R C M Technologies Inc (RCMT) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for joining the third-quarter earnings conference call.

Your speaker for today is Leon Kropyt. Mr. Kropyt, you may now begin.

Thank you very much. Good morning to everyone and welcome to our conference call.

I am joined by two of my colleagues, Kevin Miller and Art Dell, who will present their portion of the conference call and then we will return to our question-and-answer period. Art, please.

Good morning. The following is our Safe Harbor statement.

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 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 will now turn it over to Kevin Miller to provide selected financial data. Kevin?

Good morning, everyone. As you know the total sales for the quarter were $44.751 million broken out by $20.902 million for our information technology group, $15.455 million for our engineering group, and $8.394 million for our commercial services group. We had a blended gross margin of 26.46% broken down as follows -- 26.80% for IT, 25.33% for engineering, and 27.70% for commercial services.

A couple seasonal factors. I just want to remind everyone we have 63 billing days in Q3 as compared to 64 billing days in Q2, and them of course with the summer months we also typically have much heavier vacation in the third quarter as compared to the second quarter. Also, where we have some even stronger seasonality is one of our largest clients and our largest client in the commercial services group, which many of you know on the healthcare side is the New York City Board of Education, shuts down for a pretty good portion of the third quarter.

So if you compare the third quarter to the second quarter that client is down about $1.8 million; from about $2.8 million in the second quarter to about $1 million in the third quarter. That is obviously something that is not a surprise. It's something we see every year in the third quarter.

A couple of highlights on the quarter. As we see it despite the fact that we lose a big chunk of sales on the Board of Ed and then just through normal seasonality in the third quarter, our gross profit dollars in the third quarter were $11.840 million as compared to a $11.578 million in the second quarter.

So we are encouraged that our overall gross profit dollars, which is really the single biggest driver of operating income for our business, is up in the third quarter as compared to the second quarter. Even our IT gross profit dollars in the third quarter were up over the second quarter. We had about $5.6 million in gross profit dollars in the third quarter as opposed to $5.34 million in the second quarter.

The reason for that increase in gross profit dollars and gross margin going from 24.5% to 26.8% is primarily due to (technical difficulty) of our bench, i.e., higher utilization. We really put a focus on this quarter in getting our utilization up and getting our gross margins up.

In addition to that we continue to review our entire company, but especially on the IT side. Low margin business that we just don't want, which is only part of the reason why we are seeing some decreases in sales in the IT from Q2 to Q3.

A little bit on the outlook going forward. I just want to let people know that in the fourth quarter we actually pick up an extra week. This is one of those years where we have a 54-week year -- or, excuse me, a 53-week year as opposed to most years when we have a 52-week year. So we should see a little bump in sales as a result of that in the fourth quarter.

However, I just want to caution people that even though we are picking up an extra week that week is between Christmas and New Year's and that is an extremely soft week for us. We are going to have five days worth of cost, but realistically probably only three weeks worth of billing. So we will see a little extra sales in the fourth quarter as a result of that extra week, but it really will not make any impact, any significant impact negative or positive as far as the operating income is concerned in the fourth quarter.

But overall as we look out to the fourth quarter it's our belief that on a billing day basis we should see somewhat flat sales in the fourth quarter as compared to the third quarter. Then, of course, we will also have a full contribution from the healthcare group and the New York City Board of Education in the fourth quarter.

So that is all I have as far as prepared comments. Thank you for joining us today and I will turn it back to Leon.

Yes, thank you, Kevin. Operator, can we open up for the question-and-answer period, please?

Anthony Chiarenza, Key Equity Investors.

Good morning, thank you for taking my question. I noticed that the working capital between the second and third quarter went down $3.5 million or so and the intangible assets also went up a couple of million dollars. Can you explain what happened? Did you purchase something during the quarter or there was a capital expenditure?

We made an acquisition in the third quarter so that certainly made a contribution to that, but also we reclassed some deferred taxes from current to long term. So if you go to last year at the end of 2008 we had about $6.6 million in deferred taxes. Now we have used some of that up because some of those deferred taxes were associated with net operating income losses from 2008.

