R C M Technologies Inc (RCMT) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for joining the first quarter earnings conference call. Your host for today is Mr. Kopyt.

Mr. Kopyt, you may now begin.

Thank you very much.

Good morning and I'm delighted to welcome you to our first quarter conference call. As usual, I'm joined by two of my colleagues, Stanton Remer and Kevin Miller, who will provide additional information with respect to the financial performance. We will begin with Stanton, reading his --

Okay. Thank you, Leon. I appreciate everyone's interest in RCM Technologies. I will give you our Safe Harbor Statement and move on to some financial information.

Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements as 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 who outsource IT and engineering functions; and anticipated operating performance and financial condition.

The statements reflect our views with respect to future events and are subject to a variety of risks and 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 selecting suitable acquisition candidates, analyzing their businesses accurately and integrating acquired businesses into our Company; and other risks of our acquisition and investment strategy.

Many other factors will 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 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.

Well, for the 39 -- excuse me -- for the 13 weeks ended March 29 as compared against the 13 weeks ended March 31, 2008, we reported $49.1 million in revenue compared to $54.5 million in revenue. Gross profit was $12.3 million at a 25% margin compared to $12.4 million with a 22.7% margin. Selling, general and administration was $10.5 million of 21.4% compared to $10.1 million of 18.6%.

In the quarter we had a bad debt, which we believe is non-recurring, of $6.1 million. Depreciation, amortization was $361,000, essentially the same in the comparative year. The operating loss, which was inclusive of the bad debt, was $4.6 million compared to an income in the comparative year of $1.9 million. Loss before income taxes was $4.6 million compared to $2.7 million.

The net loss for quarter was $2.7 million compared to $1.5 million. Earnings per share was $0.22 on a diluted basis and on a basic basis, compared to $0.13 in the previous quarter.

I'll turn it over to Kevin to give you some detail.

Good morning, everyone.

Total sales for the quarter were $49,114,000 broken out as follows. Our information technology group at $22,439,000; our engineering group at $14,045,000; our commercial services group at $12,630,000.

We had a blended gross margin for the quarter of 24.77% broken out as follows. Information technology was 25.36%; engineering was 21.54%; and our commercial services group was 27.32%.

Thank you very much.

Shura, we are ready for the question and answer period.

(OPERATOR INSTRUCTIONS). Our first question comes from [Doug Galido]. Mr. Galido, go ahead.

Good morning. Thank you for taking my call.

Could you give us a little more color on the segments, what direction you see each one going in the coming year?

Sure. I think starting with information technology, certainly the market is a little uncertain right now, but we definitely see improvement on a go-forward basis, in Q2, in Q3 in particular.

On the engineering group, we also expect to see improvement going forward. The pipeline there is very strong. We're bidding on several sizable contracts, in the sort of $1 million to $3 million range, potentially some that are a little bigger than that. Obviously there's uncertainty there in terms of realizing that pipeline. But we're very optimistic about engineering going forward.

As far as the commercial services is concerned, we may see some growth there going forward, also particularly on the -- on our industrial group in California. We recently won a nice contract there, so we definitely expect to see some growth in Q2, Q3 and Q4 compared to where we are in Q1.

As far as our healthcare group is concerned, we've seen some pretty explosive growth there recently. So, I would not anticipate any significant growth there in the near term.

Okay. And you mentioned that you had some pretty sizable leads within the engineering segment as far as the business pipeline. Can you comment on any other segments where you're seeing kind of the same thing or --?

This is Leon. You're referring to the engineering pipeline?

Yes, you just mentioned -- you just commented that you're seeing some -- that you're leading some sizable contracts there.

Yes. We were successful in the first quarter -- at the tail end of the first quarter to get a couple of contracts with a restored client in Canada, utility. We have a number of projects that we are negotiating right now for the power plant, are just starting construction, as well as some of the qualification work in the utilities that are on the East Coast.

And in the aerospace and engineering, we are also negotiating a couple of contracts related to the structural design and the composite design for both commercial and government projects.

Okay, great. And then, Kevin, I just have a number of questions. What was the number of billable days in the quarter?

That is 63.

63, okay. Great, guys. Thanks for answering my questions.

Thank you.

Our next question comes from Jason Schacht with Heartland Advisors. Go ahead, Mr. Schacht.

Good morning, guys. I've got a couple of questions for you here this morning.

First of all, in light of the acquisitions that you guys are looking to close on here, so is there a line of credit that you have established or kind of what does the balance sheet look like once you've closed on these deals?

Well, we have a $25 million line of credit. Our debt was $5 million at the end of Q1. And that was post -- that was after closing the NuSoft acquisition.

Since the end of Q1, we have closed on the MBH acquisition. There is a third smaller acquisition that did a little on the $3 million in revenues in 2007 which we have not closed on yet. The MBH acquisition initially got acquired at $2.3 million in cash at closing. We're also in the process of funding -- both of those deals were asset deals, so we're funding working capital.

And do you know what is the debt as of today?

It's $9 million.

So our debt as of today is $9 million. The other acquisition, if we close it, is not going to require a significant amount of cash. So I would say that our -- once we fully absorb the networking capital of these three acquisitions, we're probably looking at debt in the $10 million to $12 million range, and then we would expect operating cash flow to sort of slow, we pay that down, assuming no other acquisitions, obviously.

Okay. And is the margin structure for these recently-acquired businesses drastically different from your existing business or --?

No, not drastically different. But they should, all three of them, should be accretive to our information technology gross margins. So, all three of them should increase our information technology gross margins.

They were both -- this is Leon -- they were both acquired at attractive multiples as well as a very favorable structure.

Okay. And then, lastly, it looks like your information technology segment gross margins were the lowest that they've been in, gosh, over two years. What accounted for that decline in gross margins there?

Really the biggest factor there is sort of the slowdown of quite a few projects in the first quarter. And then, the second factor is we have just continued to see -- and this is a continuing trend, just seeing a lot of pressure on our staffing gross margins.

So, those two factors -- and as you know, in Q3, probably you're well aware, in Q1 versus Q3 and Q4, we see about a 75-point, approximately, basis point decline, just because of statutory taxes. So that is obviously not a factor Q1 over Q1, but when you compare Q1 to recent quarters, it's a pretty big factor in terms of the overall blended gross margin.

So, from a seasonality standpoint, because of the statutory taxes in terms of just an overall issue with Q1, we saw quite a slowdown on some of our higher-margin work in the first quarter and quite a bit of stalling of some contracts that we expect to either, A, ramp up, or that we expect to win going forward. So, yes, it was a disappointing quarter as far as the gross margin in IT is concerned.

Why don't you guys spin that staffing business out or get rid of it instead of letting it bring your gross margins down?

Well, it still represents a significant contribution to our revenue. And I think by the -- hopefully by the growth of the engineering and the IT solution group, we'll have a much lesser impact on the blended rates.

And we've also had a lot of success in transitioning our branches that historically have done 100% IT staffing to doing project work. And we also believe that the IT staffing work can be very profitable and has been very profitable for us, particularly in specific branches of ours.

So it's not something that we're particularly interested in spinning off, quite frankly. We cannot say what we'd want to do in the future, but we really don't have any interest in spinning that business off because we think it's a good business.

Okay.

(inaudible - multiple speakers) into the solutions business, lead generation.

(OPERATOR INSTRUCTIONS). There seems to be no further questions at this time.

All right. Thank you very much for joining us, and we will reconvene at the end of the second quarter. Bye-bye.