R C M Technologies Inc (RCMT) 2005 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the third quarter earnings conference call. Mr. Kopyt, you may begin your conference.

Thank you, good morning. I'm joined this morning by three of my colleagues, Stanton Remer, Kevin Miller, and [Jim Schappert]. We will begin with the -- as usual with the financial presentation, we'll give you some segmentation data, and put a little color on the year ending '05 and a little bit of color on '06 as well as our strategy in the IT consulting group. Stanton?

Good morning, everyone. Thank you for participating in our call. Our script is, 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 engineering functions, and anticipated operating performance and financial condition. 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 expected results.

The following factors will specifically affect our ability to achieve expected results: Unemployment and general economic conditions associated with revision 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 or ability to achieve expected results, the other factors we consider most pertinent are referred to in this periodic reports on forms 10-K, 10-Q and 8K that we file with the Securities and Exchange Commission. We will be happy to send copies of these documents to you at your request. Otherwise we encourage you to review the documents as they appear on the RCM Technologies website under investor relations. Thank you.

Some salient features of our financial results for the nine months ended October 1, I will refer to essentially as the third quarter, the working capital at the end of the third quarter was $31 million, the working capital at the beginning of the year, January 1st, was $29 million, that's an increase of $1.5 million. The senior debt at the end of October 1 was $3.9 million, it's down $1 million from the beginning of the year, it's also down $2 million from July 1, which was 5 million at that time.

The net debt is zero, the cash generated from operations was $2.6 million, it was $2.3 million for the 3 month period ended October 1. The network at the end of September, October 1, was $73.7 million, that's an increase of $3.8 million for the nine months. Our tangible network on October 1st was $35.5 million that was an increase of $1.4 million. The EBITDA for the nine months was $5.3 million, it was $1.4 million for the third quarter. The capex in the third quarter was 81,000. The days outstanding were 87 on accounts receivable. I'm going to turn it over to Kevin Miller for more specifics on [executorial] information. Kevin?

Good morning, everyone. The total revenues for the quarter were $43.391 million broken out as follows. $23.564 million for information technology, $11.187 million for engineering, and $8.640 million for Commercial Services. The gross margin, the blended gross margin was 23.4%, broken out as follows. 27.47 for information technology, 17.16 for engineering, and 20.37 for Commercial Services. We had 62 -- excuse me, 63 billing days in the third quarter -- billing days in the third quarter as compared to 64 billing days in the second quarter, and 63 billing days in the first quarter.

I'd like to share a little bit of information on the quarter, and get a little bit on the outlook going forward, and update everybody on a few important items. While we were disappointed obviously with the Q3 results as compared to Q2, the company attributes the sequential decline in revenues and operating income from the second quarter to the third quarter of 2005 primarily to two different unexpected events, and several seasonal factors. We mentioned a couple of these items in our press release, obviously. During the early part of the third quarter, a client of the company's power systems group, which is Ontario Power Group, abruptly terminated a fully negotiated but unsigned contract. That terminated contract reduced the revenues in the quarter by approximately $1.5 million, and it was a terminated contract in addition to that, several other contracts were reduced in scope that impacted the third and the fourth quarter.

Early in the third quarter, approximately 20 of the company of consultants completed a major project with a pharmaceutical client, RCM had previously expected the majority of those consultants to immediately start on another project, which did not ultimately commence until early in the fourth quarter, and revenues for the pharmaceutical project were approximately 700,000 less in the third quarter than in the second quarter. A couple seasonal factors to note, revenues from the New York board of education, which is one of our major healthcare clients, they virtually shut down during the summer months, and revenues in the third quarter as compared to the second quarter declined by approximately $900,000.

Another seasonal factor, which most of you are probably aware, that in third quarter, we have less billing days because -- we have less billing days because of an increase in holidays. The billing in the third quarter are 63 days as compared to 64 days in the second quarter. Also, the summer months tend to be heavier vacation months as I'm sure most of you are aware.

