Cross Country Healthcare Inc. Q3 2008 Earnings Call Transcript

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 |  About: Cross Country Healthcare, Inc. (CCRN)
by: SA Transcripts

Cross Country Healthcare Inc. (NASDAQ:CCRN)

Q3 2008 Earnings Call

November 3, 2008 10:00 am ET

Executives

Howard Goldman – Director, Investor and Corporate Relations

Joseph A. Boshart – Chief Executive Officer, President

Emil Hensel – Chief Financial Officer

Analysts

James Janesky – Stifel Nicolaus & Company, Inc.

Frank Brown – Suntrust Robinson Humphrey

Jeffrey Silber – BMO Capital Markets

A.J. Rice – Soleil Securities

Michel Morin – Merrill Lynch

Gary Taylor – Citigroup

David Bachman – Longbow Research

Operator

Welcome to the Cross Country Health third quarter 2008 earnings call. (Operator Instructions)I would now like to turn the meeting over to Mr. Howard Goldman Director of Investor and Corporate Relations, sir you may begin.

Howard Goldman

Good morning and thank you for listening to this conference call which is also being webcast and for your interest in the company. With me today are Joe Boshart, our President and Chief Executive Officer and Emil Hensel, our Chief Financial Officer. On this call we will review our third quarter 2008 results, for which we distributed our earnings press release earlier today. If you do not have a copy, it is available on our website at www.crosscountryhealthcare.com.

Replay information for this call is also provided in the press release.

Before we begin I’d first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as expect, anticipate, believe, estimate, and similar expressions, are forward-looking statements.

These statements involve known and unknown risk, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements.

These factors were set forth under the forward looking statement section of our press release for the third quarter of 2008, as well as under the caption risk factors in our 10-K for the year ending December 31st 2007 and our SEC filings made during 2008.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that our silence over time means that actual events are occurring or expressed or implied in such forward-looking statements.

And now I’ll turn the call over to Joe.

Joseph Boshart

As reported in our press release issued earlier today our revenue for the third quarter of 2008 was $178 million, down 4% from a year ago. Our third quarter net income was $6 million down 12% from the prior year and our earnings per diluted share of $0.20 were $0.02 lower than the prior year period. Cash flow for the third quarter was strong at $14 million.

The environment in which we operate deteriorated significantly during the third quarter. Year-over-year demand for our travel nurses as represented by open orders placed by our hospital customers went from being up more than 20% at the beginning of the quarter to being down more 30% by the end of the third quarter. And demand is currently at the lowest levels since late 2003.

Just as concerning, the conversion rate of the qualified applicants that we provide to our hospital clients that may turn into book contracts also weakened. Clients have been increasingly reluctant to commit to a contract nurse, most often citing low patient census and budget reductions for their hesitation.

Our other business has shown similar reluctance on the part of clients to commit. In our clinical trial services business, we saw projects scheduled to start in the third and fourth quarters pushed into 2009. And even in our retained physician search business, which is having an excellent year through the third quarter, we see less willingness on the part of clients to engage in new searches which reduces the expectations we had internally for the fourth quarter for that business.

We believe that the current market dynamics are largely symptoms of the severe credit market issues that have worsened during the third quarter. Having said that, on September 9th we successfully closed our $200 million refinancing on favorable terms as scheduled, which allowed us to complete the MDA acquisition as planned.

Our nurse and allied segment which represented approximately two thirds of total company revenue pro forma the MDA acquisition continued to show strong focus on margins which helped offset a 13% year-over-year drop in staffing volume that we experience in this segment. Clearly, increasing the number of nurses that we have on contract as a key objective for this business.

To that end, in late August we rolled out a major revision to our compensation and benefit package for our nurse and allied professionals, that we believe significantly enhances our competitive position in the marketplace. Although immediate reaction in the market to this program was less than anticipated in the first few weeks of implementation, because of the program's complexity, we did see improved response in subsequent weeks.

We are getting more and more nurses into our applicant submission pipeline, but unfortunately, this is occurring at a time when our hospital customers appear less inclined to commit to contract nurses.

In the physician staffing, given the timing of adding this business to our mix late in the quarter, we generated $10.8 million of revenue and $900,000 of contribution income. We are pleased that MDA continues to show year-over-year growth. We believe that this business will sustain growth because of greater demand for physicians as they are revenue generators for hospitals and physician practice groups.

In clinical trials, services, which represented 14% of total revenue in the quarter, results were somewhat disappointing. Similar to the situation in nurse and allied staffing, in our nurse and allied staffing business, pharmaceutical and biotech customers have become less willing to use temporary staffing and outsourcing services to meet their clinical trials objectives.

We believe this is driven by an effort to reduce expenses at all levels to conserve cash in the current economic environment. This includes research efforts, which effectively delays the start of some clinical projects. However, we remain optimistic about this business and we believe there are sufficient numbers of clinical trials being planned that represent opportunities for our business both domestically and internationally.

Needless to say the events of the past few months have been breathtaking with storied franchises in the financial arena going out of business or being acquired for very low values. While our near term expectations are disappointing to me, and I’m sure to our shareholders, we remain on very sound financial footing with a prudent level of leverage and cash flow well in excess of what is required to operate our business on a day to day basis.

