R C M Technologies Inc (RCMT) 2008 Q3 法說會逐字稿

Ladies and Gentlemen, I want to thank you for joining the RCM Technologies Third Quarter earnings call. Your host for today is Leon Kopyt. Go ahead, Leon.

Thank you, very much, Nicole. Good morning and welcome to our quarterly Conference Call. I am joined by Kevin Miller and Art Dell to give you a little more color and additional information relating to this call. We will start with Art who gives us the Safe Harbor Statement and continue with Kevin with the financial analysis and sectorial breakdowns.

Good morning. 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 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 strategy.

Many other factors also 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 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 website under Investor Relations.

Thank you. I'll now turnover the call to Kevin to provide selected financial data.

Good morning, everyone. First, I just want to read off the sectorial data and I want to remind everyone we have 63 billing days in the third quarter as compared to 64 days in the second quarter, and 63 days in the first quarter. Of course, in the fourth quarter we'll have 62 billing days.

Total sales for the quarter were $51,617,000. The IT sales were $26,757,000. The Engineering sales were $14, 662,000. Commercial Services were $10,197,000. We had a blended gross margin of 25.6% broken out by IT, 26.0%, Engineering 24.0%, and Commercial Services 26.7%.

As far as some color on the revenues, we continue to see softness in our IT revenues particularly in the IT solutions group. Our software sales and resulting implementations have been off not only in the third quarter but year-to-date. We continue to see weakness in the Financial Services. And for the fourth quarter, we expect revenues to be probably slightly down to flat as compared to the third quarter. The good news is in Engineering, the revenues continue to hold up very well. We won several new projects in the third quarter. Our pipeline is very strong and we are hopeful that in the fourth quarter, we'll see a slight increase as compared to the third quarter. Certainly, we expect a minimum revenues in the fourth quarter to be flat as compared to the third quarter.

For Commercial Services, the healthcare revenues were down approximately$2 million in the third quarter as compared to the second quarter and that is due primarily to seasonality in our largest client. The good news is, though, we're up $700,000 in the third quarter of '08 as compared to the third quarter of '07, so healthcare continues to grow. In the fourth quarter we expect revenues in healthcare to be more in line, probably a little bit less than the first and second quarter but certainly increase from the third quarter.

In our traditional staffing unit, in Southern California, we continue to see softness in that group. We expect sales in the fourth quarter as compared to the third quarter to be flat to possibly down. But overall, when we combine healthcare plus our traditional staffing, which we report in our sectorial data as Commercial Services, we expect revenues in the fourth quarter to be up slightly as compared to the third quarter.

As far as the gross margin percentage, the IT gross margins in the third quarter were down as compared to the second quarter and that's primarily due to general softness in the IT sector, several fixed price projects that had some cost overruns, increased bench prime and decreased utilization primarily due to softness in the sector and the fact that we have a lot of salaried employees in our IT solutions group, and also a decrease in the software sales which usually decreases -- when the software sales are strong it's usually an increase to our gross margins.

In the Fourth Quarter we expect the gross margin percentage as compared to the third quarter to be probably flat to possibly a little bit up as compared to the third quarter. The Engineering gross margins were up in the third quarter as compared to the second quarter slightly, 24% as compared to 23.7%, and that's just due to a slightly improved mix as far as the project services versus our T&M work. In the Fourth Quarter, we expect gross margins to probably be pretty comparable to what we've seen in the third quarter.

In our Commercial Services Group, the gross margins in the third quarter as compared to the second quarter were down, and that's primarily due to the higher margin decrease in healthcare sales which again is a seasonal decrease and something that we expect to see every third quarter. In the fourth quarter, as the healthcare sales return close to previous levels, we would expect the overall gross margin percentage in the Commercial Services to increase in the fourth quarter as compared to the third quarter.

Only one item I want to point out as far as the SG&A costs for the quarter. The SG&A expenses do include a one-time accrual of approximately $246,000 for severance to be paid to our former CFO.

And that's all the prepared comments that I have for the quarter.

Thank you, Kevin. Nicole, we can return to the question and answer period.

Absolutely. (OPERATOR INSTRUCTIONS) We have two questions so far. First question comes from Joseph Maruvio from independent company.

Hi, Leon. How are you?

All right, Joe, how are you?