In addition to these seasonal factors that impacted revenues, we had a major sort of unpredictable item that impacted our SG&A expenses. The company experienced a substantial increase in legal fees in the third quarter for a previously disclosed litigation whereby the company is both a defendant and a plaintiff. Legal fees related to this matter increased in the third quarter by approximately $290,000, and $260,000 as compared to the second and first quarters in 2005 respectively.

On -- obviously on a very high note, we'd like to announce to everybody that -- and I'm sure many of you have seen the press release from Bruce Power, which as you know is a major client for our power systems group, Bruce Power has launched a Canadian $4.25 billion contract to restart Bruce A units 1 and 2 and to also do some work on Bruce A units 3 and 4. We have executed a non-binding letter of intent regarding the major contract with Bruce Power. As most of you know, we've been working on this contract for the better part of a year in anticipation that Bruce would award and start this major project. We're in the process of finalizing the terms and conditions of that contract.

However, despite our expectations of closing this contract, this deal is not closed, and the company must stress that, you know, all we have now is a non-binding letter of intent, and until this contract is signed, it's not signed and certainly, you know, anything could happen between now and the time that we expect to get that signed. But obviously the fact that we have a non-binding letter of intent in place from our perspective is very good news, and we expect that project to launch sometime in 2006. RCM was also placed on the master vendor's list at Bruce Power and it is our anticipation that there will be other contracts over the next five years that will be awarded, or that we'll be given the opportunity to bid on as well. And those contracts will pertain to Bruce A and the other, you know, to Bruce A, Units 1 and 2 and the other six units that they have at Bruce Power.

I'm sure most of you probably saw the press release as it pertains to Soltre Technology Inc. We're very excited to bring Soltre on board and their management team, and the entire company. As you probably saw from the press release, they're an Oracle Solutions provider, and we believe that this acquisition will allow our Oracle practice to achieve a significant growth over the next couple of years. I want to give you a little bit of color on Q4. The -- our current quarter.

As many of you know, the fourth quarter is traditionally our worst quarter as it pertains to seasonality. We have 62 billing days in the fourth quarter, versus 63 in the third quarter and 64 in the second quarter. It's also a quarter where vacations are kind of difficult to predict. Oftentimes we have clients that shut down, we call them plant shutdowns in December, between Christmas and New Year's where many of our consultants or all of our consultants are sent home for the week. So we are not anticipating that Q4 will be a strong quarter as compared to Q2, and Q1. But we are hopeful that we'll see a slight increase in revenues from Q3, but at this point, it's really too early to give anymore clarity on Q4 as compared to Q3 and Q2.

I want to talk a little bit about our pipeline, and some of our recent focus. RCM in recent quarters, particularly in 2005, has really put more emphasis and more focus on winning larger-scale projects. We have several large projects out to bid, and I'm not talking about Bruce Power. We have several large projects out to bid where we believe we are finalists and where we believe decisions will be made by the end of 2005 or early 2006, and if we win one or more of these engagements, they will have some impact in 2006. We obviously must stress while the pipeline for large project jobs is outstanding, we may not realize any of these opportunities. Obviously, we haven't won any of them yet, so giving any details on any of these projects is difficult, but hopefully on our next call we'll be able to share some good news with you.

Outlook for 2006, while Q4 could be a challenging quarter, we are optimistic about 2006. If we do close Bruce as expected, it should have a significant impact on 2006 and 2007. And as I say, we're also expecting decisions on several other bids that could also significantly impact 2006, assuming we win one or more of those projects. In addition, the trend for our core resourcing and small consulting projects is stable, and appears to be trending upwards slightly, our pipeline for smaller consulting projects is also strong, and it also causes us to be optimistic for 2006. And that's all that I have prepared in terms of the commentary. Thank you for joining the call.

Jim Schappert will give you a little bit of an update on the IT consulting group.

Thank you, Leon and good morning everyone. On the IT consulting division, we are continuing our transition from a pure staffing model to a model that incorporates, as Kevin referenced, more project and solution oriented work in addition to the core staffing business that we will continue to pursue. Our goal is to provide a more predictable revenue stream through longer term projects, deeper, more strategic relationships with our clients, and with new prospects. We're able to leverage both the existing clients, the long-term relationships we've had with these clients for argument's sake, expand our footprint in these accounts to move away from a more tactical relationship into a more strategic relationship with some more of their directed business initiatives.