Given the general state of the economy I anticipate further weakening of labor markets in the near term which will likely result in nurses increasing their willingness to work directly for hospital employers, thus potentially further reducing demand for our temporary nurse staffing solution; in a different way, it could get worse before it gets better.

Nonetheless, during this period of uncertainty our operations team will be focused on continuing to provide a high level of service to our healthcare facility customers. And the healthcare professionals that look to us for assignment opportunities. Meanwhile our management team will be focused on fundamentals such as cost control and continuing to delever our balance sheet using our strong cash flow.

I’d like to add over our history we have managed through several industry downturns and we have always generated positive quarterly earnings. Moreover, consistent with our strategy that we have communicated over the past several quarters, with the MDA acquisition we have successfully diversified into a sector of our industry that has shown consistent growth over the past decade.

And with that I would now like to turn the call over to Emil who will update you in more detail on our third quarter financial performance.

Emil Hensel

First, I will go over the results for the third quarter and then review our revenue and earnings guidance for the fourth quarter that we provided in the press release issued this morning.

Revenue in the third quarter came in at $178 million down 4% versus the prior year, reflecting the challenging operating environment that Joe referred to earlier. On a sequential basis the revenue increased 12% due to the acquisition of MDA which closed on September 9th. MDA contributed $11 million for the quarter's revenue.

Our gross profit margin was 26.6% which was essentially flat on a sequential basis, but up 190 basis points over the prior year. The year-over-year margin improvement was due primarily to the continued improvement in the bill pay spread in our travel nurse staffing business and secondarily to a higher mix of revenue from our clinical trial services and other human capital management businesses, which have higher gross profit margins than our nurse and allied staffing business.

SG&A expenses in the third quarter were up 6% over prior year primarily due to the acquisition of MDA. On an organic basis SG&A expenses were essentially flat as compared to the prior year and down 2% sequentially.

Net interest expense was $788,000 down 2% versus the prior year, but up 48% sequentially. The sequential increase reflects the additional debt taken down to fund the MDA acquisition. Subsequent to the close of the third quarter, in October we entered into two swap transactions that fixed the interest rate on $70 million of our term debt for the next two years at 3.04% plus the applicable LIBOR spread which currently stands at 2.5%.

We expect to see a decrease in the applicable LIBOR spread beginning during the first quarter of next year as we delever our balance sheet using our operating cash flow. Net income in the third quarter was $6.2 million down 12% over the prior year and 3% sequentially.

The effective tax rate was 41.5% in the third quarter as compared to 38.8% last year and 39.9% in the second quarter. The increase in the effective tax rate reflects the estimated impact of the new compensation and benefit package for our nurse and allied health professionals that Joe referred to earlier. Earnings per diluted share came in at the midpoint of the guidance range at $0.20.

Turning to the balance sheet we ended the quarter with $144 million of debt and $13 million of unrestricted cash. Net of unrestricted cash our debt to total capital ratio was 24% and the current ratio was 2.3 to 1 at the end of the third quarter.

DSOs at the end of the third quarter were 54 days down seven days as compared to a year ago and down three days sequentially. We generated $13.8 million of cash from operating activities during the third quarter as compared to $8.6 million a year ago. Capital expenditures in the third quarter totaled $1.1 million.

With the acquisition of MDA, beginning this quarter we start breaking out our results into four reporting segments. Our nurse and allied staffing segment accounted for 73% of the quarter's revenue and consists of our travel and per diem nurse and travel allied staffing businesses.

Our clinical trial services segment accounted for 14% of third quarter revenue. Other human capital management services accounted for 7% of revenue, and is comprised of our education and training and retained service businesses.

Physician staffing, our new reporting segment, accounted for 6% of the third quarter revenue. As the MDA acquisition occurred at the beginning of the quarter physician staffing would have been our second largest segment accounting for 20% of pro forma consolidated revenue. Revenue for the nurse and allied staffing segment was $129 million down 12% versus the prior year and 3% sequentially.

We averaged 4,335 field FTEs in the third quarter down 13% versus the prior year and 5% sequentially. We believe the larger than expected decline in staffing volume reflects the impact of a weakening national labor market on the demand for our services as well as the impact of the liquidity crisis on our hospital customer's ability to fund their operations.

When the labor markets are soft hospitals are able to fill a larger portion of their nurse needs with permanent hires at prevailing wage rates and thus have reduced needs for contract labor.

Bill rate, as measured by revenue per hour in our travel nurse staffing business, increased by 2.4% year-over-year. Contribution income, as defined in our press release, was $14.3 million in the third quarter essentially flat with last year but up 3% sequentially. Segment contribution margin was 11% up 130 basis points from the prior year and 60 basis points sequentially.

The margin improvement, which offset the top line weakness, was due primarily to the continued widening of the bill pay spread and secondarily to lower insurance costs.

Let me turn now to our newest segment, physician staffing. The MDA acquisition closed on September 9 and thus the results for the third quarter reflect 22 days of activity in September. Physician staffing revenues were $11 million and contribution income was $900,000 representing an 8.6% contribution margin.

