R C M Technologies Inc (RCMT) 2006 Q3 法說會逐字稿

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

Thank you very much. Good morning. Thank you for joining us on the conference call this morning. As usual, I am joined by two of my colleagues, Stanton Remer and Kevin Miller who will provide a little more detail on the financials and the operations. I'll be here to answer whatever questions you have. Stanton, would you please begin.

Thank you, Leon. Thank you, ladies and gentlemen for participating in our call and your interest in RCM Technologies.

Our presentation in this call will contain certain 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 proforma financial information; the general health and direction of the market for IT and engineering and commercial 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 and engineering functions; and 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, 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 the provision of information technology, 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 you copies of these documents at your request. Otherwise, we encourage you to review the documents as they appear on the RCM Technology's, Inc. website under Investor Relations. Thank you.

Ladies and gentlemen, for the 39 weeks -- I am going to first talk about the 39 weeks ended September 30, '06 compared to the 39 weeks ended October 1, 2005. As indicated in the press release, revenues are 147.7 million in '06 and 133.8 million in '05. Gross profit was 37 million compared to 31.3 million. Selling, general, and administration were 30.5 million compared to 26 million. Operating income was 5.5 million compared to 4.5 million. As a percentage it was 3.7 of revenues in '06 and 3.3 in '05. Net income was 4 million in '06 and 2.7 million in '05. Earnings per share on a fully diluted basis was $0.33. In '05 it was $0.23.

For the 13 weeks ended the same periods, revenues in '06 were 51.7 million compared to 43.4 million. Gross profit was 12 --13 million with a 25.1% gross margin compared to 10.2 million with a 23.4% margin in the '05 period. Selling, general, and administration was 10.3 million, [take] 19.8 percentage of revenues compared to 8.7 million and a 20.1% margin. Operating income was 2.3 million in '06, which was a 4.5% compared to revenues versus 1.2 million in '05 with a 2.7% relation to revenues. Net income was 1.3 million in the quarter, which was a 2.5% on revenues compared to 717,000, which was 1.6% of revenues in October of '05. For the quarter on a fully diluted basis, earning per share were $0.11 compared to $0.06, which was a 5% increase.

Some salient features. Our working capital at the end of September was 4.2 million. It was an increase since April of 1.7 million. Our debt at the end of September was 3.9 million, which was the same as it was at the beginning of the year. So our debt has remained the same. Our net debt is zero. Our cash flow from operations for the nine months was 4.6 million. For the three months ended September, third quarter, it was 1.5 million. Our net worth at the end of September was 80.7 million, which was a $5 million increase for the nine months. Our tangible net worth at the end of September was 41.8 million, which was a $4.6 million increase for nine months. Our EBITDA for the quarter was 2.7 million. For the year-to-date it was 6.6 million. Included in EBITDA was $693,000 of S FAS stock-based equity compensation expense. Our days outstanding have improved in the third quarter. It is down from 90 to 86 days. For the year-to-date, it remains at 90.

I am going to turn it over to Kevin Miller, who will give you some additional detail on sectorial data. Kevin.

Good morning, everyone. Total sales for the quarter were 51,650,000 broken out as follows. Information technology -- 25,871,000. Our Engineering Group did 15,504,000. And our Commercial Services Group did 10,274,000. The blended gross margin for the quarter was 25.08% broken out as follows. Information technology did 29.85%. Engineering did 18.7%. And our Commercial Services Group did 22.69%. In comparing Q3 to Q2, we had 63 billing days in Q3 versus 64 in Q2. I want to remind everyone that in the fourth quarter we will have 62 billing days with the increase in holidays and quite a few extra soft days in the fourth quarter as well as compared to Q3, Q2, and Q1. And that's all.

We are ready to open the conference call for questions and answers.

Certainly. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Bill Sutherland.

Thank you. Good morning everybody. Stanton, on DSOs, are you targeting anything better than mid-80s? Or is that where you think you ought to be?

As always, I have concerted efforts to continue to bring it down. I don't really set a specific target. I just always want to reduce it.

Does the customer mix lend itself to improving it at this point, do you think?

My personal discipline is, I just want to reduce it whether it is the customer or not.

