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On Assignment Inc. (NYSE:ASGN)

Q4 2008 Earnings Call

February 19, 2009 4:30 pm ET

Executives

Peter T. Dameris – Chief Executive Officer, President

James L. Brill – Chief Financial Officer

Mark Brouse – President of Physician Staffing Group

Analysts

Andrew Fones – UBS

Tobey Sommer – Suntrust Robinson Humphrey

Ruthanne Roussel – The Robins Group

Paul Condra – BMO Capital Markets

Josh Vogel – Sidoti & Company

Operator

Welcome to the On Assignment fourth quarter 2008 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Jim Brill, Chief Financial Officer. Please go ahead.

James L. Brill

Before we begin, I would like to remind everyone, as we do each quarter, that our presentation contains predictions, estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

We described some of these risks and uncertainties in today’s press release and in our filings with the Securities and Exchange Commission. We do not assume the obligation to update statements made in this conference call.

I’d now like to introduce Peter Dameris, our CEO and President who will provide an overview of our fourth quarter results.

Peter T. Dameris

I would like to welcome everyone to the On Assignment 2008 fourth quarter earnings conference call. With me today are Jim Brill our Senior Vice President and Chief Financial Officer, and Mark Brouse President of our Physician Staffing Group.

During our call today, I will give a review of the markets we serve and our operational highlights followed by a discussion of the performance of our operating segments by myself and Mark. I will then turn the call over to Jim for a more detailed review and discussion of our fourth quarter financial performance and our financial guidance for the first quarter of ’09. We will then open the call up for questions.

As we have demonstrated over the last six quarters, the strength of our business model has us well positioned to perform in most economic environments. While the current economic environment is worse than anyone could have projected and prohibited us from growing our revenues year-over-year for the quarter, our fourth quarter performance once again demonstrated our ability to remain attractively profitable.

Specifically, despite a loss of 1.600 million jobs in the United States in the last three months, according to the Bureau of Labor Statistics, and a decline of $4.4 million in our revenues year-over-year, our adjusted EBITDA grew $804,000 over the same period last year.

The strength of our business model continues to be based on several factors. First, we do not rely on any significant contribution from perm placement or conversion fees, 2% in the fourth quarter of 2008. Next, we enjoy a diverse client base. Our top ten clients on a consolidated basis in the fourth quarter represented 7.7% of our revenues and by segment, 15.8% in Life Sciences, 20.9% in Healthcare, 28.1% in Physician Staffing and 11.2% in IT and Engineering.

We also benefit from the relative strength of the end markets we serve, i.e. Life Sciences, Healthcare, IT and Engineering, which we believe have not been as impacted by the economic slowdown as much as insurance, real estate, lending and financial services sectors.

Additionally, we focus on recruiting specialized skill sets in each of the end markets we serve, such as physicians, nurses and scientists. And finally, we note that professional staffing remains the strongest sector in the staffing industry.

Not withstanding the strength of our business model, the key indicators of demand that we monitor weekly, i.e. the amount of permanent placement and conversion fees earned, the number of new assignments and/or terminations, our bill/pay expansion or compression, the amount of time it takes a customer to make a hiring decision on a qualified candidate, and the number of hours being worked by a billable employ each week significantly weakened in late November and have continued to weaken today.

October was a record month for the company on revenues, gross margin and adjusted EBITDA. However, starting in mid-November demand for our services weakened considerably. When we set our guidance for the fourth quarter, we did not contemplate nor did we see in our daily or weekly production reports the significant weakness that developed in mid-November.

As we evaluate near-term growth opportunities for each of our operating segments, we believe that demand still exists. However, external economic and industry forces currently will not permit year-over-year growth in consolidated revenues.

In our Life Science segment, spending by our large pharmaceutical clients continues to be constrained and venture back biotech companies have recently become much more cautious. We continue to be confident and we are managing this segment appropriately for both the short and longer term.

In our IT and Engineering group, demand as measured by new orders slowed dramatically in November. This group’s performance in the fourth quarter was well below our expectations and the projections we used to establish fourth quarter revenue guidance.

In our Healthcare segment, demand slowed significantly and we believe fewer surgeries are being performed. It appears that in this economic environment people are medicating instead of operating. Finally, our Physician Staffing segment appears not to be affected as severely by the current economic slowdown and this group, again, gained share in the markets it serves.

To enumerate specific operational accomplishments in the quarter and year, one, the company grew revenues and adjusted EBITDA 9% and 16.1% respectively on a consolidated basis for the full year. Our Physician Staffing division year-over-year growth rate was 19.9%.