Pro forma for the third quarter physician staffing days filled increased 4% from the prior year to $28,190 and revenue per day filled increased 8% to $1,584. MDA is growing at high single digit rates and remains on track for a record year. We expect that the MDA acquisition will be modestly accretive in 2008 despite higher interest rates than we initially anticipated.

Revenue in our clinical trial services segment was $25.4 million, down 3% from the prior year but up 2% sequentially. Contribution income was $3.8 million down 26% from prior year and 15% sequentially. As Joe indicated, short-term momentum in this segment has closed due to delays in the startup of certain clinical trials.

Another short-term headwind to this business has been the decision by a major customer to begin using offshore staffing for his drug safety work as a cost saving measure. The customer has informed us that it does not intend to renew a drug safety contract when it expires in the first quarter of 2009.

Our relationship with this customer remains good and we are continuing work on other contracts with this client and are not affected by this off shoring decision. Nevertheless, we remain optimistic about the long-term prospects for this business given the expectations for new compounds beginning to enter the clinical trials pipeline.

Revenue for the other human capital management services segment was $13 million down 2% from prior year, while contribution income was $1.6 million down 3% from prior year. Although placement activity remains strong, contribution margin and our retained physician search business were negatively impacted by a slowdown in new search activity.

This brings me to our guidance for the fourth quarter of 2008. The following statements are based on current management expectations. Such statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, and other business combinations, any impairment charges, any significant legal proceedings or any significant repurchases of our common stock.

Travel bookings were down 17% year-over-year in the third quarter reflecting the weak demand in our travel nurse and allied staffing business. Based on this, we project the average nurse and allied field FTE count to be in the 4,125 to 4,175 range in the fourth quarter.

Revenue for the fourth quarter is expected to be in the $195 to $199 million range. We expect our gross profit margin to be approximately 27% in the fourth quarter and our EBITDA margin to be approximately 7%. Interest expense is projected to be in the $2.3 to $2.4 million range.

Based on these assumptions, EPS per diluted share is expected to be in the $0.15 to $0.17 range. For the full year we expect 2008 revenue to be in the $723 to $727 million range and earnings per diluted share to be in the range of $0.74 to $0.76.

These estimates exclude a potential non-cash impairment charge related to a specific $3.1 million customer relationship intangible asset if we are unable to replace the previously discussed drug safety monitoring contract that will be ending in the first quarter of 2009. The after effects EPS impact of this charge could be up to $0.06 per diluted share.

This concludes our formal comments. Thank you for your attention and at this time we will open up the lines to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Janesky – Stifel Nicolaus & Company, Inc.

James Janesky – Stifel Nicolaus & Company, Inc.

When you look at the fourth quarter can you give us an idea by segment the direction of weakness? I would imagine that nurse travel would be probably the weakest, but let us know what the clinical trials and the other segments you think what will happen just based upon the first month or so of activity?

Emil Hensel

Jim, I think you are right. Probably the relatively weaker segment is our nurse staffing segment, but as I indicated in the prepared remarks we do have some short-term issues also in the clinical trial segment due to the delays on certain trials. Probably our strongest relative segment showed the physician staffing, which is having a very good year, and it continues to show good year-over-year growth in the high single digits. So in the order of magnitude I would rank nurse staffing as the weakest and clinical trials kind of in the middle and physician staffing as the strongest relative segment. The smaller of the human capital management segments are essentially flat.

James Janesky – Stifel Nicolaus & Company, Inc.

And 8.6% contribution margin for the physician staffing this quarter; where should that be on a normalized basis?

Emil Hensel

I think the margin that we had in the 22 days of the quarter, was fairly representative of the overall contribution margins of this business, on overall contribution margins of this business.

James Janesky – Stifel Nicolaus & Company, Inc.

And so will it again go back to the nursing volumes being down, why the EBITDA margin's going down about 100 basis points year-over-year?

Emil Hensel

That's correct. It's really the impact of the negative operating leverage that you have when revenues decline. Our SG&A does have some variability, but ultimately the negative operating leverage is the primary reason for the decrease.

Joseph A. Boshart

But consistent with Emil's description earlier, the clinical trial services business is operating with modestly lower gross profit margins in the fourth quarter year-over-year.

James Janesky – Stifel Nicolaus & Company, Inc.

And then last question is seasonality, going from the fourth to the first quarter; it seems as if that tends to surprise some folks sometimes, even though it shouldn't because of the payroll costs. How does the addition of the physician staffing segment affect the seasonality of revenues and earnings in the first quarter?

Emil Hensel

We're not really prepared to provide guidance for the first quarter, but your point is well taken. The first quarter does have the impact of the reset of payroll taxes. It also has two less days sequentially than the fourth quarter. I believe that the addition of MDA would moderate some of that seasonal impact, because they have less of an impact from these factors, certainly the payroll tax factor.

Operator

Your next question comes from Frank Atkins – Sun Trust.

Frank Atkins – Suntrust Robinson Humphrey

I wanted to ask about geographic areas of strength and weakness. Last quarter you talked a little bit about Texas, and if we could get an update of what's going on in Florida?

Joseph A. Boshart

Frank, based on my prepared comments you can see that within the quarter, we saw a pretty significant weakening, so areas that were strong generally, even if they're stronger year-over, they're not as strong as they were. Texas is actually down year-over-year.

