R C M Technologies Inc (RCMT) 2004 Q4 法說會逐字稿

All participants are on a listen-only mode throughout the duration of the conference. [OPERATOR INSTRUCTIONS] Thank you. Mr. Kopyt, you may begin the conference.

Good morning Sonya. Thank you for joining us this morning for the fourth quarter and fiscal 2004 conference call. As usual I have three of my colleagues participating on this call, Stanton Remer, Brian Delle Donne, and Kevin Miller, who will bring some color to the numbers and presentation. I would like to begin with Stanton.

Thank you, Leon. Good morning everyone and thank you for attending our conference 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 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 to outsource IT 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 and 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. 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 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 S. E. C. 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.

As you probably have all seen the press release, so I won't burden you with repeating all the numbers, at the end of December, our working capital was 29,500,000 compared to working capital of 23,900,000. It was a 5.7 million increase. Our working capital at the end of September was [27,000,300]. So it was a 2,300,000 increase for the fourth quarter.

Our debt at the end of the year was 4.9 million. The previous debt, the debt at the previous year end '03 was 7.3 million. So it was a reduction of 2.4 million. Our net debt at the end of December was 2.5 million, compared to a net debt at the end of '03 it was 2.1 million. So it was a $351,000 reduction.

Our net worth at the end of December was $69.9 million, compared to $67.2 million, that was a $2.8 million increase. Our tangible net worth increased by $5 million. The CapEx for the quarter was 213,000. It was 413,000 for the full year. Included in our operating results for the fourth quarter, we had an impairment of goodwill of 2.1 million, which was a non-cash charge, which equated to approximately $0.19 per share fully diluted.

I will turn it over to Kevin to give you some sectorial and segment data today. Kevin?

Hello, everyone. The total sales for the quarter were 41,723,000 for the fourth quarter. And that's comprised as follows: Information technology was 22,468,000; engineering was 12,287,000; and commercial services was 6,967,000. The blended gross margin for Q4 was 24.65 percent, broken out as follows: information technology was 26.46 percent; engineering was 24.06 percent; and commercial services was 19.83 percent.

I think we are ready to go into a Q. and A. You can open up the lines, and we welcome everyone to ask us questions relating to the fourth quarter and the year end performance.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Bill Sutherland with Boenning & Scattergood.

The silent 'O' always trips them up -- any way, how are you guys doing?

Very well, thank you.

A couple of things. Stan, the goodwill impairment, what did that relate to a little more specifically?

That was a business unit, an isolated business unit in Canada. It was in the information technologies segment. The operating results of that business unit were not measuring up to our multiples. And we decided that we obviously are following all the rules with the blessing of our accountants. We wrote it down.

Okay. How did the Sarbanes-Oxley expense come out for the year, and what do you think is going to be the continuing load from that?

The Sarbanes-Oxley -- the SOX expense, most of it was in the fourth quarter of '04. It was around 50 -- it was $60,000 going forward in '05, we are doing a fair amount in-house, we are using Jefferson Wells as our independent consultant. I estimate it could be a anywhere from 200,000 to $300,000 of expense for doing that. Depending on our working -- our market cap at the end of June, we will determine whether we are an accelerated filer or not. We are proceeding as if we will be.

Stan, did you say Q4 expense for SOX was 60 or 600?

No, 60. Not 600.

But you are saying -- what was the full year, then, of '04?

The full year was probably 75,000. Most of the work we did for SOX was in the fourth quarter.

So it's actually going to go up in '05 because you are bringing in Jefferson Wells?

Well, it's a continuing thing. There is testing work that has to be done next summer. We were not an accelerated filer in '04. The initial acceleration was to be in '05, which may be even in '06.

That's right, you are not on the same deadlines. I'm sorry. I'm just thinking about the guys that are accelerated. Okay. So your bill is just coming up?

Yes, SOX will be an ongoing expense. We anticipate it will drop down, as most companies do.

But not until '06 for you all?

Well, if we are not an accelerated, if we are not an accelerated filer it will -- we will proceed accordingly.