Okay. Leon, this is obviously not a very good report. Margins are down, revenues are down, and I'm curious to see your perspective of the future, of course, because that's where the shareholders are most concerned. Several years ago, management was traded some of the underwater stock options for good stock and in return for that, were grossed up on the cost of that and also, and that cost the company and the shareholders several million dollars. The reason for doing that, of course was to incentivize management to improve the performance of the company. Now, of course, things are bad. I know things are bad in the environment and also I hate to say it but RCM compared with its competitors really doesn't measure up as well as it could.

So looking forward, I'm wondering what plans you have in terms of cost cutting, especially with respect to executive salaries, perks, stock based compensation, restructuring of unrealistic severance packages, in order to position the Company for the future to make it even more attractive financially as far as balance sheet is concerned, or more attractive in the case of prospective acquisition by a third party.

Thank you for your question, Joe. I hope you're looking at the right sector comparison with our peers. I don't think that RCM is doing as poorly as you expressed. We've always remained profitable through many down cycles. In early 2000 where a lot of our peers have piled up significant losses. So we made the adjustments both from the cost point of view as well as the services in order to respond to changing market conditions.

With the continuing uncertainty and volatility and instability in the market it's very difficult for me to tell you which sectors will return to normal, which sectors will begin to spend some capital dollars on their networks and infrastructures, but I can tell you that we are probably much better positioned than any other company in the sector because we have the diversity in services, between Engineering, IT and Commercial Services. We have sectorial diversity. We are operating in seven sectors, where some of our peers are relying on either single or a couple of sectors. And, as well we have a geographic diversity. We're enjoying a reasonably attractive business from Canada in engineering and our expectation is we continue to do that so we'll make whatever adjustments are necessary as we have in the past in order to bring the cost and revenue into balance.

Our balance sheet -- you alluded to our balance sheet not being strong. I disagree. I think we have a strong balance sheet with a lot of availability of working capital. We continue to pay down debt and our expectation is that some time next year, hopefully our net debt is going to be close to zero.

And the goodwill on the balance sheet, Leon, you feel is strong, credible?

If we have any doubts, we will do the write-offs but for the moment, it's not.

Okay I don't have any more questions.

Thank you, Joe.

Our next question comes from Bill Detulio with Boenning & Scattergood. Go ahead, Bill.

Good morning. Thanks for taking my question guys. Kevin, my first question is for you. Could you tell me what the revenue growth rate in the quarter would have been absent the two acquisitions?

The quarter, if you strip out the acquisitions, the revenue is down about 16%.

Of course, we had as, I think you're aware, we had a large engineering client last year that defaulted on a note and is teetering on bankruptcy. If I were to strip that out we're down about 6.6%. As you know, that was a large revenue generating client, not a strong gross profit client but a strong at the top line. Right. And then I just have a question about your credit line. Have you done any drawdowns on that or do you have any plans in the near future to drawdown on that credit line?

Well we would obviously draw down that as necessary. Our debt at the end of the quarter was $9.1 million, so we were drawn to $9.1 million. We have $25 million in availability so we have a lot of availability. We have no immediate plans to draw that down. And when I say draw it down, we have no immediate plans to borrow more money. At this point, we're pretty focused on paying it off and hopefully becoming debt free or near debt free in the not too distant future.

Okay. And Leon, could you just discuss a little more in detail about the pipeline initiatives within Engineering, get a little more details and color on that?

Well, as you know, in Engineering we provide primarily two services. One is to the energy sector, utilities and the other to the aerospace. Continue to enjoy fairly significant contracts in Canada on a steady basis with the existing clients and some new clients. We've signed a number of general services agreements in the United States with the utilities which allows us to be on the inside of the procurement cycle, meaning that utilities do not have to go out for tenders but award the contract typically to the two or three pre-qualified suppliers which are part of the general services agreement. I think that that relationship has continued to develop, and I believe we'll enjoy some revenue stream in early '09 and continuing through '09 and '10. So those are the issues in the pipelines that we see in engineering.

And we can see some of those do you think in the first half of '09?

Yes.

Okay. Great. That was all my questions. Thanks guys.

Thank you.

We have no further questions in queue. (OPERATOR INSTRUCTIONS).

If there's no more questions, we thank everybody for participating in this and we'll see you at the end of the year for the year-end fourth quarter results. Thank you very much and Happy Holidays to everyone.