Ladies and gentlemen, thank you for joining the RCM Technologies Third Quarter Earnings Conference Call. Your host for today, Rocco Campanelli, will begin.

Good morning, everyone. This is Rocco Campanelli, RCM's President and Chief Executive Officer. Welcome to the RCM Technologies 2016 Third Quarter Earnings Call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a legal disclaimer, and then I will summarize the operating results for each of our operating segments. Then we will open it up for questions. Kevin?

Good morning, everyone. 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. And these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q and 8-K that we file with the SEC as well as our press releases that we issue from time to time.

Thanks, Kevin. We typically experience our lowest revenue in the third quarter due to seasonality, with the largest decline coming from school summer closings impacting our school contracts, but also summer vacations for our billable personnel across all 3 segments. As we look to fiscal 2017, we believe we are positioned to have a very strong year. I'll discuss each segment separately. Our Health Care segment continues to post outstanding results by setting an historic high for third quarter revenues, growing about 13% over third quarter 2015. Our schools program continues to perform very well across the country. We are especially proud of our 100% fill ratio in Chicago and Hawaii school nursing programs, where we have exclusive contracts. We recently won a school nursing contract with the City of Detroit. Although it is too soon to tell with certainty, we believe this contract could be worth up to $400,000 per year. In any event, we are very pleased to win another contract with a large school system. On previous calls, we announced that we won the Hawaii power professional contract that was initially supposed to start on August 1, the beginning of the current Hawaii school year. But for RCM only, it was delayed until September 1. We were initially concerned that as the only new provider, the other 4 incumbent suppliers were given a 1-month head start to recruit power professionals for Hawaii. We are happy to announce that as of today we have approximately 30 power professionals working for Hawaii. We are optimistic that our power professional roster will grow as the school year progresses, and we have high hopes for future school years when we have an entire summer to recruit and train power professionals. Our travel nurse division continues to hit the ball out of the park. We expect to generate over $10 million in revenue in fiscal 2016 and hope to hit a run rate in Q4 approaching $12 million. We continue to aggressively seek experienced travel nurse recruiters and are happy to accept any referrals. So if you would, please spread the word. While we don't expect any meaningful impact to operating income in 2017, we are pleased so far with our Locum Tenens division, which opened in early July. We have signed several MSAs, and we are actively recruiting our first physicians. We fully expect to achieve another record quarter for revenues and gross profit in the fourth quarter for our Health Care segment. Congratulations to our entire health care group, a fantastic 2016. Our Information Technology segment revenues for the third quarter continued to lag prior year results, as several large contracts ended in late 2015 and early 2016 and were not replaced. And we have also experienced an unusually high number of consultants completing assignments at the same time. We continue to make investments in sales and recruiting resources in our Information Technology group while focusing on increasing our sales activity levels and improving our recruiting process. Our HR Solutions division began new training and software implementation projects with a major workforce management company as well as implementation services for a new human capital management software system for a leading provider of these products and services. Our IT Solutions Group also started several projects with United Technologies, which has been a 25-year RCM engineering client, and we're excited to begin providing IT services to them. We are also confident that in the next several quarters, we will begin to see improved results in this segment based on the recent changes we implemented and a strong performance culture that has driven the impressive growth we realized in revenue, gross profit and contribution operating income in 2012 through 2015. It's also important to note that the third quarter of 2015 includes $800,000 in revenue and $300,000 in gross profit from our former QAD business, which we sold at the end of fiscal 2015. The first 3 quarters of 2015 includes $2.6 million in revenue and $1.2 million in gross profit from our former QAD business. Our Engineering segment has performed reasonably well with 2 notable exceptions: First, though activity is increasing, we continued to see a lag in project awards for our major Canadian engineering clients. Additionally, we have fixed price work with a major utility in the United States that has resulted in a drag on gross margin. We expect the majority of this drag on gross margin to come to an end in 2016. We have seen a definite rise in our backlog and proposal activity in Canada and expect Q4 to have significantly better results than Q3. More importantly, our backlog and pipeline at both our major Canadian engineering clients are considerably higher than they were at the same time last year. We are optimistic that our Canadian Engineering group will contribute significantly better revenues and gross margin in 2017 than we saw in 2016. This optimism is based on several recently awarded direct OPG contracts as well as a variety of large direct OPG contracts that we are currently bidding on that we are particularly qualified to perform. In addition, our Bruce Power purchase orders awarded in October grew exponentially versus the previous 9 months, and our Bruce Power proposal activity is higher than it's been all year. Our U.S. Energy Services division also continues to do well with a nice backlog of pipeline. Our focus on transmission and distribution engineering has led us to develop a new service area in testing and commissioning substation equipment. Our clients tell us there is a huge demand for service companies with this capability. We recently won multimillion dollar contracts in Canada and Northeastern United States commissioning substation equipment. We have also recently been awarded a 5-year engineering relay replacement project for 100 substations for a large U.S.-based utility and a large backfit electrical and distributed control system design engineering project for an oil refinery in Curacao. Additionally, we recently initiated a commissioning project for 2 coal plants in the Northeast as well as engineering associated with 4 fuel cells for a large fuel cell manufacturer in the Northeast, both of which are new services for our Energy Services Group. Our Aerospace division continues to perform well in both technical publications and engineering with a good backlog. We are expanding this group to offer these same services in Canada and anticipate opening a new office in Huntsville in January to support a new Sikorsky multiyear technical publications contract. We also continued to deliver on our existing contracts and are receiving new task orders from our clients on a daily basis. We anticipate a significant increase in consolidated revenue and operating results in the fourth quarter as compared to our third quarter, driven primarily by new historic record revenues in our Specialty Health Care segment and an increase in activity and improved gross margins for our Engineering segment. We believe we are poised for a very strong 2017. Thank you for attending RCM's Third Quarter Conference Call. We look forward to discussing our fourth quarter and updating you on 2017 in a few months. I would like to open the line for questions.