Three, our Nurse Travel group grew quarterly revenues 1.6% year-over-year at a gross margin of 23.5%, excluding $2.6 million in revenues derived from supporting two longstanding nurse travel customers who experienced labor disruptions.

Four, our Allied Healthcare group grew quarterly revenues 1.7% year-over-year, and five, our IT and Engineering group maintained a gross margin of 37.9% despite the fact that quarterly revenues declined 3.8% year-over-year.

With regard to SG&A, we continue to monitor the markets we serve and the level of investments we have or are making for future growth. In the fourth quarter and going into the first quarter of 2009, we reduced corporate expenses, including the number of our internal personnel in all divisions, except Physician Staffing. In the Physician Staffing group, we have budgeted growth in internal staff.

For the full year of 2009, we project on a consolidated basis that our cash SG&A will be lower than that of 2008. Should economic circumstances dictate, we will further manage our SG&A to generate appropriate levels of cash flow. We have not closed branch offices and to date the majority of expense reductions have been with third party vendors.

With that said, in 2009 we will internally measure our success by attempting to maintain current levels of EBITDA margins and gross margins, contain and/or reduce SG&A, balanced our short-term operating objectives with longer term growth objectives and expand our cash generation.

We believe we are well positioned to have one of the best opportunities in the staffing industry to limit reductions in our EBITDA as, one, we do not have a significant currency translation risk. Two, we are not a bulk seller of human capital. And three, only 2% of our total revenue is derived from permanent placement and/or conversion fees.

Now let’s review the fourth quarter and the full year results. Full year 2008 performance, again, resulted in record revenues for the company of $618.1 million, including $2.6 million in revenues derived from supporting two longstanding nurse travel customers who experienced labor disruptions in the fourth quarter of 2007. Revenues in the fourth quarter declined 1.2% over the fourth quarter of 2007.

Net income, excluding a non-cash loss of $491,000 or $0.01 per share related to the mark-to-market of our $73 million interest rate swap, was approximately $3.8 million or $0.10 per share. Revenue generated outside the U.S. was $7.4 million or 5.1% of consolidated revenues in the fourth quarter versus $7.7 million or 5.1% in the fourth quarter of 2007. Consolidated gross margin in the fourth quarter was 32.9% up from 31.8% in the fourth quarter of ’07.

Our consolidated hourly bill/pay spread in the quarter also increased year-over-year. Adjusted EBITDA was $64.4 million for the full year and $15.6 million for the quarter up 16.1% and 5.4% respectively from the full year of ’07 and the fourth quarter of 2007. Once again, our strong financial performance was achieved without any significant contribution from perm placement.

Exiting the quarter, Physician Staffing is the only segment that continues to have strong demand. All other segments have weakened and we currently do not predict a dramatic improvement in demand in the markets that the other segments serve.

Our weekly assignment revenue, which excludes conversion, billable expenses and direct placement revenues, averaged $9.339,479 in the first two weeks of February this year compared to $11.094,670 in weekly assignment revenues for the same two week period one year ago.

As many of you who have followed the company for some time know, the first quarter is our most seasonally impacted quarter. In normal economic times, it usually takes until March for the company to rebuild its billable headcount to levels achieved in the early part of the previous fourth quarter. Therefore, it will probably take until early March to get through our normal seasonality to permit jus to determine how we are trending on a sales and gross margin basis for the full year.

Operating leverage continue to improve throughout the year. Our adjusted EBITDA margin reached 10.4% for the full year and 10.6% for the quarter up from 9.8% for the full year of ’07 and 9.8% for the fourth quarter of 2007. Once again, we grew our gross profits in operating income faster than our revenues. We also increased our productivity in gross profit per staffing consultant over last year.

Before turning the call over to Mark, I would like to give you a brief review of operations. Revenues for the Life Science segment were $30.8 million, which represents a 9.2% sequential decrease from the prior quarter and a 12.3% decline year-over-year.

On a divisional basis, U.S. operations generated $26.4 million in revenues representing a 7.4% sequential decrease and a 10.8% decline year-over-year. European revenues were $4.4 million decreasing 18.4% sequentially and declining 4.7% year-over-year. On a full year basis, revenues for the Life Science segment were down only 3.8% compared to ’07.

