R C M Technologies Inc (RCMT) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the RCM Technologies year-end earnings conference call. All lines have been placed on listen-only mode, and the floor will be open for your questions and comments following the presentation. Without further ado, it is my pleasure to turn the floor over to your host, Mr. Leon Kopyt. Mr. Kopyt, the floor is now yours.

Thank you very much for joining us this morning. I am here with two of my colleagues, Stanton Remer, who would give you the financial statistics of P&L on the balance sheet; and Kevin Miller, who will go through the pictorial data as well as a brief outlook for the year 2006. So we will begin with Stanton. Then we'll open up for questions relating to the business, obviously, to the market or any other activities with respect to the RCM. Thanks. Go ahead, Stanton.

Thank you, ladies and gentlemen, for your interest and support of RCM Technologies. I'll just read our Safe Harbor statement. 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; our increased propensity of existing and potential clients through outsourced IT and engineering functions, anticipated operating performance and financial condition.

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 and competitive factors and shifts in market demand. If any of these risks or uncertainties materialize or if any of 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 reports on Forms 10-K, 10-Q and 8-K that we file with the SEC. 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 web site under investor relations. Thank you.

Some salient features of our results for the year ended 12-31-05 -- working capital at 12-31 was 33 million as compared to 29.5 million at the beginning of the year. That was a 3.5 million increase. Working capital at 9-30-05 was 31 million, so it was only a $2 million increase in the fourth quarter. Our senior debt at the end of the year was 3.9 million. Our senior debt at the beginning of the year was 4.9 million; that was a reduction of $1 million. Our net debt at 12-31 was zero. Our cash flow from operations for the 12 months was 3.6 million. For the nine months it was 2.6 million. It was $1 million in the last three months of the year. Our net worth worth 75.7 million. At the beginning of the year was 70 million; it was a 5.7 million increase during the year.

Our tangible net worth at 12-31 was 37.2 million. At the beginning of the year it was 34.1 million. There was a $3.1 million increase in our tangible net worth. Our EBITDA for the year was 7.2 million. For the fourth quarter it was a $2 million EBITDA. Our CapEx was 558,000 for the year, and we're projecting about 750,000 in 2006. I will turn over to Kevin Miller, who will give you some sectorial and some additional highlights. Kevin?

Good morning, everybody. As you know, the sales for the quarter were 46,412,000. That breaks out as follows. For information technology, 24,897,000; for engineering, 11,944,000; for our commercial services group, 9,570,000. Our blended gross margin for the quarter was 24.48%. That, of our four quarters, is the highest gross margin that we've had for the year. That breaks out as follows -- 27.95% for information technology, 19.27% for engineering and 21.98% for our commercial services group. And each one of those groups had their highest gross margins for the year compared to the other three quarters.

What was also exciting to us was that we had our highest sales in the fourth quarter as compared to other quarters, despite having the lowest number of billing days, given the holidays in the fourth quarter. If we look at our sales on a per-billing-day basis, and if you compare Q4 to Q3, our sales were up 8.7% on a blended basis. So obviously, we are very pleased with those results.

As far as giving some color on 2006, we obviously have a pretty good idea where we are going to come in for Q1 for 2006, and we're expecting Q1 of 2006 as compared to Q4 of 2005 to be fairly flat. Assuming some of our recent contract awards progress as anticipated, we should see a measured but steady increase in the quarterly revenue for the balance of 2006. This comment obviously assumes that there are no material losses of other revenue streams that we are enjoying currently. But obviously, we are cautiously optimistic about the balance of 2006 and 2007.

I also want to provide a little bit of color on some recent contracts that we've been awarded. We did mention that we had a strong pipeline in our last call, and I wanted to discuss a couple of those developments. You've probably seen the press release, obviously, on the Bruce Power engagement. It, as of today, is scheduled to be C$71 million joint contract with E.S. Fox Ltd. of Niagara Falls. That is expected to last, at present, over about a three-year period. We believe the contract should be roughly split in revenues between our partner, E.S. Fox and RCM Technologies. So roughly 35 million Canadian will be recognized by RCM. We also believe that the contract as the ability to grow in both scope and length, so it certainly has a good chance of increasing over the 71 million in three years, that we are currently contracted for.

We've also had some nice developments at one of our largest clients, Sikorsky Helicopter. As most of you probably know, they are a division of United Technologies. They are in the process of finalizing a $19 billion contract with the Marines, with the United States Marines, for 156 heavy-lift helicopters. We're hopeful that that engagement will be signed any week now and that Sikorsky will be officially announcing that contract.

Right now RCM is supporting those efforts. We have approximately 30 engineers working on that project; and, assuming that that deal is finalized -- and we started that engagement in the fourth quarter, by the way -- assuming that deal is finalized, this engagement has the potential to grow significantly and last for several years, if not longer, as the first helicopter is not expected to be delivered until around 2015 for that project.

There are numerous other smaller engagements that Sikorsky that we are bidding on. Our pipeline at Sikorsky is very strong.

Our recent acquisition of Soltre is already paying big dividends. We recently were awarded a $2.5 billion full implementation of the latest Oracle e-business suite with a company called Maksteel. Maksteel has operations in South Africa, Israel and Southern California; that's where their major operations are. They are a private company. We estimate their sales are about 6.5 billion, and they are a specialty metals producer/processor, if you are not familiar with Maksteel.