So with the projected net income in the United States for this year we have pretty much used up that portion. But we determined through a closer review of the deferred taxes at year end that really of about $6.6 million about $4.4 million should have been classified as a long-term asset as opposed to a current asset. So at the end the third quarter of this year our deferred tax asset balance is about $3.7 million, and that is also in long term.

So our working capital on a restated basis has increased from the beginning of the year to the end of the third quarter. What I am most excited about is that our cash balance is just shy of $12 million as compared to $800,000 at the end of last year. We also increased it close to $3 million in the third quarter as compared to the second quarter.

Our receivables, after allowance for doubtful accounts, so our net receivables were $55.770 million at the end of last year. And as of today they are $44.535 million. Over the last five quarters we have generated over $20 million in positive cash flow from operations. So we are obviously very excited about where the balance sheet sits today as opposed to the end of 2008.

So a portion was the deferred tax movement to long term and then the acquisition was how much? You didn't announce an acquisition that I am aware of. Was it just too tiny to be material the acquisition?

We did announce it. It must have been something that you missed, but we did issue a press release. It was at the very beginning of this quarter and it was a small acquisition. That acquisition we put out $800,000 in cash and about $200,000 in stock at closing.

And that accounts probably for the $3.5 million swing between the two quarters, basically you are saying?

Well, no, the swing is -- if you are looking at the current assets it's a little bit deceiving because we had this deferred tax item misclassified. But our -- we have $59.830 million in current assets as of September and we have current liabilities of [$17.685 million] so our working capital is $42.145 million as of September.

So if we go back to the reclass numbers for the end of the year our current assets were [$61.801 million] minus [$17.040 million] so we are looking at 44 versus 42. But the biggest reason for that is a shift of $4.4 million in the beginning of the year from above the current to below and then a shift also for this year, the 3.7 coming down.

I understand. Can you give us a little bit of a perspective of what the business conditions are in the various business? That would be very helpful just to see what you are seeing now and what you are looking for going into 2010.

This is Leon Kropyt. I think the business conditions continue to be challenging. Typically, we have a much better visibility ahead including some things around the corner what we continue to see is some hesitation and uncertainty and frozen decision processes in our own clients. But nevertheless the commercial sector and engineering sector are doing well. They are having strong pipelines.

IT is beginning to open up a little bit at the end of the year, but I think it's still too early to tell what impact it's going to -- what significant positive impact it's going to have in 2010. As you know the economic and business landscape in certain sectors have been fundamentally changed -- order of finance, manufacturing, technology. How and to what extent this change will persist I think no one really knows, but I think that we are well-positioned to take advantage of and capture the impending recovery that we expect next year.

By the way, I am looking at the wrong numbers here off this balance sheet so I just want to correct what I just told you. Our working capital as of September is $49.709 million versus $38.311 million at the beginning of the year. And that is after the reclassification of the deferred taxes because we have $59.830 in current assets as of September and $14.121 million in current liabilities and $61.801 million in current assets versus $23.490 million in current liabilities.

Does that make sense to you? So if you go to our press release those numbers are in there. We didn't put the working capital in the press release. We just put the balance sheet amounts. Hello?

[Tim Marguadar], [Bridgewood].

My first question is now that you have a little bit more cash one of the concerns I have is that I really have a hard time understanding what your acquisition strategy is and I am not sure that -- is it going to add value or not is my real question. Can you guys sort of address what your thoughts are on making more acquisitions?

We are continuing to look at a number of candidates in the acquisition sector. We are looking for acquisitions that complement and that are compatible and complementary to our concurrent offerings. So if there is a hole in the technology or delivery of RCM, then we would look for an acquisition that would complement and supplement that particular weakness or enhance the current offering.

The climate is very favorable for acquisitions; the valuations are very attractive. As you know, our acquisition strategy shifts significant risk of the acquisition on the seller by using a lower range of valuations and deferring a significant portion of our acquisition consideration over a three-year period.

So we are continuing to look at those things, but at the same time we are looking at other options to improve the shareholder equity in the Company.

I also noticed in terms of your cash that a lot of the cash came in from collecting on your receivables. I wanted to know how --

And also from a legal settlement.

