driven and, obviously, we need to find the right partner in order to do an acquisition. At this time, we're not looking at any major acquisitions for cash, because we're not interested in incurring significant debt. But we are looking at some smaller acquisitions that would potentially be for cash. The only thing I can tell you is that there's nothing really imminent out there, but we continue to look for selective acquisitions, and we hope to make a couple of small acquisitions this year. In terms of maybe doing anything large, that's really hard to say if we would buy something larger than what we typically buy, which is maybe 5 to $20 million in revenues. But we remain interested, if we can find the right partner.

Okay. And are there any new verticals on the horizon? Any new -- I think in the past you have spoken about the RFID question?

I would not say that we have any new verticals. And even the bar coding fits within our retail and manufacturing distribution market vertical. We have a pretty broad vertical distribution, as you well know, and we enjoy the cyclic nature of those, and we are seeing some recovery in the financial services and the health care; life sciences has been strong through this period. We have not seen the need to try and address ourselves through new verticals.

But we had an expansion of the existing vertical, we went from pharmaceutical to life sciences. So there are some verticals that we are expanding horizontally, but I think we are operating in about 11 different verticals, and we are comfortable with that diversification.

All right. Terrific. Thank you.

Bill Sutherland.

Kevin, does net and gross revenue pretty much equal each other at this point?

Yes.

Okay. And I know you are not doing guidance, but aside from the impact of an extra week, should we basically expect Q2 to do kind of mirror Q1 in most respects?

Yes, I think that's a pretty good assumption. You know, obviously, when we talked last time on the call, I think we told everybody that we hope and expect, on an adjusted basis, to see some sequential growth in Q3 and Q4. But we will hopefully, the next call, be able to give you a little bit more flavor for that. We hope that we'll have a better idea about some of these large contracts that we are after.

The commercial service line is doing very nicely with build-out there. Does that reflect the expansion pretty much?

Part of it is expansion, and part of it is our light industrial division -- has seen a rise in sales as well. Of course, the flip side to that is, of course, we are in California and we've got major cost issues as it pertains to state unemployment taxes and Workers Comp. We are hoping Arnie will help us out there, but we're not sure when some of those changes are going to take effect. For instance, there was recently some legislation to change some of the Workers Comp laws in California. Right now, that is really hurting the margins on that business, and we are not sure what the recovery time is going to be on that. But we are seeing some strengthening in the revenues there, which is nice.

When did you finish up in Michigan contract?

It finished up in the -- (multiple speakers)

End of the fourth quarter.

So it was reflected in fourth quarter as well?

Right. And we may see some small revenues in terms of follow-on work this year. We expect to see some, but at very low levels.

Well, I'm just looking at it, even looking at the IT line and even backing out Michigan, it would appear that there is just a delay going on as far as any pickup. And is it across the board, Brian, I guess, is the question? Or some things strong, some things weak?

It has been generally slower to materialize. We've have had some revenue erosion around some fairly low margin business, as clients continue to go to large managed national contracts. We will be walking away from a number of positions that Deco (ph) will assume at virtually no margin in this coming quarter. So, we have seen some revenue erosion around business that we really are not that interested in staying in. And then, the project that are in the pipeline have been at healthier margins, but they take longer to close, and clients have continued to be quite choosy. And of course, the competitors are quite fierce in trying to win the few signs of recovery that are out there.

Is the Smart Shore help you in any of these situations?

It is adding to our pipeline right now. And I think that our expectation is that we will be able to maintain and perhaps improve on the margins in the IT sector as a result of having some low-cost alternatives to provide to our customers. But right now, it's largely in the form of bidding proposals that are being evaluated by our customers now.

I thing you had said that you were hoping Smart Shore could be, on a run rate basis, 10 percent of -- was it IT revenue? By year end?

Yes.

Bill Sutherland Not 10 percent of total, right?

No, 10 percent of IT.

Okay. That's it. Thanks, everybody.

There appear to be no further questions at this time.

Okay. Thank you very much for joining us. We'll see you in July.

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