If you're really looking for any area that has strength, continuing relative year-over-year, you'd focus on the northwest, the upper Midwest, where there's a number of implementations of new electronic medical record technology being put in place And hospitals are bringing in the contract nurses in order to backfill as they train their full-time staff.

But across the board Frank, it's clearly a less favorable environment. We always point to the two significant drivers of our business are the labor market and hospital admissions. We think both have become weaker but I think we've also added a third element, and what I can't do is parse how important the third element is, and that' the inability or the increased difficulty of our hospital customers in financing operations cost effectively with short-term funding.

We think that's getting better and we think that'll help. I think some of what we are hearing from our hospitals regarding patient census may also be driven by again this liquidity issue and it's much easier to explain issues that the patients are showing up and saying, we're willing to work; upgrade our business with less patients per nurse.

I think there's to some degree a little bit of both is happening just because that's the way it has to be for them in this environment. We think it's getting better, it feels like it's getting better, but it really – clearly from late September into October was a significant, noticeable, deterioration in the communication we had with our clients and their willingness to take on contract labor.

Frank Brown – Suntrust Robinson Humphrey

Could you talk a little bit I guess about CapEx going into the 4Q and your expectations for 2009?

Emil Hensel

Our CapEx for the third quarter was $1.1 million and represented roughly .06% of revenues which is actually below our normal target of about 1% of revenue. For the fourth quarter I see that number being in the $1.1 to $1.5 million range and for the year as a whole, will be significantly below our 1% target. But for next year, for modeling purposes, I think 1% of revenue is a good number.

Now clearly if our operating environment remains weak, it is an area where we have some discretion and in an effort to conserve cash, we may delay certain projects. So depending on the conditions it could be below 1% next year as well.

Frank Brown – Suntrust Robinson Humphrey

I'll ask one more and then jump back in the queue. In terms of the education and training portion of other HCM, you noted some strength there. Can you talk about how that area's doing and if hospitals and customers are looking to trim some of those budgets going forward do you think?

Joseph A. Boshart

Well it wouldn't surprise us, Frank. As we speak the business is holding its own on the top line. We've had certainly some margin pressure from increased postage rates last year and again this year, but for the most part the business is holding its own. But as you kind of parse it by the different disciplines that we provide that continuing education for, we are seeing some variance.

We're seeing a little less strength in the behavioral health area. That has always been a really strong area for us. We're seeing where a lot of the professionals pay for the education themselves. I think a lot of our professionals get reimbursed by their employer, but in the area of behavioral health I think there's more yes, self pay, and we are seeing some pressure.

But overall this business is holding up and recent booking rates, or booking of registration for seminars to be held in the future, give us the confidence that it will continue to hold its own going forward.

Operator

Your next question comes from Jeff Silber – BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

You mentioned the new compensation and benefits package. I was wondering if you'd be willing to give us a little bit more color on that. And also if there was any impact on that new package on the bill pay spread last quarter and what you think the impact might be going forward?

Joseph A. Boshart

Well, we could spend a lot of time talking about that, Jeff, so we'll try to give you the abridged version. We have added an element as we discussed kind of cryptically on our last call, we were just about to roll out in late August and we did a revision to our compensation that really added a per diem allowance for nurses in travel status. This is from a competitive standpoint an important benefit to many nurses. As I described in my prepared comments, initially we were selling it to our own nurses that were renewing, and it's a more complex sale.

We took a sale that let's say might have been a 15 to 30 minute sale and it became an hour to an hour and a half sale as you walk the nurse through the various elements of what was happening. The good news is as we got further away from the launch date on this, nurses that weren't working for us began to become aware of the program, our advertising kicked in; we did see a significant increase in the number of nurses contacting us in October.

I think we've described through most of the past year our applicant activity has been negative, while it was less negative year-over-year in the third quarter it was still modestly down, but it strengthened within the quarter significantly.

And in October we were up 20% year-over-year in applicant activity. If it weren't for some of the other issues we have been describing, this would have been a great outcome for us, exactly what we were looking for.

Unfortunately, even though we're putting more nurses into our submission pipeline to hospitals in response to the position they had given us, they appeared to be less willing to commit even for those positions. That clearly their psychology had changed. Hopefully as we get into late November and December, we see this begin to move in a more positive direction as the liquidity issues become less severe.

I guess I would declare it a victory, but it is kind of a pyrrhic victory because the demand environment is really what's driving the business right now, not the supply environment. Emil, I do not know if you want to go into anymore detail.

Emil Hensel

I think that pretty accurately describes the dynamic of what we've seen here in the quarter, but I think long term what is important is that we will be on a much more solid footing when demand ultimately strengthens. We believe we will have a much better package storefront and our supply should improve accordingly.

Jeffrey Silber – BMO Capital Markets

So in terms of accounting of this new package can you just explain how it's booked both in terms revenues and costs?

Emil Hensel

Well it really doesn’t have – the package is still above the gross profit line, so the elements of the package are still direct cost. It does have an adverse impact on our tax rate, which is reflected in our tax expense that we booked this quarter and as well as last quarter to some extent and they are estimate for the tax report the fourth quarter, which is around 41 to 42%. But the elements of the package both the salary and the per diem are above the gross profit line.

