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Executives

Leon Kopyt - Chairman, Chief Executive Officer, President and Member of Executive Committee

Kevin D. Miller - Chief Financial Officer, Principal Accounting Officer, Treasurer and Secretary

Analysts

Gunnar Hansen - Sidoti & Company, LLC

RCM Technologies (RCMT) Q1 2013 Earnings Call May 10, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the RCM Technologies First Quarter Earnings Call. Your host, Mr. Leon Kopyt, will now begin.

Leon Kopyt

Thank you so much. Good morning, and thank you for joining us this morning. Kevin Miller is here, our CFO, to share with you some detailed segmentation data and other pertinent financial disclosures. We'll follow our usual agenda and protocol by having Kevin present that, then very brief remarks from me, followed by the Q&A period. Kevin?

Kevin D. Miller

Good morning, everyone. As you see from the press release, we have consolidated revenues for the quarter of $41,231,000, which is broken out as follows: our Information Technology group revenues for the first quarter is $13,994,000; our Engineering segment's revenues were $20,310,000 for the first quarter; and our revenues for our Specialty Health Care services group was $6,926,000. We had total gross profit dollars of $10,621,000 for a blended gross margin percentage of 25.76%, and that is comprised of the following: our Information Technology gross margin percentage for the first quarter was 28.66%; our Engineering segment gross margin percentage was 22.21%; and our Specialty Health Care group's gross margins for the first quarter was 30.31%.

Leon Kopyt

Thank you, Kevin. A couple of brief comments relating to the first quarter there. There are essentially no material changes in operation to report since our last conference call. The expectation for the remainder of the year is to continue to improve in all relevant performance metrics area. Engineering group continues to enjoy strong backlog and solid pipeline. IT group overall performance is continuing to improve as well, and that's despite 3 or 4 units out of hand [ph], that are providing marginal contribution to the overall performance. Health care group experienced some headwinds in the first quarter, but I think progressively should adjust and calibrate its operating performance to provide a greater contribution in the overall results for the remainder of the year. That's the essence of my comments.

Alicia, can we open up for the Q&A period, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Gregory Fuji [ph] at Avalon Capital.

Unknown Analyst

I just wanted -- I had a couple of quick questions. So I wanted to dig into the increase in accounts receivable this quarter. Can you give a little bit of color on that?

Kevin D. Miller

Yes, well, the major component of that is obviously the increase in sales. We had an increase in sales from Q3 to Q4 and then a pretty significant jump from Q4 to Q1. The net accounts receivable increased by $5.8 million. I would estimate -- and it increased $5.8 million and our sales increased from Q1 to Q4 by $4.2 million, and then Q3 to Q4 of last year increased by $2.2 million. Obviously, the Q1 to Q4 has a much greater impact on the -- the sales change from Q4 to Q1 has a much greater impact on the increase in net receivables from Q4 to Q1, but the Q3 to Q4 has a little bit of lagging impact as well. And then we did have a slight increase in DSOs from Q4 to Q1, nothing really specific driving that. It's more just sort of normal quarter-to-quarter fluctuations. I do believe that we should see some improvement in our DSOs going forward. Hopefully, we'll [indiscernible] see sales increases which, if we do, we'll continue to see AR increases. But I'm hopeful that we can get our DSOs back down over the next couple of quarters, so we can generate some cash flow.

Unknown Analyst

Got you. Got you. And then you mentioned that health care had some headwinds in the first quarter. Can you provide a little bit more color on what's going on there?

Kevin D. Miller

Sure, I'd be happy to do so. The major -- the health care is a little bit of good news and bad news. The good news is, is we recently executed what we believe will be a 5-year contract with our largest customer, which is the New York City Board of Education. What can happen sometimes with these -- this is an MSA that is very, very layered, right? There's multiple school districts, there's multiple disciplines and there's multiple lists that all of the potential vendors like RCM bid to get on those lists. And whenever you have a new contract where there's a little bit of a reshuffling of the deck, there's changes and we have to deal with those changes in terms of what lists we're on. The good news is, is that we were very successful in our view, in terms of winning most of what we wanted to win. The flipside to that was we feel like there was some sort of administrative changes and some changes that we didn't expect on the administrative side with some of these contracts that basically caused us to have a little bit of a hiccup there. So our revenues, frankly, are down from where they were in the first quarter of last year. But it's a 3-year contract that is expected to be a 5-year contract, so we have multiple opportunities to get those revenues back up through hard work and navigating the contract. So when we -- basically what happens there is, there's very little activity there over the summer months. Everything kind of resets and it's -- we get in the trenches and battle with all the other vendors that are on the approved list for the next school year. So we have -- we're optimistic that starting next year's school year, which starts in September, that we'll be able to get that back to levels that we've experienced in the past or at least close to that. We have made some good progress in some other areas there. But given the fact that this is, by far, our largest contract, any hiccups there has a pretty big impact to that group.

