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RCM Technologies (NASDAQ:RCMT)

Q4 2013 Earnings Call

February 27, 2014 10:30 am ET

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

Rocco Campanelli - Executive Vice President

Analysts

Ryan Downie - Sidoti & Company, LLC

Operator

Good morning, and welcome to the RCM Technologies Year-End Earnings Call. Mr. Leon Kopyt will now begin.

Leon Kopyt

Thank you, Alicia. Good morning to everyone, and welcome to our conference call this morning. This is my last conference call as the RCM CEO and I'm pleased to introduce to you our new CEO, Rocco Campanelli, who's beginning his tenure on March 1, joining us telephonically, as well as Kevin Miller, one of my colleagues and our CFO, who's next to me.

So before I turn it over to Kevin and Rocco, I just wanted to share a few thoughts with you. I sincerely appreciate and enjoyed the challenges and the rewards that came with being the RCM CEO. It's been a real joy and privilege to work with enormously talented and dedicated group of colleagues, and I would like to pay my tribute to every one of them, and in particular, to Rocco, Kevin, Tim Brandt, Michael Saks, Chris Giunta, every one of my colleagues on the board, as well as many, many others for their support, friendship, contributions, dedication in building this wonderful company that continues to grow and prosper despite many -- during difficult economic cycles over the last 22 years, and despite many mandatory transformations that were essential to adapt and respond to changing market and technology environments, again, over the last 22 years.

Additionally, I'm grateful to all our shareholders for believing in RCM and for continue to be invested in our stock. We have a strong and motivated team which has the experience, the knowledge, and certainly, the drive to execute our business plan. And with Rocco's leadership and Kevin's guidance and contribution and support, I'm absolutely confident that we will succeed.

Thank you, again, and I will turn it over to Kevin to go through the segmentation data, and then Rocco for his comments.

Kevin D. Miller

Okay, great. Thank you, Leon. Good morning, everyone. I just basically wanted to start, obviously, thank Leon for his many years of service and dedication. Leon, it's been a pleasure and an honor to work with you for 17 years. I don't think most people get a chance to work with somebody they really respect and enjoy their company for 17 years. It's a long time, and it's been very enjoyable.

So onto the news at hand. We're very excited to report the fourth quarter. We're very excited with the results for the fourth quarter. Obviously, we had some onetime event that sort of polluted our operating income, but the sales and gross profit for the quarter are very exciting, in my opinion.

We reported consolidated sales of $45,849,000, broken out as follows: $13,885,000 for our Information Technology Group; $23,478,000 for our Engineering group; and $8,486,000 for our Specialty Health Care group. We reported a blended gross margin of 25.72% and that is broken out as follows: Information Technology, 30.11%; our Engineering group had gross margin of 21.45%; and our Health Care group had gross margins of 30.38%. Our Engineering segment, as you've probably seen from the press release, had its highest quarterly revenue and second highest gross profit dollars, second only to the third quarter of this year in RCM's history. And our Specialty Health Care segment experienced its highest quarterly revenue and gross profit dollars in RCM's history. And our IT segment, as you can see from the numbers, continued its upward trend by posting its highest quarterly revenue and gross profit since the first quarter of fiscal 2011. So we're very excited with the quarter.

Just to sort of recap the year, we experienced revenues for the year of $170,780,000, which is a 17% increase over 2012. And that's broken out by: $55,263,000 in our Information Technology Group; $86,741,000 for our Engineering group; and $28,773,000 for our Commercial Services group. We had a blended gross margin percentage of 25.98% broken out as follows: 28.69% for our Information Technology Group; 22.75% for our Engineering group; and 30.49% for our Specialty Health Care group.

Again, thank you for your time today, and I'll now turn it over to Rocco Campanelli.

Rocco Campanelli

Thank you very much, Kevin. I'm very excited to have the opportunity to lead this great company. I came to RCM just shy of 20 years ago through the acquisition of Cataract, Inc., a small engineering staffing company. And since that time and under Leon's leadership, the engineering team has been able to transition from a commoditized staffing division to a powerhouse projects and solution group. We have successfully diversified our service offerings and client base to place us in a unique position to effectively compete with large architect engineers and service providers to major projects in North America. Our focus in engineering will continue to be in power generation and aerospace, and we will target growth in transmission and distribution and energy management.