This should provide in the long term, as I said before, a more predictable revenue stream for us with larger projects and more resources available for these accounts. We're currently, as Kevin referenced again, in various stages of the sales cycle with a number of opportunities, these would and probably will result in multi-year engagements with these clients, and again, this is the predictability of revenue where after the staffing business continues to be active for us, there is a lot of pressure in that part of the market, and we believe that in anticipation of the market, there's more focus on solutions and project work will be beneficial to RCM long term. We're also committed to improving and top-grading the sales and delivery operations in the field. We've taken a number of moves in our staff, both sales, recruiting and field-level management to improve our abilities moving forward in both the solutions and the staffing side of the business.

Thank you, Jim. And Vishonta, we are prepared for the question-and-answer period at this point.

Your first question comes from Eric Miller of Heartland Advisors.

Again, obviously with the risk that Bruce Power's not a signed contract, when would the timing of that start if, in fact, you did get that job?

Well, I'm talking about the information that we have today, and it's our expecting that it would start sometime early in 2006. But, you know, we don't control that, obviously, and it certainly is possible that it could get pushed out. But every indication we have is it would start early in 2006.

How does that compare to the earlier job at Bruce?

Well, we're at this time, and again, everything is subject to change, obviously, but at this time, we're expecting our piece of the initial contract to be $35 to $40 million Canadian, and to be recognized over a two-year period. The last time around, and obviously what happened in the last contract has no bearing on this contract, but last time around the contract nearly tripled and went over, you know, extended beyond three years. This is a more extensive job than the first one, and while the schedule is similar, it's very possible it could take even longer. It's possible that it could go out as long as, you know, four or five years to complete the entire project. So it's difficult for us to speculate what our ultimate revenues will be, but we certainly believe that ultimately the project will be more than $35 to $40 million, and potentially significantly more, and we also believe that there's the possibility that it will go well beyond two years.

Okay. The acquisition that you guys announced, did you give any or will you give any dollars on, you know, what's this going to mean, what the size?

Their LTM revenue ending September 2005 was approximately $7 million. We do expect to, you know, obviously we expect to see some growth there going forward.

Okay. And would you be -- deem that then to be accretive in '06?

Yes.

Okay. And then just a last-- it's really more of a comment, too, I've discussed would you guys, obviously we've been a really long-term shareholder here.

We appreciate it.

That, you know, just having some money for a buyback, especially when you got a clean balance sheet and you guys are in a net cash positive position here today, you know, makes sense. Here, you know, is a good example today, stock's down 18%, granted if you had a buyback, I'm sure you couldn't buy today but nevertheless for long-term holders, taking advantage of when you guys, a small company, you have variability in earnings, and project start, and stop, and that can swing your quarters, it's a -- I think it's a tool that frankly is -- the board should put in place that you have.

Right. Well, --

Eric, I appreciate your input. It's a subject that's being actively discussed in almost every board meeting. And I think we like to wait for the right opportunity and the right timing to make sure that that investment is prudently placed and it results in increasing value to the shareholders, but also at the same time, contribute to the growth of the company.

Right. Well, you know, they're not mutually exclusive so -- but appreciate it. Thanks.

Your next question comes from Bill Sutherland of Boenning and Scattergood.

Good morning, everybody. Soltre, terms of the acquisition?

I don't have them in front of me, but they'll be in the Q, so you'll see them shortly.

Okay. Mostly cash?

Mostly cash, yes. A small amount of stock.

You know, our acquisition, it's a significant portion of the consideration is deferred, based on performance, and, you know, we're sticking to that formula, Bill.

Uhm-hmm. And pretty -- you know, I'm sure the multiple EBITDAs pretty typical?

Pretty typical, yes.

Okay. I guess for Jim, the mix in the IT area, where is it now, staffing versus solutions, and where would you like to see it maybe in two years?

I think now we're probably %85 staffing, %15 projects, approximately, maybe even %90/10, and I would like to believe that the staffing number will not decrease at all, but as an overall percentage go down to something probably %75/25, maybe %60/40.