[Operator Instructions] Our first question is going to come from Bill Sutherland from Emerging Growth Equities.

So it sounds like for sure, this is -- this will be a trough quarter for you guys, Q3?

Yes. Yes. With the seasonality and some of the -- the seasonality in health care -- I mean, Health Care actually had a good quarter. It just doesn't look good compared to other quarters because of seasonality.

Was it -- and while you mentioned that, Kevin, was it kind of the normal seasonality? It's hard to tell last year because you kind of grew through the seasonality.

Yes. No. It was normal, and that's an exactly -- a perceptive observation for last year. Yes, the seasonality is normal. Now if you go back several years, we didn't have the Chicago contract. So as we add these big school contracts, seasonality gets bigger and bigger, right? So when it was just New York, it was one level. When we added Hawaii, it was another level. Now that we've got Chicago, it's another level. And Detroit, which is not going to be a big contract relative to those other 3, that will add to some seasonality next year. And hopefully, we'll add some more big school contracts and we'll see even more going forward.

Are you guys actively in proposal process with [indiscernible]?

We are always looking for new school contracts. And not only are we always looking for new school contracts, we're looking to expand our presence, the best example being the power professional contract in Hawaii. Now in Hawaii, we have currently, knock on wood, have an exclusive nursing contract. So we don't have to compete with any other suppliers there. The power professional contract, which the overall spend is much bigger than the nursing contract, we have 4 competitors there we're competing with. But that's a big spend. And we're not going to get huge numbers there overnight, but there's the potential to really expand where we are today with 30 power professionals. We think we can get a lot more. It's probably only going to grow gradually for this school year. But when we get a whole summer to recruit and train, because we're doing a lot of training on our own, we're going out and finding power professionals that we think are somewhat qualified, but maybe with some training, can be some of the better -- and we're doing that training in-house ourselves. So that could grow, and I hope it does. And that will also expand the seasonality for 2017. I hope we have that problem.

So on an annual basis, the school business is about how much of your -- of total Health Care now?

Well, the big 3 clients -- or the big 3 school contracts are about 45% of our revenues.

Of Health Care?

Of Health Care revenue.

Yes, yes, yes. Just asking because with all the ACA noise, it's kind of comforting that you got half your business -- half your Health Care business in the schools that is immune to any of those ripples; it seems to me, at least. The last question on Health Care was the gross margin. A little light in the quarter; expected to kind of drift back up to the upper 20s?

Yes. No. We'll see that come back up, for sure. The school contracts tend to have a little better margins on average. But what you're seeing, in Q3 we're having a good year for perm [ph] revenues on the 9 months year-to-date. We -- and as you could appreciate, Bill, the perm revenues can be somewhat sporadic from quarter-to-quarter, and we did not have a good perm quarter in Q3. So that clearly impacted the gross margins. And then our travel business is growing so quickly that, that is also negatively impacting the margins. But on the flip side, the -- our travel margins I think are quite good as I look out to some of the other -- some of our competitors, but they're still dilutive to the overall margins. However, the contribution margins in that business are quite nice because you don't have the heavy selling costs. You have heavy recruiting costs, but it's an interesting business. If you can get good recruiters, you can really drive revenues in that business.

Right. Let me just ask one on Engineering. As you look at your impressive new business pipeline, is the gross margin kind of ranging in the normal range?

No. Gross margins in Engineering are low right now for a couple of reasons. The 2 major reasons are we've -- we're just not getting the utilization in Canada that we need to get, and we're really striking the balance. We have made some painful cuts in staff up there. We've let some people go that, I can assure you, that we didn't want to let them go. But even still, we're not getting the utilization up there today that we can get once it starts humming. So the plan there is once the revenue starts coming up, we can bring back some of the really good people that we let go and also get better utilization. So -- and then we also have a couple of fixed-price contracts with one particular utility in the U.S., where we're just -- we're realizing some pretty lousy margins.