In the IT group, we had an excellent management team under Tim Brandt and Chris Giunta; and in Health Care, we have an excellent group under Michael Saks and Marc Chafetz. I will work closely with them to help continue their excellent progress towards sustainable profitable growth and diversification. Leon and the Board of Directors have placed tremendous confidence in me to maintain a challenging and stable work environment for our employees and increase shareholder value through predictable and continuous growth. I will do everything I can to reward this confidence.

I would like to wish Leon the best of luck for a long, healthy and exciting retirement, and look forward to his continued guidance as Chairman and thank him from his years of mentoring and friendship.

Thank you, Leon, and good luck. I'd like to open it up for any questions or turn it back over to Kevin.

Kevin D. Miller

Yes. No, we're ready for questions. If any of the callers have any questions, please ask away.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from Ryan at Sidoti & Company.

Ryan Downie - Sidoti & Company, LLC

Just a couple of quick questions. Looking at the growth in IT group, it was stronger than we'd seen in any of the quarters the past few years. Could you go into some detail about what's driving that?

Kevin D. Miller

Well, it's really just a continued effort of our IT group and some of the hires that we've made over the last 2 years. Over the last 2 years, we've seen just a renewed energy in that group, both from many of the employees that have been with us for a long time and some of the newer employees that we've added. We have seen, to be a little bit specific as to where the growth is coming from, and it's coming from several different areas, but probably the biggest impact has been in the life sciences area. We've always been a company that is very strong in the life sciences area, and we've continued to really become a force in that area.

Ryan Downie - Sidoti & Company, LLC

I know over the past few years you've taken some efforts to sort of trim some of the less profitable bits of business in the IT segment. Are we maybe seeing some fruit being borne from that behavior abating now?

Kevin D. Miller

Absolutely. We did shed a few nonprofitable groups so that the IT group could focus on the areas where we have really strong people and where we've had success in the past, and in my view, we've had even more success over the past 2 years. We had, quite frankly, 2 years ago, our IT group had become a bit complacent, to be real honest. And we've brought in some new leadership, and that complacency is no longer there. It's a group that's having fun. They're growing. They enjoy what they're doing, and they're excited to come to work every day and it's been a really refreshing change. It took us a long time to get it turned around, but we've been able to do that.

Ryan Downie - Sidoti & Company, LLC

Is Health Care benefiting from the work with the New York Board of Ed coming back, or is this new business?

Kevin D. Miller

Well, the Board of Ed continues to be a very strong client for us, and we've seen some return in that business in terms of where we were a year ago. We've bolstered that, and it's on a slight upward trend. It's not where it was 3 years ago. And frankly, it may never get to that level, and that's okay, because they're a great client. We're still going like gangbusters with them, and we expect them to be a great client for the foreseeable future. But what's really exciting about the Health Care group is that over the last 2 years, we've really sort of sat down and said, "Okay, where are we going to get some growth?" And we've been able to get some growth in some other areas, quite a few areas, but the biggest one -- the biggest impact has been Hawaii. We have 3 major contracts in Hawaii. We could -- we probably did about $1.5 million in the fourth quarter, $1.6 million, out of Hawaii roughly. And the fourth quarter of 2012, I think we did a couple of hundred thousand dollars, tops. And we expect that to continue to grow. We're going to continue to focus on one of our biggest strengths which is going after big school systems, and we have about a dozen school systems that we're -- roughly a dozen school systems that we're working with now. The 2 big impact school systems have been New York City and the State of Hawaii, but we're -- we've got a nice pipeline of other schools that we're looking to get into. The problem with the school systems is it's a very, very long sales cycle. You don't just show up and win a bid and they may not bid for -- they may not bit those out until every 3 years or so. So it's a long sales cycle, but we believe we are one of the pre-eminent health care staffing firms for school systems. So that's a real strong area for us. In the second half of this year, we launched 2 new divisions, 1 in Health Information Management, which is basically providing coders to code various medical records. That is a big federally mandated initiative. We've seen some pretty good success in that early on. We also started a travel nurse business. Neither one of those 2 businesses are making a significant impact on the healthcare group today. But we believe that going forward, those businesses could provide a pretty significant impact to our growth. At the end of 2012, we launched a senior care group, which has been slow to develop, but we're making money on it. And we also think that's a nice area for growth of us -- for growth going forward.

Operator

[Operator Instructions] We have another question from Sean [ph] with Tiberium Capital.

Unknown Analyst

First question on the IT business. We've seen 5 consecutive quarters of revenue growth and growth has been accelerating in each of those quarters. How should we think about the IT group going forward?