Okay. The ARs rose somewhat. Do you have the DSO calculation?

DSO were 88 for the quarter, and 88 for the full year, principally attributable to our healthcare segment has kicked up, and historically and industry-wide in that segment, it is a little on the high side, as well as our engineering unit in Stratford, the numbers are good, but they are just government dollars and it's slow.

So it's not a number that you are -- it's going to stay there, in other words, because of the mix of business?

No, we are continuing to work at it and I'm not happy with it, but we will get it down.

Okay. I haven't seen, Leon, I haven't seen too much from the Canadian press and whatnot about the discussions between Ontario and Bruce. Is there any info that you can provide us?

The only update is that the unions are on board, so there was an agreement reached with the unions. And the only remaining issue is the rate agreement with the provincial government which is not in place yet, but we understand the final agreement is imminent, and I think that's the only obstacle for the utility to go forward with the project.

So, basically there's nothing in motion yet, until that rate agreement is in place.

There's nothing significant in motion, that's correct.

Any new business developments, especially in IT, that you can speak to?

There are a number of initiatives and contracts that we started. Brian should recite that.

Sure, Bill. The IT has had some contracts that have come in since the beginning of the year; a couple of notable ones, RCM was awarded a contract with the Department of Homeland Security, called [ITEST]. We are teamed with SAIC, who is the prime. This is about a 7-year award, and at the present moment RCM is spooling up to do software testing, for software that SAIC is delivering to the Department of Homeland Security. And so this will be gradually ramping up through the year, and will be of a fairly long duration.

We've been doing some work with a large nationwide mortgage company on the West Coast during the first quarter, which was a significant performance testing project, as they rolled out their enterprise application, financial application across the country. We've been doing some work in our Distributed Development model for a specialty insurance company, where we are developing applications for them to process their insurance policies on line.

And we have recently signed an agreement as I think you might have seen in the press with Harland Financial Services. This is an interesting one. Harland has rolled out a new product called E3, it's targeted at the mid-tier banks, which is their sweet spot. The product in order to be installed requires re-platforming and installation services. Harland has made a strategic decision not to go and build that capability themselves. Instead they partnered with RCM, and so we are the implementation arm, and we are working with them, as they roll-out this new offering to their installed base of clients. That just ramped up in the second or third week of January.

And those are the ones of significance. There is some continuing increase in activity, as the government continues to spend, some work that we are getting with Oracle to address government compliance, government projects. We work to supplement the Oracle project teams, as they go in and implement their application.

And we've commercialized an in-house disaster recovery and business continuity solution, which is particularly relevant to mid-tier public companies. And so this is a way for companies to adopt a solution that allows them to have more control over their own disaster business company continuity, as opposed to going to the traditional outside third party vendors, who are typically are at a high price points for many mid-tier companies.

It sounds interesting. It sounds like you've got quite a testing capability that you've developed at RCM, because that's at least 2 of these 4 deals, right?

That's true. We both have a software quality testing capability, as well as performance testing. And we are and have been for some time, a Mercury partner, and that is one of the strong tool sets that we apply to some of these challenges, as well as the testing that we do in the validation, and the life science work that is driven by FDA regulation.

Brian, is there any way to give us a sense of the aggregate impact of -- I mean it's, this will be the first I guess lift in the IT business in awhile, is it, is there enough churn in the business that this won't have as big an impact, or just trying to get feel for how incremental this all is?

That's a great question and I wish we had an explicit answer. To the point you are making though, the churn in the staffing business continues about the same and so it is going to be project and higher margin work that does elevate the company above that, because it takes considerable effort just to stay even in the staffing space. And so a lot of effort goes to just maintaining the headcount, much less growing it. And so it's projects that are our target to bring us above that water line. And we are helped out a little bit by, even though there's churn in the staffing business, we are seeing some strengthening in the rates, and so a little less margin pressure around key skill sets.

Okay. Maybe one way to get a sense of what the mix is right now between staffing and solutions in the IT, because I assume the solutions is going to increase as a percent of total now?