Jeffrey Silber – BMO Capital Markets

Joe, you alluded to the, in clinical trials that the potential loss of a contract one of your clients. Is there any way to quantify that for us so we can see what the impact is on our models going forward?

Joseph A. Boshart

It’s a couple hundred thousand dollars per month or less than a million per quarter.

Jeffrey Silber – BMO Capital Markets

And in terms of the profitability of that project relative to other projects within clinical trials?

Joseph A. Boshart

It was I would say stronger than average, but actually just slightly above the average for that segment, so that whatever we have as contribution income you can just kind of roll that off and look, we do expect to replace some of the business and we had the same customer ended a project in the third quarter last year, a very similar drug safety project that we had for them for a specific compound. This customer, as we look at the very large cap pharma, as we look at our relationship with the customer over the last seven or eight years that we have been in this business. We have seen high peaks and low valleys and we're hopeful that in the future we'll have important projects that we can reengage with them. And again, they’re doing what they can to reduce their cost in this environment. There is a lot of issues that face pharmaceutical companies politically and with the drug pipeline. But we are hopeful that in no way is the underlying relationship damaged. It’s just that a value has been placed on it at the time we made the acquisition in 2006 and as a result this specific customer relationship that was valued we may have to reevaluate and we are going to engage an outside party to do that. The same one that initially valued it. We’ll get them to reevaluate it for us.

Jeffrey Silber – BMO Capital Markets

Just a couple quick numbers questions. What was stock-based compensation in the quarter and what we should be looking for in the fourth quarter?

Emil Hensel

The stock-based compensation was approximately $400,000 in Q3 and a comparable number in Q4 as well.

Jeffrey Silber – BMO Capital Markets

And in terms of the share count underlying your guidance for the fourth quarter?

Emil Hensel

It is, I have a diluted share count of about 30.8 million shares.

Jeffrey Silber – BMO Capital Markets

All right and then one more, just in terms of trying to model in the MBA transaction, what kind of amortization should we be looking for in a go forward basis?

Emil Hensel

The amortization for the fourth quarter should be in the neighborhood of about $1.2 million.

Operator

Your next question comes from A.J. Rice – Soleil Securities.

A.J. Rice – Soleil Securities

First maybe just to continue on with the MDA, you're saying $0.02 accretive for the period of time in which you owned it for the whole year. Can you give us some flavor for what it did in the Q3 and sort of what you're thinking in Q4 from the contribution for that?

Emil Hensel

Actually I think in the prepared remarks I said it was modestly accretive. It was insignificant for Q3 given that we've only had the business for 22 days during the third quarter. The impact in Q4 is roughly $0.01 accretive, a little less than we initially anticipated, primarily because of higher interest expenses that we modeled back when we first looked at this business, but it's roughly $0.01 accretive in Q4.

Over the course of – kind of on an annualized basis, we expect about $0.80 of accretion from this acquisition.

A.J. Rice – Soleil Securities

And so it wasn't really a drag in Q3, that's what I guess I was trying to get at.

Emil Hensel

No, it was neutral.

A.J. Rice – Soleil Securities

Maybe I'm reading your press release wrong on this as well, but I just want to make sure, on your debt fee, your leverage covenant, you're above two right now so your credit agreement wouldn't allow you to buy stock. I mean, how much of a priority is it to get down to a level where you can buy stock or given the environment we face, is above the sales square?

Emil Hensel

You are reading the press release correctly. Under our credit agreement we need to be below 2 to 1 before we can reinstitute our stock repurchases. We are at 2.15 to 1, so we're not very far away, and given our strong cash flow we should get below 2 to 1 in – some time in the first half of 2009.

But in the meantime we will focus on delevering our balance sheet. We always look at the optimal use of our excess cash for building shareholder value, and we continue to believe that strategic acquisitions at a reasonable price, such as the MDA acquisition, represent the best way to use our excess cash to build shareholder value.

And you know, historically acquisitions have played a significant role in complementing our organic growth, but absent acquisitions we like to repurchase shares because it enhances shareholder value, particularly given the current share price, and the relatively low interest rate environment and the lower the share price, the more aggressive we are likely to pursue these share repurchases.

We think the stock is a very good value, even relative to market multiples for private companies at these prices, and these prices are significantly accretive to our earnings. But looking at the near term, due to the limitations imposed by our credit agreement, and absent any acquisitions, we expect to use our excess cash flow to aggressively delever our balance sheet.

A.J. Rice – Soleil Securities

I know the nature of the business is such that you have good visibility on the near term quarter. I guess when you get to sort of especially the winter months, there is typically a lot of buying, purchasing or ordering I guess is the right way to describe it, where snow birds are arriving in Florida, for seasonal needs I guess to say. It may give you a little bit of visibility beyond just the fourth quarter into the early part of next year. Can you give us any flavor for what you're seeing there and whether that is really just related to the quarter ahead, or does it extend out to the early part of next year, based on what you're seeing right now?

Joseph A. Boshart

First of all, when we look at our historical pattern to this business where we saw strong growth in volume from September through December, and then if there will be a break at the holidays, and then the nurses would restart early in January, we're really not seeing strong volumes in either Florida or Arizona, probably the two most important seasonal markets.

