Good morning, ladies and gentlemen, and welcome to the RCM Technologies Third Quarter Earnings Conference Call. Your host today is Bradley Vizi. Mr. Vizi, you may now begin.

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2018 Third Quarter Earnings Call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the legal disclaimer, and then I will summarize the operating results for each of our business units before opening 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 Form 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. Though third quarter operating income came in at the low end of our expectation as a result of project timing within Engineering Services, we believe that we are well positioned to deliver a strong finish to the year and enter 2019 with momentum. On a year-to-date basis, our 2018 adjusted EBITDA of $6.4 million exceeds 2017 by a robust 16%. I will discuss each division separately. Our Specialty Health Care staffing group set a new third quarter record with $15.1 million in revenue, growing by 5.4% over the third quarter of 2017. Despite record revenue, we continue to fine-tune our strategy to better mitigate the inherent seasonality of the school business we experience each year during the third quarter. Perhaps the best news for our Specialty Health Care division in the third quarter was that our Locum Tenens practice posted $500,000 in revenue as compared to $22,000 in the third quarter of 2017, positively contributing to operating income. Though it took longer than expected to scale this business from its greenfield build-out, we believe we have reached the tipping point and now have one additional operating platform to drive performance going forward. We expect our Specialty Health Care group to hit a new revenue record again in the fourth quarter of 2018. Our major school contracts have gotten off to a great start. We ended the fourth quarter of 2017 in Hawaii with 170 paraprofessionals, and as of today, we have approximately 250 paraprofessionals. We ended the fourth quarter of 2017 in New York City with 630 paraprofessionals and 100 therapists and as of today, we have approximately 725 paraprofessionals and 140 therapists. We believe that our strong start to the 2018-2019 school year bodes well for performance in fiscal 2019. Despite expected seasonality in our engineering segment, we are disappointed with our engineering revenue and gross profit in the third quarter of 2018. But those that have followed RCM for a while know that our engineering segment generally has large projects with major clients, and sometimes the floor of those large projects result in quarterly cyclicality. It is typical to see projects lull in the summer months as many of our clients award projects to be completed in fall through spring. Our Energy Services group, which operates in the U.S., Canada and Serbia posted revenue of $9 million in the third quarter of 2018 as compared to $8.8 million in the third quarter of 2017. We are seeing an increase in awards and bidding activity in our transmission distribution markets, including a recently secured award of an EPC project. Our Energy Services group has a robust pipeline of projects we are bidding on right now for 2019. We are looking forward to continued strong performance from Energy Services as our backlog and pipeline continue to build. Our Canadian Power Systems Group, which mainly serves Bruce Power and Ontario Power Group, generated $4.8 million of revenue in the third quarter of 2018 versus $6.4 million in the third quarter of 2017. We anticipate an increase in activity and new project awards with both OPG and Bruce Power, resulting in an uptick in quarterly revenue and improved utilization going forward. Our Aerospace group generated revenue of $5.3 million in third quarter of 2018 versus $6.5 million in the third quarter of 2017. The major driver of the decrease in revenue is decreased activity from our major Aerospace clients. As mentioned on previous calls, we are far too reliant on a small number of Aerospace clients. Our primary goal in the next 12 months is to diversify and grow our client base, similar to what we've accomplished in Energy Services over the past 2 years. Related to this objective, we have recently been notified that we have been awarded a GSA contract to deliver aerospace services to the federal government. While we expect this new revenue source to take some time to develop, we anticipate that it will grow into a substantial market for RCM. We are encouraged about the activity in our information technology group. Our third quarter revenue and gross profit grew sequentially and over the prior year. It has been 3 years since our Information Technology group accomplished this feat. It is also worth noting that we sold 2 IT engagements to major North American IT solutions firm in the cybersecurity and cloud computing space that will be delivered out of Serbia. These 2 engagements will start small with about 15 consultants but have the potential for substantial growth. As a result of significant changes to leadership and investment in our sales infrastructure, we are now starting to see positive results from our Information Technology group. Company-wide, on a consolidated basis, we anticipate improved performance for the fourth quarter of fiscal 2018. We look forward to discussing our progress in February. This concludes our prepared remarks. At this time, we will open up the call for questions.

[Operator Instructions] Our first question comes from Bill Sutherland.

I got on a minute or so late. And Bradley, you were saying the Locum business has really picked up. Was there any other business lines prior to Locum that you called out on the call this morning?

So we did talk a little bit about the school -- the '18-'19 school contracts.

Yes, I got that. Yes, I got that.

Yes, that -- so we talked about that a little bit. Obviously, that impacts New York City and state of Hawaii. Other than that -- and the Locum business, which did about 500k in revenues and had positive contribution margin. That's all we discussed.

Okay. Well, maybe -- then on a couple of questions in health care. I know you've been seeing some headwinds in the perm placement business that's reflected in the gross margin as well. I just want to get an update on that. And then you'd mentioned -- you guys have mentioned the HIM business, and I guess, that -- I'm not sure that goes to the IT or health care, but...

