Leon Kopyt - Chairman, President and Chief Executive Officer Kevin D. Miller - Chief Financial Officer, Treasurer and Secretary

John - Hamilton Research Management

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

Thank you. Good morning and thank you for participating in this morning's conference call with us. Kevin Miller is here with me to share some segmentation data and other financial metrics. I will then make a brief comment on the state of the business followed by a Q&A period. We invite you to prepare your questions relating to our press release after the brief comments. Kevin? Kevin D. Miller: Good morning everyone. As you know from the press release, our consolidated revenues for the quarter were $42,379,000; our IT Group, Information Technology Group, had revenues in the second quarter of $14,228,000; our Engineering Group had revenues of $20,953,000; and our Specialty Health Care Group had revenues of $7,198,000. Our blended gross margin percentage for the quarter was 26.57% and that is broken out as follows; our Information Technology Group 29.21%; our Engineering Group was 23.13%; and our Specialty Health Care Group was 31.4%.

Thank you, Kevin. As we look ahead, I think the fundamentals of our business remain positive for the foreseeable quarters. The major business improvement indicators, such as pipeline, backlog, potential margin expansion, potential cost consolidation, utilization, are all trending in the upward direction. As you saw in the press release, both Engineering Group and the IT Group continue to deliver aggressive results and it is also our expectation that Health Care Group performance should begin to make solid contributions to the overall results as well. As you know from time to time, there are client delays and unexpected scope changes that could be disruptive to the utilization and the revenue flow as well as the visibility, but we believe that we have the sufficient momentum and the workload distribution between various groups to minimize the impact on our performance. So in conclusion, the overall management sentiment I think remains elevated based on the internal metrics. The cyclical trends are also trending favorably, and our fixation, our focus continues to be the organic growth margin expansion and the rotation into a richer, longer term contracts and engagements in which RCM can bring its technology and business sector knowledge to seamlessly deliver services across the entire spectrum of customer relationship continuum, more specifically the planning stage, the implementation stage, and the support stage. Thank you. And operator, can we open up for the Q&A period?