Unknown Analyst

Sure, sure, okay. And then just lastly for me, typically we would have gotten the proxy statement by now. Do you have a date for the annual meeting?

Leon Kopyt

No, the board has not made a decision for the annual meeting, but we will obviously comply with whatever requirements are for the annual meeting.

Unknown Analyst

Okay. Any color to provide there with respect to why it would be, I guess, a little bit later this year?

Leon Kopyt

Well, we had some important developments in the first quarter in terms of operations, some changes in the management, so there's been a delay in executing that particular part of the board duty.

Operator

[Operator Instructions] And our next question comes from Sean Connolly [ph].

Unknown Analyst

A question on the Engineering business. How should we think about revenue going forward? If the increase we've seen was due to some long-term projects that just began, should we be thinking about revenue trending around the current level for the near future? Or was the growth we saw this quarter some shorter-term projects? And should we expect the business to be lumpy going forward?

Kevin D. Miller

Well, there's all -- in our Engineering business, there is always the possibility that revenues are going to be lumpy. So I can't tell you that they won't be lumpy going forward, because historically, they are, because we tend to win pretty big contracts, and those contracts don't always roll into other big contracts. But to more poignantly sort of answer your question, we do expect the Engineering revenues, at least for the next couple of quarters, to remain around current levels. There's always the possibility that a contract gets dropped or gets canceled and that they go down. But if the projects go forward as we expect them to go as we're sitting here today, then I would expect the first quarter revenue levels to hopefully repeat themselves through the rest of the year, absent some seasonality that we typically see around holidays and high vacation months. But, yes, there's no reason as we're sitting here today to not think that the Engineering revenues could continue at their current levels. And hopefully, if we win more of the contracts in our pipeline and we have good experience winning those contracts, maybe we'll see a little bit of a bump going forward as well.

Unknown Analyst

Okay. And then on the gross margin side within Engineering, I think in 2010 and 2011, you were hovering kind of around 26% and then it was down a bit towards 24% in 2012. And then in this quarter, we saw a 22% margin. Is that -- do you think -- was there anything unusual about this quarter that drove the margin down? Or should -- just with the new business that you took on, should we be expecting to see more of a 22% growth for these next few quarters?

Kevin D. Miller

No, I think that we're going to see that come up probably not until the third quarter, but we should see that come up in the third quarter. We have a large fixed-price contract that will be winding down in the third quarter that, frankly, we haven't gotten the margins on it that we had hoped. And that will be replaced, at least we believe, it will be replaced with better margin work. Additionally, we had a large client of ours in the first quarter defer some work and that caused our margins to come down as well. This is in the U.S., and when that happens, we can adjust, but we can't adjust by getting rid of very valuable salaried employees that we need to do the work that we know is coming in the future. So it's a combination in the first quarter of not as good a utilization as we like to see and the fixed-price contract. And some of the work that we're winning is not as margin-rich as in the past, it's really the 3. But I don't expect to see much of a change in the second quarter, but I do expect those margins to come up in the third and the fourth quarters.

Unknown Analyst

Okay. And then switching to the IT practice, for the past several quarters, you've been -- I know you've been focused on turning around the business, and it seems like it's starting to take some effect now since we've seen a few quarters of sequential revenue growth. Is there much more that needs to be done to turn around the business? Or do you feel that at this point, you're getting the traction you want with clients?

Kevin D. Miller

Well, I think it's both. We're getting a lot of traction and we're having a lot of success. As Leon mentioned before, we've got a couple of units that are vastly underperforming that need to be turned around. And we're confident that given a reasonable amount of time, we will turn them around. I think the next phase for IT group is to continue by doing what we're doing and to continue investing and continuing to add more quality people so that we can grow it. But I feel like the majority of our IT group is now on very sound footing with very good people in place both at the top and both in terms of our sales and recruiting engine, which is sort of the heart of that business. So we feel like it's taken us a few quarters, which we knew it would to sort of get it where it is right now, but we think the best is yet to come.