Kevin can a little closer to that.

I was just, I think it seems like you are trying to get a little bit of color for 2005.

If you guys can address that I would appreciate it.

Well, we are generally not real comfortable discussing going out too far, but I can tell what we've seen for the first quarter, and what we are expecting in the near term. We anticipate that first quarter sales as compared to fourth quarter sales we're going to see some growth there. We did pick up an extra billing day, but even on a per billing day basis, we are going to see a little bit of growth there.

We are going to see in the first quarter we are going to see margins are going to be fairly soft compared to the fourth quarter. The reasons for that as you know, are some of them are seasonal, in terms of the resetting of statutory rates, particularly in IT and engineering. And as you know it has a pretty big impact when you go fourth quarter, from third and fourth quarter, to first quarter on the gross margin line.

In addition to that we are kind of in a soft spot, in terms of some of our project work, particularly on the engineering side, not on the I.T. side but on the engineering side, so that also is going to negative, negatively impact our gross margins for the first quarter. Our SG&A for the first quarter will be down, as compared to the fourth quarter as well. So basically as you are following along we are going to be looking at probably pretty flat operating income in the first quarter, as compared to the other 13-week quarters that we had in 2004.

But we have seen some momentum in the sales, particularly on the IT side, and obviously if that momentum continues into Q2 and Q3 and Q4, we would expect to see some modest sales growth going forward. But some of these projects that Brian has been discussing, it's really just, it's too early to really know how meaningful of an impact that's going to have on the sales going forward.

But the good news is, that we have seen some momentum. We have won a couple of nice contracts, that have the potential to have some meaningful impact going forward. And we are cautiously optimistic that we could see some modest increase to our operating income going forward.

The other question I had was, what you said about SG&A in Q1 relative to Q4, the margin is going to be down from, I'm sorry, as a percent of revenue?

The gross margin in the first quarter is going to be down.

No, I heard that.

-- from the fourth quarter. And it could could be down fairly substantially on a comparative basis. Our SG&A will also be down from the fourth quarter. We had a number of things going on in the fourth quarter, that caused the margins to spike a little bit. We did have some increased business development costs in the fourth quarter, in terms of some of our marketing costs.

In addition, we did make some, we bolstered our sales force a little bit in the fourth quarter. Of course we also always continue to prune the sales force, so that's an ongoing process. So there's a little bit of a spike in our sales cost in the fourth quarter.

In addition we had a bit of a spike on our legal costs in the fourth quarter. And then you had the normal sort of accruals, and as Stanton already discussed. We had sort of I guess a permanent spike in the fourth quarter, due to Sarbanes.

So basically if you are looking at the SG&A on a quarter to quarter basis in the near term, and it's hard for me to predict SG&A for Q2, Q3, Q4, because we don't know what the sales are going to be, but in the near term I would expect SG&A to be more at the levels that we saw in the first quarter and the third quarter of last year.

Okay.

Hopefully in the second, third and fourth quarter I hope we see significant increases to our SG&A expense, because if there are increases it would be primarily due to commissions and bonuses, which obviously are good.

Right. Stan, what's the effect of effective tax rate likely to be used in '05?

I would be comfortable at 38 percent, with a combination of Canada and U.S.

Okay. And then lastly on, any color on the acquisition world out there, and your approach to it?

Well, we continue to use a selective number of acquisition opportunities, both in IT and engineering. And I would hope that we probably would pull a trigger on one or so of them this year.

Okay. Thanks, everybody.

Your next question comes from the line of Nelson Obus with Wynnefield.

Hi there. Any developments on the stock tender legal case?

Yes. We had a hearing in the Appellate Court on February 15 in front of the three judge panel. They typically take 60 to 90 days to come up with their resolution. So we hope that by the middle of May we will hear from them.

Okay. Well. That's something good. I saw in New Jersey in its infinite stupidity, banned the outsourcing of any state contracts abroad, and I know you have a product that you offer to people that utilize outsourced IT personnel, which obviously won't work in Jersey, but probably Jersey will go bankrupt before it becomes relevant. How is that product doing in general?

