Leon Kopyt - Chairman, Chief Executive Officer, President and Member of Executive Committee Kevin D. Miller - Chief Financial Officer, Principal Accounting Officer, Treasurer and Secretary

Sean Connolly

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

Thank you. Good morning, and thank you very much for joining us this morning. Kevin Miller, our CFO, is here next to me to give you some supplemental financial data. We'll follow our usual protocol of giving you the segmentation. I'll have a brief comment, and then we'll open up for the Q&A period. Thank you. Kevin, please? Kevin D. Miller: Okay, good morning, everyone. As you've probably seen from the press release, our sales for the third quarter were $40 million -- $41,320,000, broken out as follows: Our Information Technology segment had sales of $13,156,000; our Engineering segment had sales of $22 million even, rounded to the thousand, of course; our Specialty Health Care group had sales of $6,164,000; our blended gross margin for the quarter was 25.86%; our gross margin for the Information Technology group was 26.66%; our gross margin for our Engineering segment was 24.27%; and the gross margin percentage for our Health Care group was 29.8%. We're happy to report that revenues for the third quarter and year-to-date, as compared to 2012, grew 18.6% and 14.8%. Our gross profit dollars for the third quarter and year-to-date grew 10.4% and 10.0%. And our operating income grew for the third quarter and year-to-date 63.1% and 29.2%. And if we normalize the 39 weeks this year for our onetime facilities charge that we took mostly in the second quarter, the operating income year-to-date is up 38.0%.

Thank you. Thank you, Kevin. Just a brief comment on the visibility going forward, I think it's our strong belief that the overall business sentiment remains positive and, certainly, opportunistic. The press release issued yesterday conveys, I think, the relevant data and expresses our view with respect to the current and the future performance, and I believe the prospect as well. And there's sort of an implied guidance as well on 2014. While there is always a potential for some disruptive events that may result in softness or volatility or even maybe some dislocation of revenue stream, I expected that that impact should be short term and without any substantive effect on the overall growth strategy. So the current business barometer, in conclusion, I think, points to favorable economic trends and an upward momentum going forward in all of our 3 business groups. And I think that we should be well positioned to benefit from this environment. Galecia [ph], can we open up for the Q&A period, please?

[Operator Instructions] Our first question is from Ralph with Morgan Stanley.

The question I had is, are you getting much business from the after effects of the Sandy hurricane?

We have. We've done some assessment analysis for the local utilities in New Jersey as well as in Connecticut. Some of them have resulted in additional assignments. But I can tell you that we've got some significant amount of work out of it. Kevin D. Miller: It was more of an initial bump post-Sandy. We had a couple of nice projects at the end of 2012 that carried into 2013, but the effect, as of today, is not significant.

Our next question is from Bill Sullivan with Emerging Growth.

So you were up through -- Kevin, you got through the segments a little bit before I was completely wired in. So -- and did you do the year-over-year? Could I get a comparison there? Kevin D. Miller: You'd like to get the segments?

Yes. And if you -- and did you provide Q3 last year for comparison? Kevin D. Miller: Yes, we did. We compare the quarterly numbers on each call. And they're also in the Qs as well.

Okay. Then you don't have to go through it, if the Q's ready. Kevin D. Miller: Did you want the Q3 numbers again, though, or just...

Well, that's okay. I mean, I -- if... Kevin D. Miller: It will be in the Q later on today.