There are really three big reasons why we are really excited about this contract. Number one, it is a full-scale implementation. This is something that we did not have the capability to do, prior to the acquisition of Soltre. We also believe that the size and the profile of Maksteel would have been a very difficult engagement for Soltre to win if they were part of RCM. So we are really excited; because it's a few months into that acquisition, we are already seeing some major synergies. We also are excited because this is a major strategic initiative for Maksteel, and we believe that this engagement has the potential for significant follow-on work.

And third, we are very excited about the competition that we beat out on this contract. The finalists, from our intelligence, were Oracle Consulting, IBM and Cap Gemini. And to beat out those three much larger competitors is very exciting to us.

We have also won several smaller engagements in the 2 to $400,000 range, since Soltre has joined RCM. The total revenues on those three or four projects are over $1 million.

And last, we have been verbally awarded a subcontract to the prime on a contract with the State of New Jersey child support systems. We are expecting those revenues to be -- it's a bit fluid right now, but somewhere between 6 and 9 million is the expected revenues that RCM will realize on that contract. The work that we will be doing with the child support systems is very similar to work that we did a few years ago for the State of Michigan. This engagement is not expected to have a very big impact on 2006, although we expect the engagement to start in 2006, our role in the first six months is not at this time expected to generate significant revenue. So the balance of that 6 to 9 million should come in 2007 and 2008.

So that's all the prepared comments that I have for you this morning. I'll turn it over to Q&A.

Clarke, we are opening it up for questions, please.

(OPERATOR INSTRUCTIONS). Bill Sutherland.

The tax rate in the fourth quarter, Stanton -- it was higher, I guess, because you needed to bring the full-year rate close to 39%?

Yes. Also, there is amortization of intangibles on that. Unfortunately, we cannot get a tax deduction for it.

Oh, that's right.

And that's related to the acquisition of Soltre.

And what rate do you think you are going to be estimating for '06 right now?

Without any effect for FAS 123R, I would estimate 40%, 41%.

What about 123R? Any comment on that, as far as the numbers?

It's too early to tell, at this point. Obviously, we will be fully compliant.

It will impact the numbers, obviously, but it shouldn't be huge.

No.

I don't have your most recent Q, so I don't have your footnote on that. But I'll go check that.

And it's probably a bigger number last year than this year. But, anyway -- take a look at it. If you have any questions, let us know.

Kevin, in Q4, can you tell us how much Soltre contributed?

I don't have the exact revenues in front of me, but it's probably somewhere around 1.8 million, roughly.

Looking at '06, is the seasonality going to be apparent this year or different as you look at kind of the new initiatives?

Not on the new -- we always have some underlying seasonality, as you know. We've got the statutory taxes, as you know; and that is -- and we don't sort of get that benefit until Q3 and Q4; and that impacts our margins. Obviously, holidays and vacations obviously impact our business. What we've seen over the years is often times in the first quarter, when companies are sort of getting their budgets set, in our experience January is usually kind of cruddy month. So, first quarter there is just some general seasonality that I don't think has anything to do with holidays; it just as more to do with budgeting.

And then we have a little bit of seasonality in some of our groups. For instance, our health-care group, as you're probably aware, has a pretty big slowdown in the third quarter due to the summer months and the fact that New York City's school system pretty much shuts down, and they are a major client of our's. Other than that, there's a sort of the big seasonality. We have -- as you know, in the years we have had some surprises in the fourth quarter just because, for instance, we've seen Sikorsky really slow down in December just because of sending people home and giving people a break or what not. So there's not really anything specific that I can tell you in terms of other than what we've seen in the past.

As far as the new engagements are concerned, we don't see any apparent seasonality in those engagements at this time.

I think we are probably a little bit better positioned than anyone else because we have the sectorial diversity and charter diversity in terms of engineering, health-care and IT. And that certainly helps us anticipate or dampen some of the seasonality.

The Sikorsky work coming out -- is it a deliverable, or is it staffing?

No; it's a deliverable project. When I say deliverable, I mean RCM has a significant participation in the project, and there are specific design components and design systems that we have responsibility for. But all the work that we anticipate will be time and material.

And even though this huge contract is not officially announced by Sikorsky, you had roughly 30 engineers --

Only because the Army has awarded sort of a preliminary feasibility study to Sikorsky in anticipation of the contract. So they were funded -- and I don't remember the number -- 50 million or 60 million to that feasibility study. So that's where we were participating in.

Do you have a sense of what your participation could be like, once the real deal -- ?

I don't think it would be prudent for us to speculate, really. You see the scope of the project. Obviously, there will be a number of subcontractors, major and minor, to Sikorsky. All these things will play out over the next several months, assuming that the Army awards the contract as anticipated. So I think we'll have probably a better idea in the second quarter.

And can you characterize kind of the work you have done at Bruce to-date, not quantify it, necessarily, but the number of engineers you've had in startup or things like that?

I don't know if we have specific numbers of engineers. Obviously, it's ramping up. RCM has the front-end loading on the project, where the -- our partner has the back-end loading of the contract. So I think it will probably be fully up to scale in the fourth quarter of this year, so we are still ramping up.

But you will show a gross and net revenue number when Fox starts to work?

No, we will not. We will not; we are not the -- we don't have a relationship. We are the prime, and Fox is a sub to us. It's a joint effort, and we will be showing all of our revenue on the net basis. There will be pass-through revenues on this contract.

(OPERATOR INSTRUCTIONS). It appears at this time we have no further questions.

All right, very good. Thank you very much for joining us, and we'll see you at the end of the first quarter.

Thank you. This does conclude today's teleconference. We think you for your participation. You may disconnect your line at this time.