Yes. I was also interested -- when you look at some of the new business you guys have teed up, particularly as you get into the some -- this testing commission business, the substations, are you expecting the gross margin profile to be kind of the same there?

Well, it would be the same as when you're looking at quarterly margins that are good because these quarterly margins are not so good. So we're generally looking for projects with margins in the upper 20s to lower 30s. It doesn't always happen that way because sometimes in a competitive situation, you want to -- you do a decent-sized job and it's going to be 22%, you're going to take it. But generally speaking, we're looking to drive up the Engineering margins over the next quarter. And as we get better and better at some of these new service lines, we're going to look to drive them up even more.

Okay. Then just one last one for me. On the balance sheet, great job on the debt. Where did -- I haven't calculated DSO. Where did that come out? And where are you on your path to target?

Well, the DSOs are improved, but we've got a little ways to go. In the short term, we've got a little ways to go on the DSOs. They can definitely get better. I expect them to be better in the fourth quarter than where they were in the third quarter, and I expect them to continue to get better next year. That is a major, major focus of ours, driving the DSOs down.

And our next question is going to come from John Zaro for RCM.

I've missed part of the call, so I apologize. Can you just talk a little bit more about what's going on up in Canada? I mean, I know you've had delays on the [indiscernible] because you just haven't seen these contracts that are supposed to come through, but just haven't. Can you maybe just talk about sort of what's going on up there?

Well, let me give you sort of an overarching comment since you're a finance guy, John. I was looking at our backlog, which is actual booked contracts plus weighted average pipeline, which is kind of when we assess our chances of winning a contract. And if you think you have a 50% good chance of getting it, a $10 million contract, you put it in at $5 million. And obviously, that's speculative, right? Because if you lose it, it's 0. If you win it, it's 100%. But our weighted average pipeline and backlog today is 150% of what it was this time last year. So we did about USD 20 million revenue -- we're going to do in the neighborhood of $20 million for fiscal 2016, which is a big disappointment from where -- what we thought we were going to do this time last year. But this time -- when I actually did this yesterday, I compared the weighted average pipeline and the backlog at the same time last year to where it is today;, it's 150% better. And knock on wood, some of the pipeline opportunities that I think we're probably assessing a little bit conservatively, I think we've got a good chance of winning a lot of those. So if -- and again, this is speculative. But if the percentages hold, $20 million -- 150% of $20 million is $30 million. So if we can get another $10 million out of Canada in U.S. dollar revenues -- and of course -- what happens in exchange rates influences that, too. Right now, the exchange rates are -- have been up. And hopefully, maybe with the Trump presidency, a lot of people are speculating the prices of oil is going to go up. And if that happens, so will the currency rate between the U.S. dollar and the Canadian dollar. But anyway, the short of it is we feel much better about where we are. Last year at this time, we had an okay pipeline of backlog, but the talk at our clients was lots of work is coming. So we were really optimistic last year. This time now compared to last year, we have a better backlog on the pipeline of actually identified contracts that we can bid and hopefully win. And I think some of the comments that we're getting out of our 2 big clients are maybe a little bit more believable, that this work is coming early next year. And again, I'm knocking on my desk as I say that because utilities are notorious for saying we're going to award this project in January, and June rolls around and they still haven't awarded it. But we're feeling a lot better.

And it's just more of political foot dragging of these things finally getting issued.

A little bit of it's political. Some of it is -- utilities in general, but especially in nuclear utilities. They got to be really careful in terms of doing everything that they need to do before they let out work.

Yes. There's a lot of pre-work that they have to do for us to provide an accurate estimate and schedule for our portion of the work. So lots of the preliminary engineering and specification development has to be done by them in order for us to even come close to a good estimate. And in Canada as well as everywhere else, good resources are tough to grow. And they're in a process, both -- at or both our clients of growing those resources internally as well. And at OPG, for example, they just started the refurbishment on the -- they just tripped the breaker on the first plant. But we've been able to get direct OPG work instead of through a construction contractor. So we're more and more optimistic at OPG and very optimistic at Bruce Power because we're getting our share at Bruce Power.

Right. Okay. And then, hopefully, we'll get some infrastructure projects down in the old U.S. with Mr. Trump.

Yes. We're optimistic about the U.S. We've diversified our service areas more I think in the past 6 months here in the U.S. than in the past couple of years. So we have a good list of diversified clients, and we've got a good backlog of commissioning projects. We have a good backlog of fuel cells, which is really new for us, and pretty much in demand for emergency power for hospitals and universities. So it's -- and we have an agreement with a big fuel cell manufacturer to do the design engineering for their installations. So I think we're pretty optimistic here in the U.S. on the engineering -- on the Energy Services side of the business as well as the Aerospace.

[Operator Instructions] I do not see any calls in queue at this time.

Well, thank you very much, everyone, and we look forward to updating you in a couple of months. Thanks for joining the call.

Ladies and gentlemen, thank you for joining this conference call. You may now disconnect, and have a great day.