R C M Technologies Inc (RCMT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for joining the RCM Technologies for the third quarter conference call. Your host for today is Leon Kopyt. Mr. Kopyt, you may now begin.

Thank you, Sonja. Good morning, ladies and gentlemen. I am joined here by two of my colleagues, Stanton Remer and Kevin Miller, who will as usual provide some additional financial and color information on the third quarter earnings release. We'll begin with Stanton's presentation, and then we'll move to Kevin, and open up for questions after that. Thank you.

Thank you, Leon. Thank you, ladies and gentlemen, for your interest in RCM Technologies. 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, engineering, and commercial 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 to outsource IT and engineering functions, and anticipated operating performance and financial condition.

The statement reflects--this 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 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 select--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, Inc. website under "Investor Relations." Thank you.

Well, we reported the third quarter earnings for the 39 weeks ended September 29, 2007. The comparison is for the 39 weeks September 30, 2006. Revenues for this 39 weeks were 165.4 million, compared to 147.7 million. Operating income was 7.7 million, compared to 5.5 million. Net income before income taxes was 8.6 million, compared to 5.3 million. Net income was 5.1 million, compared to 4.0 million.

Earnings per share on a fully diluted basis were $0.41, compared to $0.33. For the 13 weeks ended September 29, 2007, compared to the 13 weeks September 30, 2006, revenues were 54 million, compared to 51.7 million. Operating income was 2.8 million, compared to 2.3 million. Income before income taxes was 2.8 million, compared to 2.2 million. Net income was 1.7 million, compared to 1.3 million. Earnings per share on a fully diluted basis for the third quarter was $0.14, compared to $0.11.

The--some statistics and operating guidance. Working capital at September 29 was 45 million, up from 38.8 million. That was at the beginning of the calendar year--fiscal year. That was a $6.8 million increase. It was an increase in working capital of 2.4 million in the fourth--in the third quarter, just the third quarter itself. Cash from operations for the nine months was 5 million, compared from the previous comparative period of 4.5 million. It was a [$244,000] increase. The net worth at the--September 29 was 89.8 million. At the beginning of the year it was 83.4 million. It was a $6.4 million increase.

Our tangible net worth is 47.6 million, which is a $4.2 million increase. EBITDA year-to-date was 9.6 million. It was 3.2 million in the third quarter. Our CapEx is 128,000 for the third quarter. Year-to-date it was 500,000.

I'm going to turn it over to Kevin and he's going to give some color in sectorial and segment data. Kevin?

Okay. Good morning, everyone. As you know from the press release, we had total sales of--in Q3 of 54,079,000 and that is broken out as follows. Our Information Technology Group had sales of 24,508,000. Our Engineering Group had sales of 19,115,000. And our Commercial Services Group had sales of 10,456,000.

We had total gross profit dollars of 13,434,000 for a blended gross margin of 24.84% broken out as follows. Our Information Technology Group had $7,104,000 in gross profit for a gross margin of 28.99%. Our Engineering Group had a gross profit of 3,798,000 for a gross margin of 19.87%. And our Commercial Services Group had a gross profit of 2,533,000 for a blended gross margin in the Commercial Services Group of 24.22%.

That's the sectorial data.

Thank you, Kevin. Sonja, can we open up for questions, please? Hello? Sonja?

Yes, sir?

Can we open up for questions, please?

Sure. One moment.

(OPERATOR INSTRUCTIONS.) Our first question comes from Bill Sutherland. Mr. Sutherland, go ahead.

Thanks. Good morning, everybody. Just a couple questions in the segment area to start. One, just looking at the IT services--sorry about the background noise--lighter than I had thought and actually down year-over-year and sequentially. If you could give us some color there. And then, maybe the engineering trends looked rock solid. And maybe some color there as well. Thanks.

Sure, Bill. No problem. On the information technology, as you may recall from when we discussed in Q2 '07, that quarter had an unusually high software sales component and a pretty good chunk of that was software sales out of our Oracle division, which historically is very low margin software sales. To give you sort of a little bit more specific number, the software sales in Q2 were about 1.6 million higher than Q3. So, as you know, we were expecting lower sales in Q3, as compared to Q2.

In addition, if you compare Q2 to Q3, as you know, we have one less billing day in Q3 versus Q2. So from a seasonal factor, everything else being equal, we expect to have some lower sales in Q3 versus Q2. The Q3 sales for information technology, even considering those two things that we expected, was a little bit lower than we had hoped for the last time that we spoke. And it was a little bit lower than Q3 of last year. A couple reasons for that. One reason is that our biggest client in our Oracle group stopped the project for basically almost the entire third quarter. But that project is back on and going full steam ahead in the fourth quarter.

Also, we had a couple of clients in our IT consulting and IT staffing that were off as compared to Q3 versus Q2 of '07 and Q3 versus Q3 of last year, one of which is a large bank in the Great Lakes region. We had a couple of mortgage clients that were off as well. And we had one or two clients in our pharmaceutical group that were--that the sales came in lower than we expected.

So the combination of the project stop in our Oracle and the combination of I would say three or four of our major clients that were off some basically caused the sales to come in $500,000 to $1 million lower than we would have expected the last time that we spoke.