And the legal settlement. So how good are those receivables? Are there any kind of metrics that one can look at to figure out whether there are bad debts or other issues that might be looming there?

Well, we feel very comfortable with the allowance as of September 26. We have an allowance of almost $1.5 million on those receivables. I feel very comfortable with that balance. It's something that we have spent a lot of time on.

Our auditors obviously have taken a look at it. This balance sheet is not an audited financial statement, but that is something that our accountants take a pretty hard look at at the end of the quarter.

So as far as the metrics as to whether they are collectible, I feel very good about them. The biggest balances in there are from companies that -- I knock on wood as I say this, right, because you never know for sure. But when I look at some of the biggest balances I feel that they are with companies that really have very little risk.

For instance, the biggest balance in there is about $9 million and that is outstanding to our biggest client which is United Technologies. I really feel like that that is not at risk.

The second biggest balance, which is about $2 million, is to our second-biggest client, which is Bruce Power, which is also an entity that is in very good shape. And as I start to move down we probably only have 10 clients that have balances over $500,000 and they are all name brand companies. Companies like Celgene Corp. and PSEG, Wyeth, Bristol-Myers Squibb; these are companies that we feel very comfortable with.

We have all seen companies that you think are really healthy and then all of a sudden they are not, but we really do not have any large balances with companies that are under any financial duress or financial stress. So all I can tell you is that I am very comfortable with the $1.5 million reserve that we have.

The reason I bring it up is because I think it was your company that in the past, and under your predecessor as CFO, there was an issue. And kind of it leads to the question of have you guys changed your policies and procedures in some --

Yes, we have made quite a few changes. I will tell you point blank that we should have never -- we had two large write-offs in 2008. One was huge and the other was big, and quite frankly we extended too much credit to the wrong companies. We had no business giving that much credit to those two clients.

But what I can tell you is that historically this company is doing business with Fortune 1000 companies for the most part and historically we have done a very good job of picking our clients wisely and keeping an eye on our clients. If you look at the last 10 years, our average write-offs are -- in most years our write-offs are somewhere between $300,000, $600,000, $700,000.

2008 was a real exception to what we have seen over the last 10 years where we just extended too much credit to two clients that we had no business giving that much credit to. But we have made several changes. We have changed quite a few policies and procedures and we have brought in new people to oversee the AR collection. Not only the AR collection, but the billing process as well.

So I am very confident that that is bolstered down and that you are not going to see another situation like we saw in 2008. Now I always have to qualify that with you never know if a company like United Technologies starts having trouble in three or four months, but I see that as a very negligible risk.

I can tell you that in the two instances where we had those two large write-offs we didn't follow our own policies and procedures. The policies and procedures were in place, we just didn't follow them.

So I feel very comfortable that we have learned some hard lessons through those two large write-offs and that we have put the proper policies and procedures in place. And perhaps more importantly, we have put the right people in place.

Great. And my last question is just following up on my first one which was to understand -- Leon, you mention that your acquisition strategy is to fill in holes to what your current kind of set of capabilities are.

So my last question is competitively where would you guys say RCMT is? What is the niche, especially on the IT side, where you feel like you are the strongest and are able to win business? And then what are the holes in that set of capabilities that you see that you are actively trying to fill?

Well, I think our strongest capability in IT is the ability to implement enterprise software across many different organizations in the industry. More importantly, to mitigate functionality gaps that traditional enterprise software has. Both the functionality gaps as well as business process issues that neither SAP or Oracle or other enterprise software address fully with many industrial, financial, and distribution companies.

We are very heavily evaluating our ability to develop proprietary packages internally that will address those functionality gaps and business process issues. And we are looking for the company that will bring that capability in.

The other one is the company that does not have a unified ERP platform and they have a lot of discrete systems in their IT infrastructure. Those systems need to have connectivity and communication. So we have an integration group that specializes and focuses on integrating a lot of discrete systems in the IT infrastructure that do not join by a unified ERP platform.

So those are primarily the focus and the specialty that we have developed and continued to look at in the IT.

(Operator Instructions) There are no further questions at this time.

Thank you very much for joining us. We will reconvene at the end of the fourth quarter. Thank you.