Kevin D. Miller

Well, we don't provide revenue guidance, as you probably know, but we certainly expect that group to continue its upward trend. We're going to continue to add new people to reinvest some of the increased profits to keep growing the group, and we fully expect it to keep growing. We're probably not going to see significant margin expansion going forward. We kind of like where the gross margins are right now. Of course, we'd like to get them up, and we'll try to get them up. But we're more focused on growing gross profit dollars at acceptable margins. So we're going to continue to focus to try and grow the gross profit dollars at acceptable margins so we can grow the profitability. But we don't see any reason why we can't continue to see steady progress going forward.

Unknown Analyst

Okay. Then on the Engineering side, over the last few calls, I think you've mentioned that there were several clients who you believe were likely going to ramp spending in '14. Is this still the case, or has there been any changes in timing or scope of these projects?

Kevin D. Miller

Well, we have a very robust pipeline in the Engineering group, particularly in the power systems area. And the thing with Engineering is that we've experienced over the years is a lot of times clients will tell you they're going to award a contract at a certain time, and 3 months later, they still haven't awarded it. So that business can be a little bit lumpy because the clients are hard to predict. But that -- putting that aside, the fact that there are always going to be sort of misstarts or delayed projects, we continue -- we expected to see a continued upward trend in that group. I'm not sure that we're going to see a huge growth in revenues next year because the clients were ramping up in 2013. We expect them to spend more in 2014. I don't know, depending on where the projects land, that we're going to see huge growth there. I think we'll continue to see growth. But what I expect to happen in Engineering, particularly starting in the second quarter, is I expect to see better gross margins. So I expect the gross profit dollars to grow nicely in 2014, which, frankly, is more important than growing top line.

Unknown Analyst

Okay. Just to kind of switch over to Engineering gross margin, we did see that step down in gross margin this quarter. I think you had mentioned last quarter there was a fairly large project that you had bid on that was essentially breakeven and that, that was likely to continue into Q1. Is that the main driver of what was bringing margins down this quarter? And then, is that also the reason why you think if that project ends in Q1, we're going to see the ramp-up in margins starting in Q2?

Kevin D. Miller

That's a big part of it, yes. That's a big part of it. We had a big project in Canada that we, actually, throughout the year, we probably actually had a little -- a small negative gross margin on that project, and it was a big project. That project is going to go into Q1 and probably a little bit into Q2. And as I sit here today, I'm not 100% sure what kind of impact we're going to see in Q1 and Q2. But I do believe the impact is not going to be as great, particularly in Q2 as it was in 2013 as far as bringing the margins down to a level that, frankly, we're disappointed with. We're obviously thrilled with the revenue that we've gotten out of the Engineering group, but we're a little bit disappointed with the gross margin. But that project, and we also had a project on this side of the border in the United States that we -- a fixed price project that we sort of took it on the chin a little bit in the fourth quarter. So there's really sort of 2 projects, but that project is finished. So I don't expect to see continued impact from that. As far as the fixed price contract in Canada, we'll see. It may continue -- it's definitely going to impact the first quarter, but I'm cautiously optimistic that by the time we get into the second quarter, that's not going to have any impact on the gross margins.

Unknown Analyst

Okay. And then on the healthcare business, from a seasonality perspective, I think the general trend we've seen over the last couple of years is that revenue is somewhat, I guess, consistent in, say, the Q1, Q2 and Q4 periods. But then due to the New York Board of Education, we see a falloff in Q3. Is that largely the trend that we should expect to see this year because you could say that $8.5 million for the next quarter or 2, the falloff in Q3 and then see the rebound in Q4?

Kevin D. Miller

Yes, yes. I mean, I don't know that we're going to do $8.5 million in Q1 and Q2, but we'll definitely be higher than where we were in 2013 with $6.9 million and $7.2 million. But whatever, you'll continue to see a pretty big drop in the third quarter due to the board. We usually lose about roughly $2 million in revenues from Q2 to Q3 just from the Board of Education. And we are in a lot of other school systems. Hawaii is slower over the summer months than they are in the other months, but they don't have quite the shutdown that New York has. They have quite a few kids in session over the summer, a lot more than they do in New York. But to answer your question, yes, we'll continue to see that in Q3 for, frankly, as long as we have a big contract with the Board of Ed, which I expect to be forever.

Operator

There are no further questions in queue at this time.

Leon Kopyt

So there's no more questions. All right, thank you so much for joining us this morning and we'll reconvene at the end of the first quarter.

Operator

Ladies and gentlemen, this does conclude the conference. You may all disconnect.

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