R C M Technologies Inc (RCMT) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen and thank you for waiting. Welcome to the 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, Leon Kopyt.

Good morning and welcome to our year-end and fourth-quarter conference call. As usual, I'm joined by two of my colleagues, Stanton Remer and Kevin Miller, who will give you a more detailed presentation about the financials and the analysis of various aspects of the P&L and balance sheet. We will begin our presentation with Stanton Remer and followed by Kevin's analysis of margins and segmentation. Stanton, please?

Thank you, Leon, and thank you ladies and gentlemen for your interest in RCM Technologies. I will read you the script. 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 in higher margin service areas, our pursuit of strategic alliances, partnerships, clients and acquisitions; the increased propensity of existing and potential clients who outsource IT and engineering functions and anticipated operating performance and financial conditions. These 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 and engineering services and solutions in placement of temporary staffing personnel; our ability to attract, train and retain qualified personnel who possess the skill and experience necessary to meet the staffing requirements on our customers and future customers; our ability to achieve and manage growth and our ability to -- in 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 filed with the SEC. We will be happy to send you copies of this document at your request. Otherwise, we encourage you to view the documents as they appear on the RCM Technologies web site at www.RCMT.com under investor relations. Thank you.

Now I will give you some highlights of the results for the 52 weeks ended December 30 as well as the 13 weeks ended, same date. For the year, we posted $202 million for the 52 weeks '06 compared to $181 million in '05. The gross profit was $50.5 million compared to $42.7 million. General and administrative, which included $955,000 of FAS 123(R) expense was $41,243,000 compared to $35,500. Depreciation and amortization was $1.5 million compared to $1.2 million. Income before taxes was $7.5 million compared to $5.8 million. Income taxes was $1.1 million compared to $2.2 million. The net income down at the bottom line was $6.4 million compared to $3.5 million for a total posting of $0.53 compared to $0.30.

For the 13 weeks, it was $54.2 million compared to $46.8 million. The income before taxes was $2.1 million, $2.2 million, compared to $1.5 million. It was an income tax benefit of $174,000 compared to an income tax expense of $693,000. The net income for the quarter, 13 weeks ended December 30, was $2.3 million compared to $819,000. That is $0.19 compared to $0.07.

Our working capital at the end of December '06 was $38,800 (sic -- see balance sheet) compared to $33,000 (sic -- see balance sheet), and that was a $3.5 million increase. Our goodwill was $40 million compared to $38.5 million. Total assets were $100 million compared to $106 million.

Our senior debt was zero at the end of December compared to $3.9 million at the end of '05. Total liabilities were $16.6 million compared to $31 million at the end of '05. Shareholders equity was also up considerably with $83.4 million compared to $75.7 million.

The working capital was $33 million.

I will check that. Kevin, you want to --?

I just wanted to give out the sectorial data for the fourth quarter. Good morning, everybody. The total sales for the quarter were $54,192,000, and that is broken out as follows. Information Technology was $26,690,000, Engineering was $17,018,000, Commercial Services was $10,483,000. The blended gross margin was 24.66% for the fourth quarter and it's broken out as follows. Our Information Technology group, the gross margin for the fourth quarter was at 30.51%, Engineering was 17.37% and our Commercial Services group was 21.60%. And that is the material data for the quarter. Leon?

Thank you, Kevin. Briana, we are ready for the question and answer period.

(OPERATOR INSTRUCTIONS). Bill Sutherland.

In Engineering Services, can you all give us a little color on some of the trends there? And I am curious -- did you have a 10% revenue client in '06?

Yes. Our biggest client on the Engineering side is Sikorsky Aircraft, and I don't know the exact percentage Bill, but it's somewhat in excess of 10%, not significantly.

Right around there, okay.

Yes, we probably -- off the top of my head, we did sort of last year in the low 20s, and when I say 20s, $20 million, with them next year. Our outlook going forward with them is fairly positive. There is a lot of activity there. They will be down a little bit in the first quarter compared to where we were last year, but there is a number of initiatives there that lead us to believe that we will see some growth in 2007 with that client. And not only with them, but with some of their other contractors as well.

Are you talking about in the aerospace end, Kevin?

Yes. As I'm sure you know, there are a number of subcontractors to Sikorsky and we feel like we've made some pretty good inroads with some of those subcontractors. And we feel like -- that we could see some decent business coming from those subcontractors as well, not only for work that they're doing for Sikorsky, but for other aerospace clients as well.

Are there any Sikorsky programs that are impacting you plus or minus like last year's? I realize the S-92 didn't have an impact, but anything else that we should know about?

No, other than Sikorsky has received a number of their proposals for the new heavy lift helicopter to do the detailed design. As you know, we were doing the preliminary design. They've taken bids on the various pieces of the aircraft, starting with the cabin, all the way through the tail and propulsion, and they have not adjudicated those contracts yet. But our expectation is that we should participate in some of those.