We do have some steady, but slow-paying customers that cause that to be up. But as Stanton said, there is always room for improvement.

Nice pickup in the top-line in both Engineering and IT. Any particularly notable pieces of business that got things moving?

No. I think it's just continuation of existing business, expansion of the [recurring] clients, some new clients. We still have not been able to get to the full ramp-up on the Bruce project. I think every segment of the business, with the exception of the Commercial Services were affected by the summer shutdown in schools were off.

Just a general pickup in business. In Engineering we continue to see some increases in Sikorsky. Whether we'll see that going forward remains to be seen. That -- we seem to see a pickup in business every quarter for the last five or six quarters at Sikorsky.

Have you all worked your way through most of the process of moving your business mix in IT up to better gross margin business? I am sure there is always work to be done. But have you -- it seems like it was holding back top-line for awhile.

The transformation continues. Its an ongoing process. Clearly we are focused on the margin-rich revenues and continue to expand the services in order to entrench our position with the client and bring additional value. That will result in better margins.

Leon, do you all track the mix of solutions to staffing in IT?

We do.

Can you give us a sense of where it is now and where it was. Maybe that is one metric that can ----

I think on a combined basis, our solution business is close to 50% of our revenue. That would included the Engineering and the IT. That compares to about 25% of that about two years ago -- two and a half years ago. So there has been a significant -- I can't give you the exact [breakdown] between the IT and Engineering ----

That's fine.

But I think that we probably doubled our solutions business in the last two or three years by a combination of IT and Engineering.

Was it more in one than the other as far as that move?

No. I think they equally grew at the same rate, I think.

Alright. That's it for me. Thanks everybody.

(OPERATOR INSTRUCTIONS) Nelson Obus.

I assume Engineering was EBITDA positive this quarter as opposed to a year ago? Is that correct?

That's correct.

What would you consider to be an appropriate EBITDA margin for that business?

For the Engineering business?

Yes.

Probably in the upper single digits.

Yes. Before allocating any corporate costs, yes.

And Bruce would be in there too. Right?

Yes.

Again, you said it's started, but it hasn't ramped?

It's been ongoing. We did about 2 million roughly at Bruce in the third quarter, which is almost dead-on with what we did in the second quarter. We did about 2.1 in the second quarter and about a million in the first. We're expecting total revenues of somewhere around 30 million and potentially a lot more than that depending on whether we win any add-on work. We do expect it to ramp at some point. We expected it to ramp in the third or fourth quarter when we first won the project. That hasn't happened yet. Our expectation now -- or I hesitate to call it an expectation because, as I am sure you can appreciate, we have very little control on the pace of a multi-billion dollar project. But we are hopeful that it will start to ramp early next year. Whether that will happen or not remains to be seen. It's not necessarily a bad thing for us that it is taking longer to ramp because that increases -- at least in our view -- it increases the probability that we win more work. But, at the same time, we may not see a meaningful increase on our quarterly Bruce revenues until who knows -- first quarter or second quarter next year. It's just hard for us to really predict.

Aerospace analysts are pretty unanimous that the upcoming winner of the order to build the replacement for the Sikorsky's Jayhawk helicopters is not going to be Sikorsky. And that is a $13 billion contract. Have we been part of that? Or have we been part of the S-92? How will -- if it plays out the way we think it will, what kind of an impact do you expect it will have on us?

Yes, we have been part of the S-92, which has gone on for the last several years in conceptual design and feasibility studies. Clearly it is going to be an [indiscernible on a go forward]. I think with the present loading at Sikorsky and the H-53K helicopters and others, it may affect the growth -- our growth of work at Sikorsky. But I would not be too concerned.

There have been some criticisms of the S-92 development since they haven't been able to get an order for it yet. But you feel like as far as we've performed, no one is pointing fingers at us?

Oh no, absolutely not. RCM has been a significant contributor. Obviously we don't control the overall design or the capability or the feature of the helicopters. But we've done an incredible job for Sikorsky. Clearly they have recognized that. That is why we are a part of the new development on the H-53.

I know you don't give backlog orders, or you at least don't do that regularly -- from new business orders. But can you give us a sense of what you have been able to -- of what the new order input order has been of late -- in the various areas, a subjective overview of opportunities that you've been able to execute in the various businesses.