No, the HIM business is part of health care, Bill, so let's talk about perm a little bit, which unfortunately has been significantly down in 2018 as compared to 2017. So our dedicated perm group did about 332k in perm revenue in Q3 of '18 versus 451k in 2017, so down about 119k. Year-to-date, we're running at about $1 million this year versus $1.5 million year-to-date last year, so down over 500k. And as you know, that's very profitable revenue because basically, your only variable cost against that is -- are commissions. So that has impacted not so much the top line obviously, but it impacts the gross margin and the gross profit and the contribution margin. You also asked about HIM, and HIM is not having a great year relative to last year either. We're up $500,000 in revenues year-over-year, so it's growing this year. But it hasn't grown in '18 at a rate that we hoped that it would. But we do believe that, that's going to be a really nice engine for growth going forward. We recently won a nice contract. The contracts tend to be fairly short-term, 3 to 6 months, typically when -- like an 18-month engagement in this business. But that's going to give us a nice little jolt in November and December and into the first quarter for health care. And we're really, really just bullish on HIM in general just because it's such a big market. And we feel like at this point, we're still small players in that market and can grab -- we can get a lot of business going forward. We really think that can be a big growth driver going forward.

And you called out a couple of pieces of business that are being handled, I guess, in Serbia, in your center of excellence. Where are you as far as headcount there now? And...

Right. Well, our headcount is, as far as the engineering, is roughly 40 people right now, so it's -- we're up about 10 from where we are. It might be a little bit higher than that, I don't know exactly what it is today. Right now, we have 6 IT people out, one who runs the practice and 5 that are on billing, and we have a couple more doing some internal software development as well. So we probably have about, in total, 7 or 8, maybe 9 IT persons working out of Serbia. The engagement that Brad referenced, we have 5 people on that now. By the end of the year, we expect to have about 15 on these 2 engagements. One is a cybersecurity engagement and the other one is a cloud-based computing engagement. We feel like those 15 people can grow quite a bit just on those 2 engagements. And what's nice about these engagements is they have the potential to sort of be recurring because they're not working on a specific assignment for our customers and clients. So we really think that can grow quite a bit. And I think it's also nice to be in these 2 areas that are very hot areas. This is where a lot of spending is going on, as you know. So we're hoping that we can use these engagements as really great references to go after similar work in North America. We're not under any illusion that the IT Serbia effort is going to just mushroom quickly, but we think that it has the potential over time to be... [Technical Difficulty]

You are not ended, Bill. Keep going. Do you have more questions?

Yes, sorry. Let me just jump to one on the P&L and then I'll get in queue. Remarkable job on the SG&A this quarter. How should we think about kind of the level at which you need to at least -- expect in the future?

Sure. I mean, Q3 is down for a couple of reasons. Obviously, there's seasonality in the Q3 SG&A, particularly on the commission. But you and I -- as you and I have discussed on previous calls, we're very, very focused on getting as much efficiency out of our SG&A as possible, while at the same time reinvesting some of that into -- primarily into sales-generating activities. So in terms of the SG&A in Q3, that's obviously lower than what you're going to see going forward. But I think you're going to continue to see a lot of discipline in terms of our quarterly SG&A spending.

I'm not surprised. But good job on the cash this quarter, too.

[Operator Instructions] Our next question is coming from Frank Kelly.

In the area of other expenses, I noticed we had that $300,000 this quarter. Could you shed some light on what some of those numbers are composed of?

It's primarily interest, Frank.

Primarily interest, okay. Was it -- is it up off of last quarter?

It's not up by a lot.

Right. But borrowings are down, so that's why I kind of -- one of the things that...

You're looking at quarter-end borrowings, though, Frank, so that can be a little bit misleading. But our interest last quarter was $400,000, and it's about $306,000 this quarter. So we're down. We're down about 100k.

Okay. And where do we see that in the next quarter going as far as borrowings and interest numbers?

I would expect the debt to probably increase in Q4. As you appreciated, it's a little bit difficult to predict because that -- our receivables really sort of drive that number. And of course, there are other things that could drive that like an acquisition or anything along those lines. But absent any out of the ordinary -- out of the typical quarter events, I expect the debt to go up and the interest to go up in Q4 just because I expect a big jump in our revenues in Q4 relative to Q3.

Great. And DSOs, I noticed our AR for Q3 has gone up a little bit as well. Where do we see the historical DSO [indiscernible]...

I think that our DSOs will come down in Q4 relative to Q3. I think we'll see some improvement there. We had -- as you know, the seasonality, particularly in our health care business, kind of distorts the DSOs a little bit because a lot of the school revenues come in August and September, right? So we typically get very little, if any, collections in the quarter. But because you have no revenues coming in July, you've got this low revenue base, but you've got this sort of high receivables. We also had some -- we also continued to have some issues with our largest client, which is the New York City Board of Education. As you know, Frank, the collections are going to be an issue with that client, but computer glitches and approvals and all kinds of other things in any given quarter can be an issue with them. And we had some issues in Q2 with New York City. And in Q3, we started off fast and furious. We collected a ton of money in July and August. And then in early September, they just shut everything down and we didn't get a payment for all of September. So unfortunately, we have a fair amount of receivables still outstanding from '17-'18 school year, which I'm hopeful we'll get it all cleaned up in Q4. We'll see. But they're a bit of a wildcard and unfortunately, they tend to drive our DSOs quite a bit.

[Operator Instructions] Gentlemen, there are no more callers in queue for questions.

Okay, everyone, thank you for attending the RCM Technologies Q3 call. Looking forward to speaking with you in 2019.

Thank you, ladies and gentlemen, for joining today's call. You all may disconnect at this time, and have a great day.