Kevin, did the financial service hesitation continue in Q4 do you think?

Well, it's a little early to say right now. But it's likely that the financial services components will not recover to previous levels in Q4. We do have a number of exciting client wins in the IT group that we hope will offset that. On the--and Leon can talk a little bit about that after I finish answering the rest of your question, which I believe you wanted to hear a little bit about engineering as well.

Engineering, we had another great quarter. The primary driver in terms of the increase from Q2 to Q3 was our Bruce--the Bruce project had a pretty nice jump - about $800,000, from Q2 to Q3.

While we're at it, we probably--I always like to remind everybody that isn't maybe as familiar with our business as you are, Bill, the Q3 decline in commercial services as compared to Q2, again, was expected, because we have the New York City Board of Education is our largest client in that group and our largest client in our healthcare group. And when school is out for most of the summer, our revenues take about a million--have historically taken about a $1 million drop from Q2 to Q3 and that trend was exactly what we expected this quarter as well. Fortunately, we're up a little bit Q3 over Q3. And when you consider the fact that our traditional light industrial group was down a little bit in the beginning of the year and made a nice recovery in Q3, the fact that we were able to grow our revenue in the commercial services group Q3 over Q3 we're actually quite pleased with.

So while we're a little bit disappointed with where IT came in for the quarter, our feeling is it's nice to have the diversity that we have and be able to get the growth from the engineering and the growth from the commercial services group to help offset a little bit of the decline in the information technology group for the quarter.

Bill, in terms of the--some of the significant wins and the good sales during the third quarter in the IT area, we've received a contract from Eli Lilly with the initial value of about $3.5 million, Wyeth approximately 1.9 million, and we kicked off a vendor management services contract with Aramark here in Philadelphia. So I think those are sort of long term relationships, and we hope that the initial values of those contracts will increase as the budget progresses.

Are you the exclusive with Aramark now?

Yes.

Okay. How many employees do they have?

Pardon me?

Do you know roughly what their employee total is?

I'm not sure, but it's got to be over 100,000.

Yes. I mean, because this isn't just IT, right?

It's IT.

Oh, it's just IT people?

Yes, it's IT. In the engineering, we had two new contracts for gas turbine power plants with Connecticut Light and Power, initial value totaling about $1 million; a number of additional projects in the Bruce area; and critical module negotiation that's going on on this CH53 helicopter and the F135 helicopter with I think significant opportunities for RCM, although we have not finalized and signed this contract. But I think we're in a very good position to do that in the fourth quarter or the first quarter of next year.

Leon, those are--are those both Sikorsky?

One is Sikorsky. The other one is a Pratt & Whitney.

Which is which?

Well, the F135 or the jet--new jet engine is Pratt & Whitney designing and RCM does some critical packages. The CH53K and the CH47 are Sikorsky.

Great. What is the nature of these Rx--of these pharmaceutical deals in IT? Are they particular applications or--?

--Yes. They are some manufacturing engineering and process engineering type assignments.

Okay. And what is the run rate of Bruce in Q3?

We have--.

--Q3 was about 3 million for Q3 and was about 2.2 in Q2.

Okay. All right. A couple of little housekeeping ones. CapEx in the--I guess the quarter and the nine months would be helpful.

The CapEx was 128,000 for the quarter. It was 502,000 year-to-date.

Okay. Tax rate was--.

--39.7.

And so, you are now estimating about 40 for the year, Stan?

Yes, that would be a fair number. 40 is a good number.

Is that a number that we should use next year just preliminarily?

Yes. I don't anticipate anything to materially change that would change that rate.

Okay, it's just--it's a little below where we started to estimate for this year. That's all I'm asking. Let's see. And the share count, I know it's adding up a little bit because of just allocating some shares for the plan at the company.

It has a lot of interaction of the exercised price of options compared to the market price of the stock at the time that we do the calculation.

Oh, that's--yes, okay. It's the share price increase. Okay. What would be the--what's the--I'm going to try and ask--the outside number at this point, Stanton, as far as--?

--The weighted average shares?

Yes. What could the upper end be depending--if the stock price is high enough?

It was at 12,650,000.

Okay. We're almost there. All right. That's it for me. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS.) Our next question comes from Peter Coleman.

(Inaudible) margin is coming from perm or temp-to-perm conversion fees? And what do you see in that side of the business in terms of continuing demand?

Peter, it's Leon. We did not hear the first part of your question. Could you please repeat it?

Oh. I was asking what portion of revenues are a function of perm fees or temp-to-perm conversions, and what trends are you seeing there?

It's--I don't have those exact numbers in front of me, Peter. But the perm--amount of perm that we do is very small. It's usually maybe $200,000 a quarter typically.

It certainly is insignificant.

So that's not a big part of our--most of our business. We do a fair amount in our healthcare group. But relative to the overall sales of RCM, our total perm, even including the healthcare, is just not very significant in terms of the total sales in the company.

Great. Well, thank you very much and keep up the good success here.

Thank you.

(OPERATOR INSTRUCTIONS.) There are no further questions at this time.

All right. Thank you very much for joining us and we'll see you next year at the end of the fiscal '07. Thank you.

Thank you.