Are you referring to our relationship with Sikorsky?

No. Just in general.

The general pipeline ----

The pipeline, yes.

I think our pipeline continues to be strong. Again, the pipeline, the proposals, the presentations, are the internal indicators for me in terms of the viability of the business. Our general sentiment is that we should experience a moderate but sustained growth environment over the next year or so. We don't see any [armenias] or anything else that is going to impact the sector.

Is that across all the segments, would you say?

[Both] IT and Engineering, yes.

Oh, in Engineering and IT. The other one obviously is -- any thoughts about the long-term strategic utilization of the staffing business? It is a little bit -- I wouldn't say it was a core business. Do you have some comment about whether -- it doesn't seem to have a critical mass. I am sure it contributes. But is it worth the -- what you could get for it by putting it up for sale?

You are talking about our Commercial Services business?

Yes.

That is actually two different businesses. We have a traditional commercial services group.

That's what I meant, yes. I meant that part of it.

And then we have a Health Care Group.

Health Care you want to keep, I am sure.

We continue to build the value of both of those units. By building the value, it provides us whatever options that we will exercise in the future. The important thing is to continue to build the value. Over the last two years, the value of both those units at least doubled, if not tripled.

To answer your question, you never know. But I find it highly unlikely that we would do anything with those units. Because both of them have outstanding management. They are growing really well. The value to someone else is probably quite lower to them than it is to us. They are both contributing fairly significant operating income to RCM. We've got great management in place that is really growing the operations and going quite nicely. We like both of the businesses.

Okay. What would you -- with your current -- some would look at your current balance sheet and say you are underleveraged. Clearly you are generating cash. Your capital expenditures are not great. So maybe you could prioritize what your strategic thinking is in regards to excess cash, which appears to be building up a tad on your balance sheet.

We continue to look at the acquisitions as we have over the last 12 to 18 months. They have to meet certain criteria. They have to bring some strong synergies and complementary services, have strong business fundamentals, obviously accretion to our financial performance, and also technological capabilities. The pipeline is there. We continue to evaluate. Having the debt capacity allows us to pull the trigger when we find the right opportunity.

I would classify our balance sheet as opportunity-rich because no leverage.

Yes, opportunity-rich is certainly correct.

I am jesting a little bit. Obviously we feel like we're in a good position to take advantage of some potential acquisition opportunities going forward.

The stock traded for long periods in the late '90s from the mid-teens to the mid-twenties. What would your thought be in terms of what the Board's thinking is when they look at the share buyback option as a possibility if you wind up paying more than you should for acquisitions, if that is the alternative.

We are certainly not going to pay more than we should for acquisitions. We always consider doing a stock buyback. What we keep coming back to is we think that doing acquisitions is a better use of the balance sheet, number one. And we continue to look for opportunities. Number two, we think we have some float issues as it is. I am not sure going into the market and restricting the float -- I am not sure, that long-term, that is the right thing to do. Certainly in the short-term you probably could get a little bit of a pop to the stock. But I am not sure that in the long run going out and buying 200,000 or 300,000 or 400,000 shares of stock makes a lot of sense long-term. It is something that we look at as a management team. It is something that we discuss regularly with our Board. It is something that we will always consider going forward.

I think what the Board has to do is to determine at what price it becomes an investment in your own shares, which you would have a hard time beating through acquisitions. Remember there are people who would -- float -- I think that is not the way to look at things. I think you've got to look at where you're buying the stock and where the price of the stock goes. Remember there are a number of investors who look to companies to do that calculation and are attracted to them and would find your Company more attractive if you were a little more flexible about how you put your excess capital to work. Because clearly acquisitions are not particularly cheap in this environment. I am not saying that this is the right price. But it's an exercise that -- in other words, if you have the luxury of having a good balance sheet, you can have more than one option. You can have a trigger price, at which point numbers would indicate that buying shares back would be the best way to serve the outside shareholders and yourself.

You are correct. We go through that exercise on a regular basis.

Okay. Thanks.

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

Very good. Thank you very much for joining us. We'll reconnect after the next quarter. Thank you.

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