We attribute the fourth quarter performance to a number of factors. One, our client’s feedback to us, which indicates they continue to be focused more on cost containment than on operating projects, developing new products or enhancing existing product lines. Two, expected Q4 seasonality included a greater number of customer facility closures during the hospitals.

Three, reported tightening of venture capital funding and a decline in the number of new assignments and investments in the life science arena. Four, clients' decision to reduce the number of billable hours and to transfer contractor duties to regular staff, five, a greater number of early assignment terminations, and six, the deteriorating foreign currency rate for the British pound and the euro combined with a deepening recession in the U.K.

Gross margin for the Life Science segment was 34.3% for the quarter, which represents an increase of ten basis points sequentially and 110 basis points increased year-over-year. On a divisional basis, U.S. gross margin was 33.9%, an increase of 61 basis points over the prior quarter, and 138 basis point increase year-over-year.

European margin was 36.7%, a decrease of 224 basis points over the third quarter and a six basis point decrease over the prior year. Furthermore, the average bill rate for the Life Science segment grew 4.6% year-over-year.

Moving on to the first quarter of 2009, the challenges that we face in the fourth quarter have carried over into the first quarter for all the aforementioned reasons. Although the Life Science segment is seeing an uptick in orders, demand for its services remains at a weaker level compared to the first and fourth quarters of 2008. In response to this challenging economic climate, we have made reductions in field and other operational staff.

Now I would like to turn to the Allied Healthcare group. Revenues were $13.1 million for the fourth quarter of ’08. This represents a 1.7% year-over-year increase and a 9.9% sequential decrease. On a full year basis, revenues increased 60 basis points over 2007.

During the quarter, all product lines within Allied Healthcare realized a sequential decrease in revenues and outside of traditional seasonal challenges unique to the fourth quarter, we attribute this decline to the following specific recessionary factors.

One, survey data from the American Hospital Association indicates that two-thirds of the 700 plus hospitals surveyed have seen a decrease in the number of elective procedures and admissions since July of 2008. Two, media sources indicate that a greater number of patients chose more cost effective forms of treatment such as self-medication over costly medical procedures.

Three, hospitals reduced their usage of contract professionals in response to declining patient admits, and four, our clients efforts to control costs by reducing the number of billable hours and transferring contractor duties to regular staff.

Allied Healthcare gross margins increased 171 basis points year-over-year to 32.8% and 97 basis points sequentially. The Allied division also successfully increased its average bill rate 4.7% year-over-year mainly due to a greater contribution from the health information management business line and improving pricing from the Allied, Travel and Healthcare Staffing groups.

As for the first quarter of ’09, although we continue to see demand for our various services, the operating environment is challenging as we have seen a drop in the number of hours worked per week.

As we have done in other divisions, we responded to these economic challenges by focusing on business development, specifically with our HIM and our newer rehab therapy business lines, gross margin preservation, sales and recruiter skill enhancement and greater attention to individual performance metrics.

As for cost containment, we have made reductions in both field staff and back office expenses and will continue to monitor SG&A levels throughout the quarter and the remainder of ’09.

Turning to the Nurse Travel group, during the quarter we continued to expand gross margins and preserve many of our gains in diversifying our client base in spite of a more challenging operating environment. Our results for the quarter were also impacted by the normal seasonal decline we see each year as our nurses return home for the holidays.

For the year, our revenues of $125.1 million represented a 4.4% year-over-year increase and our gross margin improved 57 basis points to 22.8%. Our fourth quarter revenue of $29.2 million was down 6.9% year-over-year. Excluding $2.6 million in labor disruption revenues from the fourth quarter of 2007, revenue was actually up 1.6% year-over-year.

Our gross margin was 23.5%, a 61 basis point sequential improvement and a slight year-over-year decline of nine basis points. We billed 345 clients during the quarter compared to 340 in the same quarter last year and 286 two years ago. Our top ten clients accounted for 30.9% of revenue compared to 28.5 for the same quarter last year and 48% two years ago.

Looking forward, we expect the operating environment to be more challenging in the first quarter than what we experienced in the fourth quarter. While supply constraints have relaxed somewhat for the time being, hospital buying behavior remains erratic with some hospitals holding off on bringing in travel nurses in spite of their clear needs.

For the nurses working for us during the quarter, the averaged hours worked per week remained fairly steady compared with the prior quarter and year-over-year. This suggests to us that hospitals continue to have strong needs for the specialized nursing personnel we provide.