I think there's a number of factors that contribute to this. Certainly high gasoline prices did. I think gasoline prices are coming down. I think the liquidity issue is dead. I think those issues are resolving themselves. Having said that, when we talk to our clients in Florida, they are not optimistic; to some degree that actually sets us up for a much more favorable environment as they overshoot the weakness in admissions in the seasonal months of, call it November through April.

And we have one client on the west coast of Florida that's expecting admissions to be down 20% year-over-year. In my 16 years in this business, I've never heard of such a thing. But clearly they're being very cautious as they look forward as far as admissions.

Now some of it is related to the economy and a decline in elective surgeries. I mean there's a lot of factors that go into this, but it's hard for me to imagine that kind of environment, so I'm hopeful that we will see an uptick. But right now, A.J., as we look at where we are and nurses working in Florida, positions given to us by clients in Florida, it is not a very favorable picture. And the same is true for Arizona.

A.J. Rice – Soleil Securities

I guess, quite a while back, probably smartly, you guys went sort of one quarter ahead guidance and obviously we have to think about what the '09 outlook might be. If you're sort of in a $0.15 to $0.17 run rate you're going to pick up on a quarterly basis, you're going to pick up an $0.08 annualized benefit next year from the MDS at least $0.07I guess, if you take out the one in the fourth quarter.

But can you talk us through any other swing factors that we should consider in thinking about moving the needle big either way? I mean are there things that would take, even at the current run rate of contract activity which we hope improves, that you can do cost sides and materially improve the earnings power? Or is there some other dynamic that we should take into accounts, we think about the '09, sort of based on forecasts might be?

Joseph A. Boshart

A.J., I'll take the first cut at this, and then Emil can jump in as he sees some opportunity. I think if you look at the upside scenario, there's two things. One, the new benefit package really appears to be working. I mean we've been really lamenting a lack of willingness of nurses to apply with us. Even in this very difficult environment we're seeing a significant upsurge in nurses looking for jobs.

Part of my fear on that one, on that particular metric is, that possibly other companies aren't getting nurse's jobs, and they’re more open to increasing the number of companies they're contacting to find one that can get them a job in this environment. So I'm a little cautious on that metric.

But having said that, it's a terrific metric, and if the demand does come back, again, if seasonal customers have overshot in their pessimism, we could see a real uptick in demand because we have nurses willing and ready to work for us today. So that's a potentially exciting development as we speak, but I certainly don't want to count on it or hang my hat on it.

The other element is that the clinical trials business has really been disappointing from our expectations coming into this second half. We really had a lot of activity in a pipeline of projects that we were looking at and that pipeline really dried up rapidly. The client that we were working with had pushed a lot of projects into the first half. We think it's for a lot of the same reasons we've discussed in our prepared remarks. There's just, cash is a focus for many companies, in this environment today, and our biotech customers, a lot of reports in the media, they're just having trouble accessing financing markets, either IPO, or venture capital, whatever it may be.

So there's real pressure on this segment that didn't exist six months ago. In other words, they certainly didn't exist to the same degree, that if that were to become less significant, the first half could be significantly better than the second half of 2008. I think those the up sides.

Getting back to the nursing business, we had really, we had seen the business kind of stabilize in late August, early September from a working traveler perspective, and then it appeared we took a leg down, particularly in the last several weeks. It just seemed like there was, everything had worked its way through the system of our clients, and they said, hold on now.

Even though things are getting better that the bureaucracy within our customer's works, it takes a lot to get to our customer. And even if things are improving as we speak, it may take a while for them to realize that we can loosen up a little bit and we can get nurses at the bedside. We need to have a greater sense of urgency in achieving that.

So again, that was a point of optimism that is going to be – slipped away from us, but it was a very good sign at that point, that the changes we made to our compensation and benefit program really were having an impact and you need to stabilize the business before you can begin growing again or moving the needle in a positive direction. So certainly those are possible outcomes.

I just would not want to set your expectations. I believe that the labor markets can get weaker, and if they get weaker, it could have a negative impact on our business, and I think that's probably the more likely prospect in the next two quarters A.J.

Emil Hensel

I think you hit all the high points Joe. I will also add that it is a potential area of upside for us, is the physician staffing business. The key differentiator here of course is that physicians are revenue generators so even in a relatively weak economy, hospitals and large medical groups have strong incentives to bring these temporary positions onboard and we are not seeing any sign of a slowdown in that business, in fact it's performing at record levels.

Operator

Your next question comes from Michel Morin – Merrill Lynch.

Michel Morin – Merrill Lynch

Yeah, good morning, just to follow-up on your last comment here, Emil, on the physician side of the business. Some competitors have reported some weakness which I think has been related to exposure to the imaging side. Do you have – could you remind us if you have any exposure to that particular end market?

Emil Hensel

The radiology segment is one of the top four specialties for M.D. as well. That part of the business is weaker but it’s more than offset by very good strength in other segments such as emergency medicine, primary care including hospitalists and anesthesiology is also improving.

Michel Morin – Merrill Lynch

And then specific to travel nursing, would you mind sharing with us what the volume percentage growth rate or shrinkage was this year because I think you gave us the overall segment line and in the past you've given us some color specific to travel nursing.