Okay. And, Leon, while you are on, can you give us an update on the -- not just Bruce -- well, Bruce, and also whatever else there may be in the power side as far as opportunities??

Well, Bruce continues to be behind the ramp-up schedule that we originally anticipated. As you know, we were helping to be fully ramped-up by the third-fourth quarter of '06. It did not happen and I'm not sure it's going to happen, but we are not too concerned about that because obviously it stretches the project slightly into the '08 and early -- 2007, as well as part of the '08. There are a number of other projects in the Canadian market that we expect to participate. They are all obviously in the utility market, and there is a number of projects in the aerospace both domestically and internationally that we are -- also have a strong pipeline prospect [in integration]. So all in all, we expect a moderate growth in '07. Obviously the first quarter is always a challenging quarter in terms of margins and growth, but the expectation is that we -- obviously, we're not going to see -- expect to have the same growth in '07 as we had in '06. But we do continue to expect a moderate and sustained growth in the '07 as well.

Okay, and then last, did you happen to have billable employees in front of you for year end?

We don't have it in front of you, but we can give you that number very quickly and very easily after the conference call.

Very good. Thanks, everybody.

Nelson Obus.

Yes, just a couple of little nips and then a bigger question. By the way, it looks like a great quarter. It certainly looked like a breakout quarter on the surface. I'm just curious -- why in the balance sheet was goodwill and intangible assets up year-over-year?

[Pete], we had an earnout payment need in -- I believe it was October or November, and it was a small acquisition in April of '06.

Okay. And the stock-based compensation, what triggers that? It is that a lump sum grant that you have to expense up-front? Is it tied to the -- I know they've changed all of these accounting rules and I'm having a hard time following it. Is it like stock appreciation rights in the old days when the stock goes up? What exactly is it?

It is somewhat like stock appreciation rights. This is -- I will try to make it so everybody on the call understands. For the unvested portion of a stock right, be it an option or a stock award or some type of award that an employee receives, there is a theoretical growth in that right as the unvested portion becomes vested and they are actually receiving something tangible over that time when it becomes vested, and you have to expense that portion that I just explained. It's really just bookkeeping. I don't mean to [deminimize] it. The first part of it is an expense and the other side goes into additional paid in capital, so there is no change on the balance sheet. The balance sheet is not affected by this expense. But in our particular case, the only thing that we have there that's hitting that is our stock option, is the traditional sort of stock options that we have granted over the years that have not been expensed. (MULTIPLE SPEAKERS) that's what you're seeing and we happened to issue a fair number of options in 2005 just because we had not issued options for awhile. So 2005 was a year where we issued an out-of-the-ordinary number of stock options. And because of the accounting rules starting January 1, and it's a very complicated formula how the expense is calculated, but it's impacted by the number of options, by when they vest, the share price at the time you do the calculation (MULTIPLE SPEAKERS).

Weighted average cost of capital and so forth.

Yes, so -- but, what's important I think is that, that expense in 2006 is higher than it should be going forward just because we had a spike in options issuance just prior to FASB coming out with that rule. So that in 2006 was running approximately on average I think $250,000 a quarter roughly, that we should see that start to come down a little bit in 2007. It's hard for us to sit here and say exactly what that expense is going to be just because it's influenced by the stock price and everything else, but it will eventually come down and the options that are being expensed now will eventually -- that expense will eventually go away, and then what you will see is any new options that are issued. But the important thing is, that expense should come down some in the future.

In the 10-K, in the body, there is a disclosure that estimates -- if we don't issue any more options, it will be over a period of 1.9 years. The remaining cost is approximately $1.1 million. So it will come down fairly rapidly.

Yes, if I got it right, I think what FASB did was create was a situation where the mere granting of options concentrates their recognition of that liability up front, as opposed to in the past when that wasn't recorded until they vested. But -- or now, it's a mixture, but there's more up-front expensing now under the new FASB rules. Isn't that the case?

That's an overall, a 10-foot explanation, yes.

Anyway, let's go from there to a bigger picture question. Let me just get to this in the -- Leon, you have a quote here that sector-leading indicators point towards positive momentum in 2007. I wonder if you could give us some color on that? What indicators you're looking at? Are they industry-wide, are they Company? And you are obviously covered under forward-looking, so any color you could give us, it would be appreciated.

The indicators that I am referring to are the IT sector indicators, and also the engineering sector indicators, that I am projecting a sort of a mid-to-upper-single-digit growth in '07. That is one of the indicators. The other indicators, obviously, you're looking also at IT distributors who traditionally offer the good window into the market because they represent a cross-section of different IT companies, from processors to high-end servers and everything in between. So, they can signal either industry slowdown or an isolated limited problem or certain geographic sector or sub-sector. So those distributors are also projecting a sort of a moderate growth in '07. And similarly in the Engineering sector, both in the defense aerospace and utility which are the two major sectors that we participate in.