As demonstrated by the improvement in our gross margin, we continue to refine our financial controls to drive profitability. We recently launched a new front office software system, which is driving improved productivity, helping us hold the line on SG&A costs now, and will allow us to scale it faster and at a lower cost when the market turns. Beyond this, we continue to be extremely successful in retaining key talent at all levels within the nurse travel group.

Finally, a few specific data points relating to the Nurse Travel group. Order volume has declined 47% sequentially and 5% year-over-year. Average bill rate is up year-over-year by 1.7% and average hours worked per nurse remains strong for the quarter ending at 39.7 hours compared with 41.3 hours in the prior quarter and 41.5 hours in the fourth quarter of ’07.

Now moving on to our IT and Engineering division. On a full year basis 2008 revenues were $218.7 million, a 10.2% increase over the $198.4 million pro forma 2007 results. Sixty-eight percent of the increase in sales for the year was due to an increased consultant on assignment and 32% was due to increased bill rates.

Two thousand eight was the most successful in Oxford Global Resources 24-year history and company records were set for revenues, bill rates, gross margin percentage and overall profit contribution. Revenue in the fourth quarter per Oxford was $51.3 million, a 3.8% decrease from the $53.3 million in Q4 of ’07.

The decrease in revenues was due primarily to fewer billable consultants on assignment and fewer days billing. During the fourth quarter, we averaged over 836 billable consultants compared to 846 in the fourth quarter of ’07, a 1.2% decrease, and 853 billable consultants in the third quarter of 2008, a 2% decrease.

The average bill rate in the fourth quarter was approximately 122.5 per hour compared to 122.43 in the fourth quarter of ’07 and $124.18 in the third quarter of '08. Gross margin for the fourth quarter remains strong at 37.9, 44 basis points higher than the fourth quarter of '07. Bill rates and gross margins continue to be among the highest in the staffing industry.

While our average length of assignment remained at approximately five months during Q4, we saw a significant decrease in client demand and new assignments. We started seeing normal recessionary slowdown in the third quarter of 2008, especially within Oxfords Information Technology Segment.

But beginning in mid-November, we experienced a significant increase in project delays and cancellations beyond what one would consider normal. We also experienced a large increase in consultant availability over this same time period signaling an overall weak demand. As a result, our consultant terminations in the fourth quarter were significantly higher than our historical averages.

We continue to be highly diversified across clients and industries in Q4, billing over 750 different client companies with no single client accounting for more than 2.2% of our revenue. From an overall industry perspective, our business was strong in education and healthcare services, pharmaceuticals, medical equipments, select machinery and appliance manufacturing companies and semiconductor manufactures.

Business declined slightly with durable good wholesalers, computer system design services and aerospace manufacturers. We had relatively few consultants in the financial services, mortgage and insurance industries. Our internal sales consultants drive our business and are a significant investment necessary for current and future growth.

While the average number of sales consultants increased during the first two quarters of '08, we decreased the number of internal staff in the third and fourth quarters due to the economic uncertainty in both the U.S. and Europe primarily through normal attrition.

We averaged approximately 395 sales consultants during the fourth quarter of '08 and 410 in the third quarter following a high of 447 during the second quarter of '08. We monitor our operational activity daily, and we will continue to ensure that the size of our sales force is in line with the current and future economic conditions.

Oxford specializes in recruiting senior consultants in four technical disciplines, information technology, software and hardware engineering, mechanical and electrical engineering, and telecom.

We experienced revenue growth in the fourth quarter of '08 over the fourth quarter of '07 of 1% in software and hardware engineering, 13% from mechanical and electrical engineering, and 28% for telecom. Revenues from our technology discipline were down over 9% in the fourth quarter compared to the same period of '07.

Regarding the decline in the IT business, consultants for large ERP vendor installations and upgrades for SAP and Oracles slowed significantly. Much of our software and hardware engineering volume came from the semiconductor industry and from companies that manufacture electronic equipment. The key drivers of our mechanical and electrical engineering specialties in both the third and fourth quarters were for mechanical engineers in the medical equipment industry and validation engineers in Life Science industry.

We continue to see project cancellations and budget constraints in the first quarter of '09 that are affecting our number of new assignments. This lack of demand has been confirmed by the Oxford Index, our forward-looking client's survey of market demand.

This quarterly survey of Oxford's clients has been highly predictive of actual demands since 2002 and the results of our survey for Q1 showed decreased demand for our IT and Engineering consultants in most of our specialties with a few notable exceptions in our electrical engineering and validation segments.

In addition, we will closely monitor and aggressively pursue the potential that might be available for our consultants through the Economic Stimulus package, most notably the investments to be made in the medical records arena.