Emil Hensel

Let me look that up. It’s roughly – I don’t have one line that summarizes exactly but it’s, on a year-over-year basis in the third quarter the nursing volume was down about 15%.

Michel Morin – Merrill Lynch

Fifteen? One, five?

Emil Hensel

One, five, yes.

Michel Morin – Merrill Lynch

And then just following up on an earlier question on the comp package, so did I hear you correctly that the higher tax rate is something that really on a permanent basis going forward, we should assume a higher tax rate as a net impact but possibly a little bit of a higher maybe gross margin number? Did I read that correctly? And if so, where are you in your rollout of the new comp package and are we at the steady state already or should we assume kind of further creep as we think about 2009?

Emil Hensel

Michel, I think you are hitting the two key impacts. I think we do have a somewhat higher, somewhat lower payroll tax expense which improves our gross profit margin and somewhat higher income tax expense. We have rolled this program out beginning with new assignments that started after a certain date in August and so we are kind of halfway through it at this point. By the end of the year most – average assignment is about 13 weeks so by the end of the year the large majority of our assignments in our nurse and allied staffing business will be under the new program. But it won’t yet be in steady state. The steady state will be reached probably in Q1.

Michel Morin – Merrill Lynch

And then just a final quick one, with respect to the possible charge in the fourth quarter, it sounds from what you said, Joe, that this is a legacy client of yours, i.e., you didn’t get this client relationship in the last year and a half via one of the acquisitions.

Joseph A. Boshart

Well we’ve served this client for the entire period. It was a significant component or a significant part of the revenue of the MRA, Metropolitan Research business that we bought in 2006 and the independent appraiser assigned it a specific value. I’m not entirely sure what their process was and clearly the revenue associated with this contract which initially increased but then has tailed off in the last 18 months, would encourage us to re-evaluate that specific client valuation.

I’m not sure what the outcome’s going to be. We're hopeful to get another project with them that mitigates the downsize, but as you look at the acquisition, the great news was even though this was a very significant client we have diversified the revenue screening for MRA with other clients. So it’s not a goodwill associated with the acquisition. It’s a goodwill associated with this specific client relationship, unfortunately.

Emil Hensel

Yes, specifically it’s a client relationship intangible asset as opposed to goodwill.

Michel Morin – Merrill Lynch

In the clinical trials business how big is your largest customer as a percentage of revenues in that segment?

Joseph A. Boshart

I would say on the order of 20% to 25%, but within that customer it's a number of projects. It's not any single project that's a significant component.

Operator

Your next question comes from Gary Taylor – Citigroup.

Gary Taylor – Citigroup

Good morning. A couple questions, first of all just on the gross margin guidance for the 4Q, but slightly better sequentially. Is that just seasonality or MDA mix of business? Is there anything you can give us in that or is it also the roll out of this compensation program, or?

Joseph A. Boshart

I think it's a little bit of everything. I think you have a couple of moving pieces but at the end of the day we expect gross profit margins to be relatively consistent on a sequential basis. The new compensation plan is a positive. MDA's average growth profit margins are slightly below our corporate average, so when you actually put that all into the hopper you end up with a pretty flat scenario. But I think probably the biggest issue, Gary, is the mix. As the mix shifts away from the nurse and allied business, which is our lowest gross margin business, it does tend to have a positive impact.

Gary Taylor – Citigroup

And can you talk about how your bill rates are holding up? I thought earlier in the year or in the second half of '07 you'd seen some nice increases and then talk about maybe being a little selective in turning some business away in order to hold up the bill rates. As the demand environment has weakened should we expect the bill rates to be weakening as well?

Joseph A. Boshart

If we stay in this kind of environment I would expect that bill rates will weaken, Gary. We have operated and been able to show roughly 3% to 4%, closer to 4% quarter in, quarter out over the last 18 to 24 months. The most recent quarter we were looking at kind of 2.5%, so that's slightly below that. It's just kind of trending the wrong way and like I said, the environment is really not conducive to significant increases across the board.

Having said that, I'm still hearing that we're getting some material increases and important increases and important accounts, but my overall expectation is that the year-over-year increase in bill rates will start to moderate vis-à-vis what it's been for the last two years.

Gary Taylor – Citigroup

On, I think Emil, you had said that the full amortization on MDA would be $1.2 million in the 4Q.

Emil Hensel

I just want to clarify that. That's our total amortization expense, not just for MDA.

Gary Taylor – Citigroup

So how much does D&A pick up then sequentially, roughly?

Emil Hensel

The sequential in D&A is from about $2.5 million to roughly $3 million, about $500,000.

Gary Taylor – Citigroup

Thank you. And then just my last question, can you I guess briefly but in a little more detail just explain exactly what the per diem payment is on just an average travel nurse per comp package? Did it look like he or she and it now looks like this, is it just a meal per diem that you're putting in there?

Joseph A. Boshart

I'm not sure how specific we want to be for competitive reasons, Gary, but it's a meals and incidentals per diem. And it's enough to result order of magnitude in 10%, well 10% to 15% more after tax income for the nurse. While we do take a tax hit on that it's still good value to the nurse and we think the dynamics within our applicant activity kind of validate our assumptions. It's just, like I said, it's kind of a pyrrhic victory, given that the demand environment has really gone the wrong way.