So you are talking about industry macros more than anything else, right?

That's correct.

Just one question about your balance sheet and also your P&L. Can you give us some of the strategic questions -- obviously, you have some capabilities now that you really have not had quite so clearly in the past, particularly in two areas. Number one, you have no senior debt on the balance sheet, so you're completely unleveraged; and number two, the commercial business, which is probably your least value-added is not only profitable, but is in an environment where you certainly could find buyers for it, I believe, looking at some of the deal flow that I have seen. So it gives you a lot of moves to move some of these pieces around. And without committing to anything, I just wonder what is going through your mind, given the things I have just discussed.

Let me answer the Commercial Services part. We view both -- and as you probably know, there's two businesses there -- our traditional sort of staffing business and our health care business. We view -- (MULTIPLE SPEAKERS).

I'm sorry, I didn't mean the health care; I think there's a good future there. Go ahead.

And I think there's a good future for both of those businesses. As you have probably noticed, we lump them together for sectorial purposes, but both have been growing very nicely. Both businesses have good management in place that really run that business very well without a huge amount of attention, or frankly a lot of resources that corporate has to pour into those businesses. We like both of those businesses. We like we like the fact that they are growing and we're excited about the prospects of both of them going forward in terms of continuing to generate attractive growth.

Now, obviously, if we were to see an opportunity that makes sense for the Company in terms of doing something strategically with those businesses, we certainly -- we'll get all of our options and consider that. But one of the issues there is if we ever did decide to do something there, we have some tax issues too. So, it's not -- they're not that easy for us to sell, even if we wanted to, and quite frankly we're not looking to sell them to be real up-front with you. Now if something came along, obviously we would look at that, but it would have to make sense for the shareholders and both of those businesses make up a meaningful amount of our revenues, a meaningful amount of out growth and a meaningful amount of our operating income. So it's not quite as simple as, gee, these two businesses don't look like the others. What are you going to do?

The important thing is we continue to build a value in both of those businesses. I think that is important in both improving our balance sheet as well as the performance, and that's a very important component in terms of evaluating our options. So building value and growth in those two units is what we are focused on, and obviously all the other options will be available to us.

And quite frankly, we like the diversity that those two businesses give us in terms of spreading the risk around and in terms of our service offering.

Okay, let's turn it around then. Keeping in mind that -- which is really what I meant to when I asked the question, look at it from both sides (technical difficulty) keeping in mind that most acquisitions are probably not the smartest things for companies to do, and given the fact that you really have an unleveraged balance sheet, and it's -- clearly, you don't have a lot of capital, which is what's the great thing about this industry is -- what are your options in terms of guarding the business? What are you thinking in that regard, or share buyback or dividend? Let's look at that for a second.

Obviously, we continue to look at all of those options. To us, the most attractive option is to make some disciplined and focused acquisitions, which we are very interested in doing. We are continually looking at acquisition opportunities. As you know, we are pretty disinclined, so we hope and expect that we could do an acquisition or two this year, and quite potentially do something of some size. But as we sit here today, we cannot say for sure that whether we're going to do that or not just because we're not going to do an acquisition just to do an acquisition obviously. But that is our biggest focus in terms of potentially leveraging and getting some good -- getting a good return on our equity.

Okay, I think you are (indiscernible) -- because you're so unleveraged, you ought to think about having a buyback program in place in case we have another February 27th and the market is down 500 points, and also think about dividends. It's a whole suite of opportunities you have.

That's something we have never had the luxury of considering (MULTIPLE SPEAKERS) but we certainly will consider that in the future, without a doubt.

I know, this is a watershed opportunity I think, given where your balance sheet is. Thank you.

(OPERATOR INSTRUCTIONS). Nelson Obus.

Obviously, you haven't given the segment breakdowns and the like and somebody always usually asks that question. I don't need to have you necessarily go through that if your K is going to be out pretty soon -- what's the answer on that?

I can give you the segment data if you want (MULTIPLE SPEAKERS) .

That question -- what, no one cared?

We gave out the numbers.

You gave out gross margins, right? But the revenue numbers are also interesting, and when is the K going to be out?

The K will be out today.

Alright, I don't need to ask it. Let people do some homework.

[Larry Brooks].

I am wondering going forward what you expect your tax rate to be for the quarter, future quarter and the year?

I expect that to be approximately, an effective tax rate of about 40-41%. That includes Canada and the United States.

So this was unusual as far as -- it looks like the low tax rate?

That is correct. As what we disclosed in the 10-K, there was a tax reserve that we had that was finally settled and it came back into income.

Very good, thank you.

(OPERATOR INSTRUCTIONS). Mr., Kopyt, it appears that we have no further questions at this time.

Thank you very much for joining us and we will reconvene after the first quarter. Thank you.

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