I would like to now turn the call over to Mark Brouse, the President of our Physician Staffing Group.

Mark Brouse

Vista Staffing Solutions, the Physicians Staffing Division of On Assignment, had a solid fourth quarter and full year 2008 performance. We finished the year with a 20% increase in revenue, growing margins and an experienced management team in place. Revenue for the fourth quarter of 2008 was $23.2 million, a 19.9% increase over the same quarter last year and a 1.7% decline sequentially from third quarter.

We placed 389 physicians in the quarter, a 2% decline from Q3 and we served 349 clients, a decline of 12%. We believe this decline can be at least partially attributed to seasonality as we've seen the business slow slightly in fourth quarter in the following first quarter three out of every five years throughout the history of the Company.

On the upside, our gross margin continued to grow in the fourth quarter. It increased 32 basis points over the third quarter to 31.9%. Full year 2008 revenue was $89.2 million, a 20% increase over 2007. Gross profit was up 26% for the year ending at $27.4 million. Our full year gross margin was 30.78% up 145 basis points over 2007.

We placed a total of 1,090 physicians with 694 clients in 2008 compared to 1,025 physicians placed with 741 clients in 2007. We believe our strategy of broad diversification continues to serve us well. Our top ten clients accounted for 25.1% of revenue with no client accounting for more than 4.6%.

We placed physicians from 30 medical specialties in settings as diverse as a critical access hospital in Skowhegan, Maine to an orthopedic surgery practice in Portland, Oregon. We continue to invest in our diversified business units with our international locum tenants division making a push into Australia.

Our Physician Search and Consulting division continued to see interest from clients in a broad range of specialties and geographic locations with an increase in consulting and executive search business. One obvious trend we are watching is the rise in unemployment and its potential impact on our healthcare clients. Here is what we are seeing.

As employers cut ranks, they cut the ranks of the insured. Health plans are seeing a decline in enrollment. One large organization we served cancelled a longstanding contract for nine physicians due to a projected drop in health plan enrollment.

Other healthcare organizations we work with are seeing what we believe is a temporary decline in patient volume and procedures. The Wall Street Journal recently released a survey indicating that 22% of consumers said they expect to make fewer visits to physicians this year.

In addition, a recent American Hospital Association survey of more than 700 hospitals found that two-thirds have seen a decline in elective procedures and admissions since July. Patients are clearly delaying some procedures due to the uncertainty of their employment and the decline of their investments.

It's reasonable to believe that high deductible health insurance plans, in which the patient has significant first dollar exposure, are also a contributing factor to this decrease in volume, as well as an increase in hospitals bed debt.

Our client healthcare organizations are also being hit by higher borrowing costs, tight credit and investment losses. The slowdown has started to have a ripple affect through our business with some clients now slow to confirm doctors we have presented and others slow to pay. We believe this is a short-term response similar to the market slowdown we saw after September 11, six months into the 2001 recession.

Patients can only delay treatment for so long without seriously endangering their health and/or ending up in an emergency department. Facilities can only delay contracting for doctors for so long before their patients demand access, their existing staff burns out and their physician revenue stream dries up.

If there is an upside to this trend for physician staffing, it is that physicians are becoming a little less demanding when it comes to compensation and a little more flexible when it comes to assignment choice.

Historically, Vista and other locum tenants companies have only been able to fill about 30% of requests for physician coverage. We've been working hard over the last several years to focus on high value clients and actually reduce the number requests for coverage we accept. We think the current situation will enable us to make excellent placements that make the most of every physician's available time and talents. Our days of coverage should remain relatively stable.

The other important trend we are watching is the state of primary care here in the U.S. A consensus is that primary care is nearing collapse. The American College of Physician’s State of the Nation's Healthcare 2009 report indicates a current shortage of 16,000 primary care physicians.

They expect the shortage to grow to 40,000 in the year 2010 in response to healthcare reform efforts. These include the addition of $13.4 million new Medicaid recipients plus people covered by new insurance purchased through a national plan or their employer.

Whenever there is such a striking imbalance of supply and demand in a market sector, it generally bodes well for locum tenant staffing. The essence of our business is distributing the supply of physicians to the area of greatest need.

Of course in this case the challenges is finding and keeping physicians. The option to practice medicine on a part time or locum tenant basis actually keeps physicians in the workforce longer. In a January 2008 Vista survey, 69% of physicians said locum tenants could extend their careers in medicine, 53% said they believe locum tenants could help them avoid burn out.