Leon Kopyt

Yes, I think the fundamentals are in place, organizationally, in the business model. So I think we should continue to refine and adjust some of the less -- the units that are performing not to our expectations, but I think we should continue to see those improvements going forward.

Unknown Analyst

Okay, great. And then within your press release, you had mentioned in your outlook that you expect to have improved results over the next 3 quarters. Is that specifically referring to just overall earnings? Or within that, should -- are you implying that we should see top line growth throughout the remaining quarters or...

Kevin D. Miller

If you compare them -- if you can -- looking out in terms of our expectations when we compare Q2 to Q2 and Q3 to Q3 and Q4 to Q4 of last year, it's our expectation that we'll see improvement in revenues, gross profit dollars and earnings for all 3 quarters. I think the second quarter is, hopefully, going to be pretty similar to the first quarter. And if that's the case, then the Q2 will significantly exceed last year's Q2. If you look at last year's performance, the first quarter was by far our best quarter of the year. And then for a lot of different reasons, we had a pretty big drop from the first quarter to the second quarter, and then we kind of slowly picked it up from there. But it's our expectation as we're sitting here today, unless something happens that we don't expect, that Q2 will have better revenues, better gross profit dollars and better operating income than Q2 of last year and so on through the rest of the year. That's our expectation.

Unknown Analyst

Great. And then just kind of curious about your assumptions about the overall economy that kind of support your outlook. Are you forecasting any improvement or just kind of thinking that things are going to stay kind of as they are and, say, 2% to 2.5% growth economy?

Kevin D. Miller

I think there's a lot smarter people out there that can opine on what the economy's going to do, but we're not baking in any major increase in the economy as far as our expectations are concerned. Obviously, if there's significant growth in the economy, that's going to help us. If -- I think if there's a major hiccup in terms of the sequestration or other political wins that caused the economy to go backwards, that could impact us as well, not so much on the power side, but certainly, if capital spending decreases, that certainly would impact our IT group and certainly could impact our aerospace group as well, right, if government spending goes down. But our anticipation is that we're basically planning for the economy to continue like it's been continuing.

Leon Kopyt

I think in having the diversity and having the diversity in services, Engineering, IT and health care, and having diversity in geography and sectors will help us with whatever changes there are in the economy.

Operator

We have our final question from Gunnar Hansen.

Gunnar Hansen - Sidoti & Company, LLC

A lot of my questions have already been answered on the call here. But just in terms of the IT segment, I think you guys mentioned potentially just the sales effort or adding some headcount there. Wondering if you can kind of give us some more insight into how many sales or recruiting people are currently employed and how that kind of compares to a year ago.

Leon Kopyt

I don't know if I can give you precise numbers, but I know we have rotated significantly and upgraded our sales and recruiting staff. I would venture to say that we probably have about 15%, maybe 18% larger sales staff then we had a year ago. But I think the most important thing is the upgrade in quality of the account executives and having them work together and effect some of the cross-selling activities that have not had been happening in the past.

Gunnar Hansen - Sidoti & Company, LLC

Great, great. And I guess, just lastly, in terms of Engineering, it seems like are seeing some traction there. Just in terms of the pipeline, kind of any color into a particular amount or what sort of deals are kind of in the pipeline at this point?

Kevin D. Miller

Yes. I mean, that's not something we typically discuss with the public. But what I can tell you is that the pipeline is very strong. It's good. We're very excited about it.

Leon Kopyt

And more importantly, I think the ratio of wins is also -- meets our expectations. So...

Kevin D. Miller

Right, right. The pipeline is rich with business that we know we can win.

Gunnar Hansen - Sidoti & Company, LLC

And is there a particular region that you guys are having the most success in at this point?

Kevin D. Miller

I think it's both in Canada and U.S. as well.

Operator

There are no more questions in queue.

Leon Kopyt

All right. Thank you so much, and we'll reconvene at the end of the second quarter.

Operator

Ladies and gentlemen, this concludes your call. You may all disconnect.

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