Yes, that's fine. Inside of Engineering, which I assume maintained its momentum, did you provide any color in terms of the groups, Canada versus U.S. particularly, or -- also just the power overall? Kevin D. Miller: Well, we did not. We didn't provide that sort of granular detail. But I can tell you that the Engineering segment is performing very, very well. The Q3 year-over-year growth was 28.3% year-to-date; for the 39 weeks it's 30.4%. And a large portion of that is coming from Canada. Certainly when you go into the segment and you see the revenue disclosure versus Canada versus the U.S., you can kind of get a pretty good flavor for it, since our IT presence in Canada is pretty small. It's roughly $2 million a year, so the balance of that is all Engineering. So you can get a pretty good sense for how the Canadian Engineering group is growing relative to the U.S. But both areas are certainly growing and both areas are very exciting. One of the other things that is probably good to point out is as great as we're doing in Canada, we have a large fixed-price contract up there that we bid rather aggressively in early 2012, just because we had about 30 or 40 engineers coming off of a major project at Bruce. And frankly, we needed to keep them and keep them working. Plus, it was the first major project at OPG, and we needed to bid it pretty aggressively to get it. So that project, from a pure dollars and cents standpoint, has not worked out real well for us. It's been basically breakeven. And that's about roughly CAD 4 million of breakeven revenues for the 39 weeks, and -- for the 39 weeks in 2013, which has had a pretty big impact on the gross margins. But the good news is, is while that project will continue to go through the first quarter of next year, we are fairly confident that it will end in the first quarter of next year, and we're fairly confident that the engineers that we have working on this fixed-price project we'll be able to roll them into projects with margins in the high 20s, the mid- to high 20s, which will have a real nice impact as we sit here today on 2014. Once we get that project behind us, we don't really need to grow our Engineering revenues all that much to grow our gross profit dollars, which ultimately is what matters. So the Engineering group is having a great year, from our perspective, and we believe they're going to have an even better year next year. So I probably answered more than your question, but I thought I'd...

Well, you answered actually something else, as well. But -- so the split between Aerospace -- your 2 main groups are still Aerospace and Power, right? Kevin D. Miller: Yes.

Yes. What's the rough split there? Kevin D. Miller: Well, let me give you the -- I'll give you some numbers there and be more precise.

I'm just curious if you're able to get any forward momentum in Aerospace these days, given the backdrop there. Kevin D. Miller: Yes, it's been a little bit of a struggle to really get that growing. Our Tech Pubs group is growing very nicely, but our -- the pure Engineering group is not growing as much as we'd like it to, but it's performing well. But just to give you sort of a sense, we'll probably do somewhere around $20 million to $23 million in Aerospace this year. We did about $5.6 million in Q1, about $5.9 million in Q2 and about $5.7 million in Q3. Certainly, the sequestration is impacting us there. As you know, we're tied to, in large part -- what UTC -- UTC is our major client. Not just -- Sikorsky is the largest of the UTC family, but -- so we're somewhat dependent on how UTC is doing. But we don't -- as we sit here today, we think we're going to get some single-digit growth out of that group in the near future.

And then the last thing I just wanted to get an update on is kind of the mix within Engineering between O&M kind of work and project work. I think that's been moving more towards O&M. Is that right? Kevin D. Miller: Project versus...

Versus ongoing annual kind of evergreen kind of work that you've -- doing maintenance and that kind of stuff. Kevin D. Miller: Yes. Yes, that is accurate. I don't have sort of exact numbers for you. But the majority of the work in Canada is what you would call evergreen work. We're working on various projects, but there's a pipeline of 4 or 5 years of major projects at OPG. We believe -- and this is always subject to change, because utilities -- we've seen utilities sort of change their projections on what they're planning to spend, but we believe that probably toward the end of 2014, early 2015, Bruce Power is going to be looking at some major refurbishments as well. And as you know in the past, when Bruce Power has had significant refurbishments, we've been a major player in those. We believe the window for OPG is going to be at least 5 years, and maybe longer, in terms of some of the heavy spending that they're doing. And we're 1 of 2 approved engineering firms at OPG right now.

Bill, I don't know if you recall, but a couple of years ago, we've indicated that we wanted to seek a more optimum balance between the capital and the operating projects, emphasizing the master services agreements, emphasizing the engineering-of-choice engagements and also the Engineer/Procure/Construct type model. We've been very successful in transitioning to that balance and, obviously, now benefiting from that particular strategy.

Right, I do remember you heading in that direction. Kevin D. Miller: And our quarterly Engineering revenues, which is -- if you chart it since early 2010, they're really just -- there's been a few jagged quarters there just because that's what happens when you're working with these big firms. But it you sort of look at the chart, it's pretty impressive.