We believe that locum tenants is a great practice option for physicians who were planning to retire but have to work a few more years to rebuild their retirement portfolios. In summary, we think healthcare will fare better than many industries through the economic downturn.

However, we don’t believe it will be immune to job cuts and revenue shortfalls. These issues make it harder to convince clients to make decisions about doctors and slower to pay for our services. At the same time, the tremendous shortage of physicians means that these clients will have to compete aggressively for the available talent and/or other clients will surface.

I’ll now turn the call back to Peter.

Peter T. Dameris

Before turning the call over to Jim, I would like to comment on our projected first quarter performance. Again, for those of you who have followed our company for a number of years, you know that the first quarter has fewer billable days than other quarters, and our business is impacted by customer facility closures and the timing of a release of new budgets.

In addition, this year’s first quarter is impacted by severe weather in the Midwest and Northeast. Traditionally we do not expect our fourth or first quarter results to grow sequentially. In addition, due to all the economic uncertainty that our economy currently faces, our outlook for the first quarter of 2009 is more cautious than normal. With regard to divisional performance, we believe the Physician, Life Science, and Allied Healthcare groups may have the most visibility.

I will now turn the call over to Jim.

James L. Brill

As Peter, mentioned consolidated revenues for the quarter were $147.6 million down 2.9% from 2007. Last year’s quarter also included $2.6 million in labor disruption revenue and nurse travel. There were 62 billing days in this quarter, 63.5 in the third quarter and 61.5 in the fourth quarter of 2007.

However, for nurse travel there were 92 billing days this quarter, 92 last quarter and 92 in the fourth quarter of 2007. Foreign currency had about a $1.1 million negative impact on revenue. Now let me address some of the variance and their related explanations to the extent Peter or Mark has not.

In physician staffing the significant revenue growth, which included a 13% bill rate increase was discussed by Mark. And as he mentioned he saw good growth margin expansion off the third quarter and last year, which included an increase in the bill/pay spread.

Again, as we’ve mentioned in the last couple of quarters, the actions that we took to turn margins around are working well. I think Peter did a thorough job of addressing both revenue and gross margin in Life Sciences, Allied Healthcare and Nurse Travel. I’ll just add that bill rates were up in each as were bill/pay spreads. We also benefited from lower payroll related taxes as we’ve not yet seen the impact of higher unemployment insurance related expense and lower workers compensation insurance expense.

The decrease in Nurse Travel’s gross margin was primarily related to an increase in other employer related expenses. Our IT and Engineering segment revenues, as Peter mentioned, where impacted by a drop in billable consultants that was not offset by an increase in the bill rate. In addition, we had a slight decrease in the bill/pay spread.

Conversion and direct hire revenues totaled $2.9 million in the quarter or 2% of revenue, as compared to 2% of revenue in the third quarter 2008 and 1.7% in the fourth quarter in 2007. The mix of this revenue shifted away from Life Sciences and toward IT and Engineering conversion revenue.

Total SG&A expense in the fourth quarter was $38.2 million or 25.9% of total revenue, which is down from $39.2 million or 24.2% last quarter and $40.4 million or 26.5% in the fourth quarter of 2007. The reduction from the fourth quarter of 2007 is in part related to a $1.3 million reduction in amortization of intangibles related to the acquisitions to $2.4 million.

Also included in SG&A in the quarter was $1.6 million of equity base compensation expense and $1.3 million of depreciation. Our operating income of $10.3 million or 7% of revenues for the quarter compared with $13.6 million or 8.4% of revenues last quarter, and $7.9 million or 5.2% of revenues in the fourth quarter of last year.

As we have previously discussed, in the second quarter of 2007, as required by our bank agreement, we entered into a two-year interest rate swamp for $73 million, which fixed our 90-day LIBOR equivalent rate at 4.94%.

The decrease in market value of this instrument was $491,000 in the quarter and this non-cash expense is included in non-operating expense and thus excluded from EBITDA. Our tax rate for the quarter was 52.5% and included a non-deductible loss related to the drop in our deferred compensation asset that was offset in the income statement by a similar drop in our deferred compensation liability, and, an increase in other non-deductible staffing consulting related expenses. Net income was $3.5 million or $0.10 per diluted share.