(Operator Instructions) The first question is from Mark with Morgan Capital. Please go ahead. Mark, your line is open. Did you have a question? We do have another question from John with Hamilton Research Management. Please go ahead. John - Hamilton Research Management: I have four of them. First one is, can you provide revenue and profit contribution details for the BGA acquisition that you made last year, could you maybe discuss the impact on the first two quarters? Kevin D. Miller: Yes, I mean I can certainly give you the revenue contribution. Just give me a second here and I'll let you know what that is. BGA for the second quarter the revenue contribution was $1.7 million, and if I look at the 26 weeks $3.5 million. John - Hamilton Research Management: Okay, those are revenue contributions? Kevin D. Miller: Yes. John - Hamilton Research Management: Okay. And do you have profit as well? Kevin D. Miller: No, we don't disclose profit for individual business units. John - Hamilton Research Management: Okay, alright. My second one is, can you explain the charges in the income statement for facility consolidation the first two quarters, I think in total it's around $343,000, can you say which facilities were consolidated? Kevin D. Miller: Yes, I can, and there will be a little bit more detail in the Q which I expect to file today, but we previously had two locations in Canada, we have a small IT operation in Canada and then we have a very significant engineering operation in Canada. We previously had two offices, two major offices, one in Mississauga and the other one in Pickering, and for strategic reasons we decided to consolidate those two offices. Canada has some kind of quirky labor laws that we really don't have in the United States where if you lay off an employee for any reason, for someone who works for you for more than four years, you have to take severance. And if you move an office more than X amount of miles, I'm not sure on this but I want to say it's 25 is the cut-off, then if that employee chooses not to move to a new location, then you are required to pay severance. And the severance increases quite a bit depending on how long that employee has been with you, has been with the company. So, we had three employees that were with the Company, in the 20 year range, with RCM and then many, many years ago with predecessor companies that we purchased in Canada. So we had some normal moving costs that you have with anytime you consolidate or move an office, but that was probably maybe $40 million of the $340 million off the top of my head, the bulk of that cost was related to one-time severance payments that we were required to make to the four or five employees that chose not to move. John - Hamilton Research Management: Just as a follow-up to this, can you say what the expected annual savings might be and are there future are there more special charges to come? Kevin D. Miller: There may be some small amount, residual amount in Q3, but probably not more than $10,000 or $15,000, I wouldn't think. We are really not going to experience any significant savings or I should say the savings are going to be masked because we significantly expanded our space in Pickering to meet the growth there, we are hiring a lot of engineers, we've expanded our staff significantly this year in Canada. So in theory, I guess there are some savings because there is always some fixed cost associated with each real estate location, for instance we don't need two receptionists anymore, but you're not going to see that in the P&L, but you're going to see the opposite which is we're continuing to expand our space in Pickering and we're actually to a point where we're going to need more space in Pickering, maybe in a different location. But the reason why we wanted to consolidate in Pickering is because, number one, that's already where our significant operations were, number two, it's much closer to one of our major clients which is, OPG, Ontario Power Generation. So, the move was not really driven by savings, it was driven by the ability to manage our operations better and more efficiently and have the majority of our work force close to the client. John - Hamilton Research Management: Okay, thanks. Two more please. Next one just has to do with Health Care which I think you briefly alluded to in your comments but can you provide a little more detail or color on the weakness in the segment? Kevin D. Miller: Sure. The major reason for the weakness in the segment in both Q1 and Q2 was that our biggest client, the New York City Board of Education in the beginning of the school year starting in September, and even more so, starting in January when the school reconvened for second semester if you will, we just had several hiccups there in terms of, they changed their entire – first of all, we got a new contract with them, which is good news, starting with the school year in September of 2012, and that contract is at least three years but more likely to be a five-year contract. So we renewed the contract and that contract says multiple schools, multiple disciplines, multiple districts, it's a very complex contract, and you bid on all kinds of different disciplines and districts. And we pretty much did very well in the bidding process in winning what we wanted, but they changed some of the administrative functions which caused us some delay in getting people out at the client, and as a result, we lost some of our therapists and nurses that couldn't wait around for us to get them placed. So, we had a pretty big setback there in terms of losing some people that we otherwise expected to place. The guys have been working very, very hard, our Health Care team has been working very, very hard to get back on track with the New York City Board, but we really going to have to wait till the new school unit of our efforts of getting our revenues back in line with where they have been in the past. But that was sort of the major impact as it pertains to Health Care. The good news is, we get to start over in September, that doesn't necessarily mean that we are going to get back to the level that it was before we lost 20 to 30 therapists, but we are optimistic that we will each quarter improve a little bit. We did improve the revenues to the Board, improved quite a bit from Q2 to Q1 which I was happy to say, and just as importantly, we won two pretty significant contracts last year that are also starting to come to fruition in the State of Hawaii. We won a contract with State of Hawaii Board of Education. The State of Hawaii has one Board of Education for the whole state, and starting in August, we are going to be the sole provider of nurses to the State of Hawaii Board of Education. That should be a pretty significant contract for us. We also won a contract with the State Corrections Organization that we are going to be providing nurses to the prisons. We really don't have a good handle on what that means yet. John - Hamilton Research Management: But that's all with Hawaii? Kevin D. Miller: That's all with Hawaii, and that contract is actually under protest, which is common in government contracts, but we don't expect that to impact us, although it certainly could. But the bottom line with Health Care is, we increased revenues from Q1 to Q2, so that was nice to see. Revenues in Q1 were $6,926,000 and that went to $7,198,000. So we went from about $6.9 million to $7.2 million. So certainly our Health Care Group did a really nice job in my opinion of weathering the storm that we experienced in Q1 and making improvements in Q2. As we look out to Q3 and Q4 for the Health Care Group, they are actually projecting slight increases in revenues over Q3 and Q4 in 2012. So we are cautiously optimistic that we're going to see some continued improvement in Q3 and Q4. On the year, we'll probably still be down a little bit but what we expect to see in Health Care is a continued upward sequential trend and that will be sort of nice momentum, if it occurs, as we head into 2014. John - Hamilton Research Management: Okay. You said the New York Board of Ed contract is worth three years but you are hoping to extend them to five. Kevin D. Miller: The way it works is, they sort of dictate the terms, but it's a three-year contract which the Board of Education has the option, their sole option, to extend it for two additional one-year periods. The last time around that's what they did, we certainly expect them to do that in this contract too just because it's a huge endeavor for them, and if they can extend it without having to go into it again, they generally choose that option. John - Hamilton Research Management: Right, right. And how long are the Hawaii contracts for Board of Ed and Board of Corrections? Kevin D. Miller: I believe they are on sort of a one-year rolling basis that needs to be renewed each year. John - Hamilton Research Management: Okay, great. Last question I have is, when do you plan to hold the Annual Meeting and what's been causing the delay in that? Kevin D. Miller: Well, we have not set the Annual Meeting yet. We expect to set that pretty soon. So I would think in the near future maybe getting some information on when we'll be setting that. John - Hamilton Research Management: Okay, great. Thank you for taking my questions.