And then, I just want to get a little update on Health Care. The New York contract is still at a reduced level, I guess. And then as Hawaii, which you've -- you're going to be doing work there under a contract, is that reflected in the quarter yet or... Kevin D. Miller: Yes, it is reflected in the third quarter, particularly. We've had a tremendous amount of success in Honolulu. We've won one major contract there with the State of Hawaii Board of Education. And as you may know, there's only one board of education in the entire state, and we have the exclusive contract there to provide nurses. We also have a contract with one of the major hospital systems in Hawaii where we have about 25 professionals, mostly nurses, at the hospitals. We also recently won -- and that hasn't started yet, it's going to start November 1. We won a contract with the New York State Corrections. So we're going to be providing nurses to jails. It's still a little bit fluid as to how big of a contract that's going to be, just because that's a little bit different where we're the primary vendor, but there are various levels of vendors underneath of us. But we're cautiously optimistic that, that could be a pretty significant contract for us. But just to talk a little bit about health care, which is something that we're particularly proud of, we grew 15.8% in the third quarter of 23 versus -- 2013 versus 2012. And year-to-date, we're actually down 2.2%. However, if you look at our largest client, which is the New York City Board of Education, Q3 is -- we did $1 million with them versus $1.4 million in the third quarter of last year. And we've done $7 million with the Board of Education versus $8.7 million last year. So we're down $1.7 million on that contract. We also have -- our second largest customer in 2012 is the Jewish Home and Hospital. And year-to-date, we did about $900,000 versus $1.6 million. And that's not so much that there's anything major going on at Jewish Home and Hospital, they just had a real spike need in 2012. We're actually sort of down around the levels this year that we've done in prior years for Jewish Home and Hospital. As far as the New York Board of Education is concerned, we had a number of snafus that in the beginning of last year's school year that contributed to the decline. The new school year started in September of this year, and while I can't say that we're going to get back to the levels of prior years, we're pretty confident that our 20 -- that the second half of 2013, particularly the fourth quarter, we believe our fourth quarter New York City revenues are going to exceed the fourth quarter of last year. And we're reasonably confident that our 2014 revenues at the New York City Board of Education will exceed 2013. So the -- our Health Care group, quite frankly, was delivered a couple of tough blows in the first half of this year. And they have really regrouped and rebounded really nicely, and we're really proud of what they've done so far. And as we head into 2014, we think that the prospects are very good there. Additionally, we started 2 new divisions in our Health Care group. And we're starting them small, as we normally do, without making a huge splash as far as adding SG&A. But we started a travel nursing business in San Diego, and we hired 2 new employees to get that off the ground. And the early signs are good. We don't have a lot of revenues generated from that yet, but we're excited about the prospects. Additionally, we started a health information management, which basically provides digital coders to the hospitals to get older records digitized. And we only started that about 1 month ago and we already have an order for 20 coders. And we believe both of those 2 divisions, long term, has some nice prospects for growth. So we're really excited about those 2 initiatives as well. I mean, they're not going to take off like a rocket, right? It's going to take some time to get those going, but we're excited about them.

Thanks for that color, Kevin. So I also noticed in the press release, you guys updated us on the -- where you mentioned further initiatives for enhancing shareholder value. And you -- obviously, it's been focused in the stock repurchase area. Any other ideas that you have, at this point, when you talk about that?

Yes. Two years ago, we started a number of business initiatives. They consisted of 3 major elements, I would say. One is performance, the other one is services transformation, and the third one is the stock value improvement. If you look at the performance segment of those -- of that strategy, we started with the IT group first. It needed to be turned around, and we've done that in the first 2 quarters of that initiative. Subsequent quarters, we restored the growth through sales productivity and a margin expansion. Then we continued the transformation of some of the IT services to a higher value-oriented solutions, which included bundled solutions, as well as employment of some of the proprietary methodologies. Other initiatives in IT included seeking a stronger balance along the services continuum lines. Services continuum line is the 3 phases of the relationship with the client -- plan, build and support. Traditionally, we were in the implementation and the building phases. We've supplemented that with services in the planning and the support phases. We also strengthened our Technology Services platform, with a lot of the vertical expertise, improved the utilization, and looking at investing in some new technologies that surround around the mobile communication, cyber-security, cloud services. So all in all, I think, moving towards a predictable recurring revenue stream is what we have done in the IT. And I think the trajectory over the last several quarters are a testament or the result of some of those initiatives. Engineering, as we mentioned before, was the -- seeking the optimum balance between the capital and operating projects. I think we've done -- we have accomplished that very nicely. We've also strengthened the cross-border collaboration between the Engineering groups and transfer of the expertise, so we can support and supplement some of the shortage of our engineers in our Canadian operations. And I think diversification of the Aerospace and Defense unit has not been as strong as we expect to be, but I think it's an initiative that will realize its results in the near future. So those are some of the initiatives in the IT and Engineering group. And on the corporate side, we've looked -- we are looking at optimizing and streamlining the corporate cost by moving a lot of the field administrative functions into the corporate. We are looking at improving the enterprise platform to better serve the field operations. And lastly, on the stock side, clearly the consistent and sustainable performance will contribute to the awareness of the -- of our performance. We just announced the $5 million stock repurchase plan. We're constantly looking at maximizing capital allocation. And I think the only other area that we have not initiated is the -- attending aggressively some of the investor conferences and presentation, and seeking a more broader analyst coverage. And I think we are in a better position now having the visibility and predictability of our performance to engage in those activities as well. So those are some of the high-level initiatives that we've started a couple of years ago and continue today.