We believe it’s meaningful to compare EBITDA and adjust EBITDA when comparing the current quarter’s results to prior quarters. As outlined in today’s press release, EBITDA for the quarter was $14 million. Excluding equity base compensation expense of $1.6 million, adjusted EBITDA was $15.6 million or 10.6% of revenue. Adjusted EBITDA was $18.8 million or 11.6% of revenue last quarter and $14.8 million or 9.8% of revenue in the fourth quarter of 2007.

We ended the quarter with cash and cash equivalence of $46.3 million down from $48.7 million last quarter. This included the use of $10 million to pay down our term loan. CapEx was approximately $1.9 million up from about $1.3 million last quarter, as we completed the conversion of our operating systems in our Nurse Travel division.

Net accounts receivable was $78.4 million at the end of the fourth quarter. Days sales outstanding were 48 days down from 49 days last quarter but up from 47 days last year.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant. In the fourth quarter we averaged 740 staffing consultants and gross profit per staffing consultant of $66,000 up from $63,000 in the fourth quarter of 2007.

Life Sciences segment generated $91,000 in gross profit per staffing consultant for the quarter as compared to $100,000 in the fourth quarter of 2007. The Healthcare segment generated $71,000 in gross profit per staffing consultant for the quarter as compared to $76,000 in the fourth quarter of 2007.

The Physician Staffing segment generated a $102,000 in gross profit for staffing consultant for the quarter compared to $79,000 in the fourth quarter of 2007. And the IT and Engineering segment generated $49,000 in gross profit per staffing consultant for the quarter compared to $45,000 in the fourth quarter of 2007.

Looking at the first quarter revenue expectations this year, it is very difficult to estimate what will happen to revenues because of the worldwide economy. So given that backdrop based on labor markets not getting any worse than they are today and normal seasonal trends, we currently estimate consolidated revenues of $119 million to $124 million for the quarter ending March 31, 2009.

You should also remember that in the first quarter last year our Nurse Travel business had $2.4 million in revenue related to labor disruptions of one of our large customers. We’re estimating gross margins of approximately 31.4% to 31.8%, SG&A of $33.9 to $34.8 million, including equity based compensation expenses of approximately $1.6 million, approximately $1.5 million of amortization of intangible assets and financing cost and depreciation of approximately on $1.5 million.

We estimate net income of $900,000 to $1.5 million, earning per share of $0.02 to $0.04, and an effective tax rate of about 45%. Adjusted EBITDA is estimated range from $8.1 to $9.2 million. As you know these estimates are subject to the risks mentioned in today’s release and at the beginning of the conference call, and do not include any impact related to the mark-to-market of our $73 million swamp.

Now I’ll turn it back to Peter for some closing comments before we open up the line for questions.

Peter T. Dameris

Despite facing an increasingly more challenging economic environment, we're very satisfied with our success in expanding our operating and gross margin, generating cash, and growing our revenues faster than our competitors.

While the entire On Assignment team is very proud of our results today, we are now focused on 2009 and beyond. We'd like to once again thank our loyal, dedicated, and talented employees whose efforts have allowed us to progress to where we are today.

I'd like to now open the call up to participants for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Andrew Fones – UBS

Andrew Fones – UBS

First of all, I wanted to ask if you could quantify the impact of the annual savings from the cost cuttings that you've announced, and when you started to take those actions in the fourth quarter. I'd just like to understand how much of those savings were benefit to the fourth quarter versus what we should expect in Q1 and beyond.

Peter T. Dameris

We identified and started moving on some of the reductions in staff, but we didn’t do much in the fourth quarter, Andrew, because it was the holiday season. So most of it occurred in January and, as you will note from the absence of any kind of restructuring charge, there are some severance payments and we're just flowing that through the income statement and that is not sizable.

But the majority of what we hope to gain from holding our SG&A or reducing it is in the forward quarters versus any significant impact in the fourth.

James L. Brill

I might just add Andrew, I think we've given for the most part some staffing consultant numbers and for example at Oxford as you know there's a fairly robust turnover, and [Mike] started to not replace some of the people that were departing back in the third quarter of last year. We actually talked about some of that in the third quarter conference call.

Andrew Fones – UBS

And then in terms of the guidance, you mentioned obviously the fewer days in Q1, but looking back historically, other than the year where you did the Oxford acquisition and the Physician Staffing acquisition, we have seen revenues remain flat from Q4 into Q1. So I was just wondering if you could perhaps give us the number of days do you expect in the first quarter, quantify that as seasonal impact as you see it relative to Q4.