Just depending on more Soltre-type deals and so forth?

Well, Soltre is a key part of it, we do expect that the Oracle practice will continue to grow both in Southern California, where they're located, as well as pushing it across the country. But we have a number of other opportunities that we feel are very project-oriented, non-core operations for some of our customers that just don't want to deal with it any longer, IT infrastructure outsourcing, call center outsources, those are some of the other areas we've got proposals out for today, which will continue to increase the project side of the house.

What's the growth been like at Soltre?

It's been excellent. The company is approximately three years old, and they've been able to build to $7 million in three years.

Uhm-hmm.

I don't have the exact numbers in front of me, but their growth record is outstanding.

Well, you just hear the tales about how tough it sometimes can be being a partner to Oracle. Is Oracle kind of changing as time goes by from that regard?

Well, changing, I think, you know, as you know, there are some structural changes that's happening in the software industry, the combination of the consolidation as well as development effort towards a more flexible service-oriented infrastructure. And I think Oracle is going through that, and they have a number of conversion or fusion activities that are going to have to happen as a result of the four major acquisitions they made.

Uhm-hmm.

We believe that we can participate in some of that conversion as well as, you know, pushing out their core product, you know, throughout the entire RCM network.

So because, you know, it's become a more far-flung organization in a sense, they have to obviously reach out to the independent-type implementers more?

Yeah, I think they're going to rely more and more on outside implementation as opposed to on the inside organization. That's been the trend. Right, Jim?

Absolutely. And I also think there's another trend there that they will continue to look at partners more in the middle market and low end of the market, and have themselves and their service organizations focus at the higher ends. So that provides a wonderful opportunity for companies like RCM.

Good. What was the size of your other -- your contract for 3 and 4 at Bruce initially? What was the start up?

The initial project was approximately $40 million Canadian. That was --

But half -- but the -- about half of that, that was the gross. About half of that was supposed to be ours, and that 40 turned out to be about 120. And which half of which was ours and approximately --

The 40 was the total contract, including the subcontract work.

Right.

And your subcontractors are much smaller now?

Well, there may be -- that hasn't been fully determined. There may be a subcontracting element to this contract, but the $35 to $40 million number that I gave you is the piece that RCM is going to be doing, so the contract may be much larger than $35 to $40 million. But the core revenues, you know, from the contract that we're going to provide is going to be between $35 and $40 million.

The-- okay. And you covered that it would be starting probably in early 2006.

That's our belief, and our hope. But obviously we don't control that.

Oh, well, obviously. So right now, it's pretty tough making -- you know getting a bead on '06 for you all because you've got so many opportunities hanging. Is Soltre, it's effective as of today? Or I mean, this week?

It was effective September 1.

Oh, it is, okay. Okay. All righty, I think that's what I need. Thanks a lot.

Thanks, Bill.

Your next question comes from Steven [Secelwit] of Winfield Capital.

Good morning, most of my questions have been answered, but I guess one question I have is you commented a little bit about how much litigation is costing. Can you just update us a little bit on where you're at, add a little more color of what's going on there?

Yes. There are two litigations, one is the -- where we are a defendant, and that case is on the appeal, in front of the New Jersey appellate court. The oral arguments were heard on February 15th. It was our hope that the decision would be forth coming shortly after that, here we are eight months, nine months after that, and we still do not have the decision. But we still feel hopeful that that verdict is going to be overturned or reduced, but that's our expectation.

The second legal proceedings is where RCM is a plaintiff, and that's against the lawyer that drafted the contract in the underlying case. It's a malpractice case against two law firms in Philadelphia. And we had a heavy activities in discovery and depositions, and that's obviously reflected in the cost. We don't expect, going forward, you know, to have that burden, unless we go to trial.

Right.

That's where we are today.

Okay. All right, great. Thank you.

You're welcome.

At this time, there are no further questions. Are there any closing remarks?

All right, thank you very much for joining us, and we'll see everyone in 2006. Thank you.

Thank you. This concludes today's third quarter earnings conference call.