And as far as capital plans and allocations, what would you say about that at this point looking ahead?

Well, it's a consideration that the board always looks at practically at every board meeting. And when they feel that the timing is correct and the decision is proper, we will -- we'll pull the trigger as we have in the past.

Our final question is from Sean Connolly with Teradium Capital.

A question on the IT side. I was noticing that the gross margin was the lowest we've seen in several quarters. Can you discuss what was driving margins there? Kevin D. Miller: Yes, certainly. Really just kind of -- a little bit of a down quarter as far as margins are concerned. We had a project that basically we needed to do some rework on it. Frankly, I'm not sure that, contractually, we needed to do it. But it was for a large client that felt we needed to do it, and we felt we needed to do it in order to maintain that client. And that was a couple hundred thousand dollars. Additionally, we had -- we don't have huge software sales and executive search placements relative to the overall revenues of the company. But we do have some that do impact the margins a bit. And those sales were down quite a bit in the quarter relative to what we typically see. So that was like another $100-and-some-odd thousand of pure margin that was lost. So it was few factors that sort of brought that down. I would say that the third quarter, as far as the gross margins on the IT, is more of an anomaly than something you should expect to see going forward. As we move forward, we're going to continue to look for big clients where we might not necessarily get 30% gross margins. So you may see some margin deterioration in 2014, but that should be with the goal of increasing the gross profit dollars, which is ultimately what's most important. But that -- I don't -- I expect the margins in the fourth quarter for IT to be a lot better than they were in the third quarter.

But I think the greatest impact was the pause that we had in the contract -- on an ongoing contact with a major client. They needed to do some reassessment moving into their next phase. That has been restarted and we are back to the levels that we were before in the fourth quarter. And that's what we say, that from time to time, there will be some disruptive events that will have a temporary effect, but will not have a lasting effect on the strategy going forward.

Okay, and then on the Engineering side, you had given us some detail about some clients you're expecting to ramp spending in 2014 and beyond. Is -- from the comments that you made, I guess, I was getting the -- I guess, would it be fair to say that the growth is going to be more back-end loaded next year, or do you expect growth to be more spread out throughout the year? Kevin D. Miller: I would think it would be more gradual. It's a bit fluid right now in terms of -- we have a lot of proposals out. So if we win the share of proposals that we think we're going to win, we should continue to see some growth in the Engineering group. I don't know that we're going to see the kind of growth in Engineering revenues in 2014 that we saw in 2013. In fact, we probably won't, quite frankly. However, what I'm excited about is I think we're going to see some pretty good margin expansion in 2014. So I think in 2014, assuming no disruptive changes and no curveballs that we don't expect, I think we're going to see some pretty healthy growth in the gross profit dollars for Engineering next year, which, quite frankly, is more important to me than revenue growth.

Okay. And so, when you say you -- and obviously -- I mean, you've been growing Engineering at a 20% clip or so this year, you said you obviously don't expect to see that level of growth going forward. But I guess would you see, for the next couple of quarters, at least maintaining sort of that $22 million in revenue that we saw this quarter? Kevin D. Miller: Yes, I believe that we will see that for the next couple of quarters. Yes.

Okay. And then on the operating expense side, you had some pretty nice leverage this quarter. SG&A was up, I think, 5.5% on an 18% increase in revenue. Is this the sort of leverage that you would expect to see going forward? Kevin D. Miller: Yes. Yes.

There are no more questions in queue.

All right. Thank you very much for joining us, and we'll reconvene after the annual results are published next year. Thank you.