Brian, you want to respond to that?

In general we, we continue to promote it. We have some dedicated people within the sales force that are focusing on that activity. We continue to be optimistic about it. The sales cycle is longer. Our target there is not the government sector at the state or Federal level, although there is some of that that going on, it's not with RCM. We are focusing more on the mid-tier companies who may be new to this, and do not have a standing partnership with some of the big named players. And at that level we have been building a pipeline, and we hope to be able to report more throughput on that, as we move through '05.

Okay. Great. The engineering arena has been pretty robust. Can you give us color or do you just think it's an ephemeral thing why the engineering activity looking forward, we are in a little bit of a slow patch?

As you know, 75 percent, maybe even 80 percent of our revenue comes from the energy sector. Some of the projects that are sizeable, require significant amount of due diligence on the part of the client, before they are awarded. And but when they are award it, obviously they will comment, and give us some visibility over several years in revenue.

Okay. That's fair enough.

We just have a natural lumpiness to our engineering group because it's pretty heavily focused on the utilities industry. The other 20 to 30 percent, which is focused primarily on manufacturing and aeronautical; it's doing quite well. So overall we are real happy with engineering on the utility side, and our power services side. We've got a very robust pipeline. It's just that theirs is always going to be some lumpiness to that business.

Yeah, and the industry still -- that part of the industry is still undergoing consolidation. Mr. Sutherland kind of talked around this, but you all talked around it in relationship to his question, but just looking in the fourth quarter, SG&A year-over-year being, SG&A being up, on an absolute basis and revenues being down, just two questions, what were the major reasons for SG&A being higher year-over-year with revenues down, and has that led to you fine-tune your cost structure at all going forward?

Well, we are constantly fine-tuning our cost structure. It's something we spend a lot of time reviewing. In terms of comparing 2004 to 2003, as you probably know, we had two major, major contracts, two of the largest contracts in the history of RCM, that coincided and ended at the end of 2003. So when you lose that big chunk of sales, obviously it takes some time to replace those contracts, especially when you are replacing them with much smaller contracts. And there's a certain fixed level of SG&A that you are going to have. So we continue to monitor and right size our SG&A, it's something we look at very, very carefully.

What's the best way you could do that? I mean, because obviously you don't want to lose your ability to accommodate an upturn?

We never want to cut productive sales costs, but we are constantly looking at our sales costs and trying to drive efficiencies. We regularly hire new salespeople, and the bottom performers are often, meet on their own, or leave us some help. It's something that we are constantly looking at. In terms of the fixed costs, or what I would call semi-variable costs, we are looking at them as well. If we have an office that is not performing, we look to see where we can get some of those costs down. But we are also careful not to cut productive costs, productive sales resources.

You may also recall, this is Brian speaking, that last year we opened three new offices. Those were investments for obviously in the expectation of future revenue streams we open offices in St. Louis, Puerto Rico and reopened an office in Phoenix. And so -- and I think our healthcare practice expanded into a new office during the course of the year. So those are investments that had some lead time built into them, where you will see the SG&A hitting before you see the operating income that should follow.

That's what I was looking for. Okay. Thank you.

Once again, [OPERATOR INSTRUCTIONS]. Your next question comes from the line of Eric Miller with Heartland Advisors.

Hi, guys. Leon, on your, when you look at acquisitions, what type of multiples are you looking at?

Really maintaining the same that we have in the past, between 4 and 6; maybe 7, depending on the margins, and the particular quality and proprietary technology or service that the company would have.

Now with your stock you obviously couldn't use stock, so you would do typical of cash with some earn outs?

Yes.

Thanks a lot.

You're welcome.

At this time there are no further questions.

All right. Since we don't have any further questions. Thank you very much for participating this morning, and we will see you probably in a couple of months. Thank you. Good bye. Thank you. This concludes today's RCM Technologies year end earnings conference call. You may now disconnect.