R C M Technologies Inc (RCMT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for joining the RCM Technologies conference call.

Your host for today is Mr. Leon Kopyt Mr.Kopyt, you may now begin.

Thank you. Good morning and I'm delighted to welcome you to our conference call this morning. As usual I'm joined by two of my colleagues, Stanton Remer and Kevin Miller, who will provide detailed information relating to our financial statements, and then we'll open it up to the questions relating to the recent acquisition as well as our release yesterday. Stanton, (inaudible) you begin?

Thank you, Leon, and thank you, ladies and gentlemen for your interest in RCM Technologies. Just read you this Safe Harbor declaration. 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 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, 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 supervision 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 Form 10-K, 10-Q, and 8-K we file with the Securities and Exchange Commission. We will be happy to send you 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.

Give you some overview of the results if you haven't seen the press release yet and then Kevin Miller will give you the detail. Revenues posted for the year were $214.2 million compared to $201.9 million of the '06 year. Gross profit was $53 million compared to $50.5 million. General administration was $41.4 million compared to $41.2 million '06 period. Operating income was $10.1 million compared to $7.8 million. The income before taxes was $11 million compared to $7.5 million in '06. Net income in '08 -- excuse me, in '07 was $6.8 million compared to $6.4 million . It's important to note in the '06 year there was a $1.3 million income tax credit in the '06 period which was not in the '07 period. Earnings per share on a diluted basis were $0.54 compared to $0.53. The income tax credit was essentially attributable to $0.11 in the '06 period.

Our working capital at December 29th, which was the year end, was $43.5 million. At the beginning of the year it was $38.8 million. It was $4.7 million increase. Cash flow from operations as defined in the cash flow statement was $8.6 million compared to the previous year of $5.6 million. That was a $3 million increase. Net worth at 12-29-07 was $92 million compared to '06 period was $83.4 million, that was an $8.7 million increase. The tangible net worth at 12-29-07 was $52.1 million compared to $43.4 million for an $8.7 million increase. EBITDA for the year, inclusive of an $800,000 legal settlement, was $12.4 million. That was $2.8 million in the fourth quarter. The CapEx for the quarter was $122,000 and for the full year was $625,000.

And I'm going to now turn it over to Kevin Miller.

Good morning, everybody. Just wanted to read off the sectarial data the fourth quarter. We had sales in the fourth quarter -- total sales of $48.790 million, our information technology group had sales in the fourth quarter of $22.138 million, and our engineering group had sales of $14.810 million, our commercial services group had sales of $11.843 million. We had a blended gross margin for the fourth quarter of 27.19%. Our information technology group had a gross margin of 29.35 %, and our engineering group had a gross margin of 24.27% and our commercial services group had a gross margin of 26.79%. So I'll turn the rest of the call over to Mr. Kopyt.

Thank you, Kevin. Operator, could you please open up for Q&A period .

(OPERATOR INSTRUCTIONS) Our first question comes from [Kevin Cavatoni]. Mr. Cavatoni, you may now begin.

Good morning, guys, jumping on for Bill Sutherland is here. I see the numbers on the top line were a little bet -- were a little lower than we what were looking for, but you guys were slightly better on the bottom line. Can you give us some color as to what drove the gross margin in the quarter and whether or not you guys think that's sustainable going forward?

Sure. Well there's a number of factors driving the gross margin. On the engineering side, which is where you'll see a big jump in the gross margins in the fourth quarter as compared to the first three quarters of 2007, what's driving that essentially is we had a very large client of ours decline substantially in the fourth quarter. That was a very low margin client, so it had a major impact on the top line but not as big of an impact when you get to the gross profit line. Also in engineering, we had a very strong quarter for project work and some of our higher-margin project work in the fourth quarter so that's what's driving the gross margin in the fourth quarter for engineering. As far as going forward, we're not expecting any more revenues from the client that halted in the fourth quarter, the low margin client, so we do expect to see higher gross margins in 2008 than we seen in 2007; however, we do not -- certainly do not expect to see margins at least in the first quarter in engineering that we saw in the fourth quarter. It will be quite a bit lower than that but higher than where we've been historically.

As far as our IT margins, our IT margins pretty much held steady with what we expected to see as far as the gross margins are concerned. We typically see a little bit of an uptick in the fourth quarter as compared to the third quarter, due in part to statutory tax decreases. So those margins were in line with what we expected to see. We expect to see margins in 2008 that are comparative to the quarterly margins that we saw in 2007, and bear in mind that number one, we typically see much larger -- much lower gross margins earlier in the year in our IT group and in particular, this year is a little bit -- with some of the softness that we're seeing in the market and some of the softness that we're seeing in our project group, it's certainly very feasible that we'll see lower margins, particularly in the first half of this year, in our information technology group than we've seen in the past couple of years.