Gary Taylor – Citigroup

I guess what I'm missing, why – is it because more of it can get passed through to the client or just because the tax treatment for them is different? How do they see the pick up?

Joseph A. Boshart

How does the nurse kind of pick up?

Gary Taylor – Citigroup

Yes.

Joseph A. Boshart

Assumably because a portion of their compensation stays as an expense allowance for those nurses that are in travel status, meaning that they are traveling away from their permanent residence.

Operator

(Operator Instructions). Your next question comes from David Bachman – Longbow Research.

David Bachman – Longbow Research

Going back to MDA you kind of mentioned some of the top specialties. Can you provide us with just a little bit more color on sort of the mix of those specialties I guess either in days filled or revenue for MDA?

Emil Hensel

Well order of magnitude, the largest single specialty that MDA has is anesthesiology. It’s roughly 20, a little over 20% of their total mix in terms of days filled. Emergency medicine is the second largest, about 15%, and I would then rank the next to be primary care a little over 10%, and radiology a little under 10%.

David Bachman – Longbow Research

And most of my questions have been answered, but I just wanted to go back. You guys have been doing this a long time and, Joe, you’ve been in the business. You mentioned the demand weakness was as is the weakest you’ve seen since 2003. Can you just talk a little bit about what’s similar this time around to then and perhaps what’s different and how you might be looking at this either the same or differently than five years or so ago?

Joseph A. Boshart

That’s a fair question. Probably the biggest difference between the environment today versus the environment that led up to 2003 which to me was the nadir of the last downturn that occurred beginning, let’s say, in the second half of '02 where the weakening labor market started to impact the booking activity and then in the first quarter of '03 we saw a shockingly low admissions number at our hospital clients which really they were not expecting and changed the tone and tenor of the relationship they had with us.

The biggest difference today, probably two of the biggest differences, one is admission have not been strong. If there were two shoes that dropped after the middle of 2002 there was really only one shoe to drop. Admissions have been a headwind to this business since 2001 and the early part of 2002. So that’s A, and B, we’re a much more diversified company. Nurses are a cost.

And we really, we get that hospitals when they look to reduce cost they look at where their costs are and 25% of operating cost and 50% are labor for registered nurses. So they start to look for creative ways to provide patient care with less registered nurses. But usually it doesn’t end well. I mean, nurses are the most important ingredient to good outcomes in an acute care environment, but, again, it’s almost they can’t help themselves because it’s such a significant cost and they don’t get reimbursed for it.

It’s an element of their reimbursement, but they aren’t reimbursed specifically for nursing care. Whereas, for example, the physician business they don’t admit patients unless they have physicians admitting patients so they tend to be very different psychology in the demand for physician than there is for nurses. It’s really one of the reasons we have been so earnest in our desire to get into the physician staffing business really for the last five year.

We just were – finally found the right company at the right price, and we’ve really, the more I interact with the management of MDA the more impressed I am. They really, they’ve been doing us a very long time. They understand how to provide a very quality outcome for their client, and this business, this sector as well as the specific MDA business has grown consistently over the last ten years whereas nursing clearly has had its ups and downs. Hopefully that answers your question.

I mean, we’re a more diverse company and there isn’t as much bad news that can rain down on us. A new element that is bad is this liquidity crisis. I believe we’re most of the way through the liquidity crisis, but it’s our experience over the last several months is it can get significantly worse very quickly with an event. But right now it just feels better. We were able to hedge our debt at, what I would describe as very attractive rates.

We hear bank lending’s becoming looser. So we’re optimistic that whatever new element that has produced will be mitigated and hopefully moderated and go away over the next month or so. We can just deal with the historical issues that we have

I’ve been doing this 16 years but Emil's been doing it even longer. We’ve seen tough markets and we’ve been able to manage the business through tough markets and generate positive results. Clearly, when the tide goes out in this business all the boats float a little lower and when you look at the companies – we’re focused on our biggest most important markets. Our most important market historically or the biggest market share is Florida.

And Florida is, without question, the weakest market in this environment. So that tends to hurt us more than some of our competitors, but we think the same factors are going to affect everyone. An example is in California a large customer has told their vendors they’re going to reduce the number of nurses they have on contract. We have very few nurses there. That’s kind of the good news, bad news story. In California we don’t tend to have the prime market share.

But this is going to affect other companies more than it’s going to affect us. At the end of the day, I think it’s going to look very similar to all the companies. We don’t expect that we will continue to see the kind of share reduction that we’ve had over the last several quarters, assuming our competitors continue to operate in a disciplined manner as they did through the last downturn.

We’ll be watching carefully to make sure that we don’t see someone trying to buy market share. We have a lot of respect for our competitors and they’ve, I think they understand what the golden goose in this industry is and having a race to the bottom on margins has never served anybody well, and we don’t anticipate seeing that in this environment.

Operator

At this time there are no further questions.

Joseph A. Boshart

And with that I’d like to thank everyone for their participation in this call and we will look forward to updating you on our fourth quarter results in February. Take care.

Operator

Thank you for participating on today’s conference. The conference has ended. You may disconnect at this time.

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