There are no further questions in queue.

Can we make one more inquiry to make sure there are no questions?

(Operator Instructions) And we do have a question from [Sean at Teradium Capital] (ph). Please go ahead.

In the press release you made the comments about seeing market improvement in 2014 versus 2013, are you saying that more on the Engineering side or on the IT side or both? Kevin D. Miller: We think all three are going to improve in 2014 versus 2013, but I think where we have the chance to see some pretty significant growth is on the Engineering side, just based on some of the contracts, based on some of the master service agreements that we have in place and based on what our clients are telling us as far as contracts that they are looking to elect. Obviously these things are always subject to change but we've got two or three, and one in particular, clients on the Engineering side that we believe are going to be spending significant amounts of money next year, more than they are spending this year. So we think that we have a real good chance of seeing some pretty nice growth, particularly in our Engineering Group.

So Engineering has been trending around $20 million in revenue over the last couple of quarters, so are you expecting a fairly sizable step up from that level in 2014? Kevin D. Miller: We certainly think we can see a nice increase in 2014 over 2013, and just as importantly is that, I think we're going to be seeing better gross margins in 2014 than we have seen in 2013, so even if we don't see a huge jump in revenues, we could see a pretty nice increase in gross profit which from our standpoint is more important.

Great. Then I guess what's driving the gross margin improvement next year? Kevin D. Miller: It's more of what's driving our gross margins in Engineering being low this year. We have a pretty large fixed-price contract that we started in Q3 of 2012. We are hoping it's going to be substantially finished this quarter that we are just not doing well on from a profitability standpoint. We'll probably, when we get to the end of the project, we'll probably break even on it from a gross margin standpoint. So we had about $1.7 million in revenues that went through Q2 of this year, we have very little gross profit dollars on it. And we had approximately 50 people working on the project. So, when we finish that project, those 50 people should, if everything sort of happens the way we expect it to, should move on to other projects where we'll make some gross profit on them.

But looking at the contractual mix of engagements that we have and in full utilization, we think that's going to make an impact on the gross profit.

Okay, great. And then how should we – I guess maybe relative to revenue growth next year, how should we think about SG&A going forward, should we be able to get some operating leverage on the revenue growth? Kevin D. Miller: Yes. If we see revenue, the kind of revenue growth that we hope to see, obviously we will probably see some corresponding SG&A growth, but it won't grow at the same percentage. So the answer to your question is, definitely yes.

Okay, great. That takes care of all my questions for now. Thanks.

(Operator Instructions) There are no more questions in queue.

Alright, thank you very much for joining us. We'll reconvene after the end of the third quarter.

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