As far as our commercial services group, there was a pretty nice uptick in margins there as well, and that's due primarily to a mix shift in terms of our higher margin. As you know, we have two distinct groups that make up our commercial services group. We have our healthcare group and our traditional staffing group that does a blend of light industrial and clerical stats, and the healthcare group is doing extremely well and that -- their margins are much higher than the margins of our traditional staffing group, so what you're seeing there is as that group is growing very nicely, you're seeing a bit of a mix shift effect on the margins. In addition to that, we are getting -- we have increased our margins in both groups from where they've been historically, so healthcare's margins have improved nicely and so has -- and so have the margins in our traditional staffing group. So while I don't know that we're going to see the margins in the first and second quarter that we saw in the fourth quarter, for the commercial services group, we do expect to see pet tier margins in 2008, in Q1 and Q2 and what we saw in Q1 and Q2 of 2007.

So just to summarize, our margins jumped quite a bit, as you know, in the fourth quarter. We do not expect to see -- on a blended basis to see margins, particularly in the first and second quarter of 2008 margins that would be in line with what we saw in Q4. Probably at least several hundred basis points lower in the -- particularly the first quarter and possibly into the second quarter.

Okay, great.

Does that the answer your question?

I think so.

Good.

And then on the NuSoft acquisition, could you give us an idea of the valuation of that and whether you expect it to be accretive to earnings in the first year?

Well, we expect it to be accretive certainly. We generally don't disclose valuation information but what I could tell you is the company did $16 million in sales in 2007 with gross margins in the low to mid 30s and net margins of approximately 10%, so we expect to see similar results on a go-forward basis and down the road we expect to see improved results.

This is Leon Kopyt. As you know we are very disciplined in making our acquisition and we have a model that shares the risk of the acquisition for the seller, so we continue to exercise that discipline in the acquisitions that we've made and we continue to look at.

Okay. Also on that press release you mentioned two deals that were under letters of intent.

Yes.

Can you give us an idea of the size of those two companies, revenue numbers, anything?

Well, the only thing I can tell you is the combined revenues of the two. The combined revenues is approximately $16 million to $17 million.

Okay.

And obviously, it goes without saying that we're under letter of intent and we feel pretty comfortable that we're going to close both of those deals, but we haven't closed them yet so there is always a possibility that they don't close.

Right. Anything else in the acquisition pipeline other than that and if so, are they also IT solutions companies?

This is Leon. Yes, they are IT solutions companies and they are primarily to compliment our enterprise business solution group offering, which you know is an offering that addresses the complexity of the enterprise software, the ERP platform and all of the related services of the supply chain; the CRM, the life cycle management, the Lean and so on. The primary focus of these acquisitions, both the NuSoft and the two that we have on the letter of intent, is to address the shortcomings of some of the ERP offerings, primarily bridging some of the functionality gaps and addressing business process issues that most of the ERP systems are not proficient in doing yet.

When you begin to cross the organizational boundaries of ERP, there is a -- they fail in the integration and functionality and I think people that can solve the functionality gaps and the business process issues, those companies will benefit tremendously from the complexity of the total enterprise -- business enterprise IT systems. The other thing is that a number of companies do not have unified platforms and you need to integrate a discrete system in their back end, and NuSoft and the future acquisition will allow us to integrate and provide enhanced functionality, communication, sharing of the databases, business intelligence, and other assets that exist that would not be available without that integration.

And I think in the third area is -- there is an ongoing consolidation in the software sector and I think a number of companies, including Oracle, that made a number of acquisitions need to integrate or fuse the functions of those different acquisitions, whether it's T-Bow or PeopleSoft or JD Edwards. And again, the companies that will help those global software providers in integrating and improving the functionality and bridging -- and solving the -- mitigating the business process issues will benefit tremendously and that's our focus.

Okay, great. And one last one real quick question in terms of the modeling. Is it safe to use a 40% effective tax rate going forward for '08?

Yes, that's fine. That's good. That's a good number.

Okay.

(OPERATOR INSTRUCTIONS) There are no further questions.

Okay, thank you very much for joining us this morning and we'll reconvene at the end of the first quarter results. Thank you.