I guess it looks as though you're saying that the weekly revenues in February, they're I think around 16% year-over-year versus the guidance of around 19%, just wondering whether you’re modeling kind of further deterioration here in terms of the guidance, or whether there was just some significances or impacts early in January that is starting to wash out, just a little color there. That would be great.

Peter T. Dameris

I'll give you kind of a qualitative comment and then Jim can give you the quantitative comment, but as it relates to the first quarter, clearly the end markets have deteriorated and probably the biggest surprise for us, Andrew, has been on the nursing side.

The first shoe to drop for us was that the number of our open orders declined significantly and then most recently, we typically can predict that 60% of our existing billable assignments will be extended or renewed, and now the hospitals had started saying, when the assignment is over with there's no need for there to be a renewal.

The holiday closure period extended a little bit into the first quarter, and historically I think maybe excluding Oxford and Vista, but for the other lines of On Assignment, I think three times in the history of the firm, has the first quarter revenues exceeded the fourth quarter revenues. The first quarter seasonally is our most impacted quarter, but clearly the economic environment is what is impacting our revenue trend currently.

Jim, do you have the number of billable days handy?

James L. Brill

I think the significant number would be relative to 2008's billable days. There's about a half a day less in 2009 than there were in 2008 across the majority of the businesses.

Andrew Fones – UBS

Okay. And then sequentially, do you have that comparison versus the fourth quarter?

James L. Brill

Yes. It's 62 days across most of the businesses in the fourth quarter and it's about 63 in the first quarter of ‘09, and that relates to about 62.5 in the first quarter of '07.

Andrew Fones – UBS

Then just kind of finally, gross margin, obviously, was an upside surprise versus my number. It looks as though you are still projecting some increase year-over-year, is that due to the kind of the pay/bill spread continuing to kind of widen and can you give us some comments there. Sounded, at least kind of on that physician business, that you are being able to kind of push through if necessary some changes in pay there given the economic environment.

Peter T. Dameris

The things that we have directly within our control are pricing, costs containment, type of work that we take, we still feel very, very confident that we're doing the right thing and that we're performing at the top of the staffing industry.

As it relates to revenue, we don't think we're losing market share as indicative of our fourth quarter performance. Although we were down 1.6% year-over-year, that compares very favorably with some of the other professional staffing firms that were down closer to 9%, 10% year-over-year.

We do not believe that we will have bill/pay spread expansion on the nursing side. Pricing has gotten very challenging there but we have been able to work on cost of services surrounding travel and per diems that have helped us actually maintain or expand the margin.

On the IT and physician side, we have just very, very good pricing discipline, as well as the Life Sciences and local healthcare side, so we feel pretty good on the margin, it’s just the revenue. It's not that we're losing business to anyone, there's just not business out there right now at the level that we once saw.

James L. Brill

I might just add for those of you who have watched our industry over the years, there's an employment tax reset in the first quarter coming out the fourth quarter, so we have also taken that into consideration. But the billing rates have held up pretty well, and as Peter mentioned, we have been able to work on the cost of service also.

Andrew Fones – UBS

Just one other Jim, could you give us the implied tax rate from your Q1 guidance?

James L. Brill

Forty-five percent.

Operator

Your next question comes from Tobey Sommer – Suntrust Robinson Humphrey.

[Frank] for Tobey Sommer – Suntrust Robinson Humphrey

This is [Frank] in for Tobey. Can you hear me?

James L. Brill

Yes, go ahead [Frank].

[Frank] for Tobey Sommer – Suntrust Robinson Humphrey

I wanted to talk a little bit about your use of cash, what you're looking for going forward in terms of opportunities in the acquisition environment and paying down debt. What are your thoughts on stock repurchase programs going forth?

Peter T. Dameris

Well, as we've said previously, our ability to repurchase stock is somewhat limited by covenants in our bank agreement. We have been and we continue to grow our cash balances, and they are relatively sizable. And we're either going to use it to pay down debt, or we're just going to keep it on the balance sheet for the time being.

We continue to have some very thoughtful conversations with some Life Science and Physician Staffing firms, but until the credit markets fall further than they have, I think we're not inclined to do any acquisitions at this point.

[Frank] for Tobey Sommer – Suntrust Robinson Humphrey

Okay. I just wanted to verify the interest rate swap matures June 30, 2009?

James L. Brill

That's correct.

[Frank] for Tobey Sommer – Suntrust Robinson Humphrey

If you could talk a little bit about strength or weaknesses across different geographical areas in IT and Engineering and Healthcare.

Peter T. Dameris

We're not seeing a dramatic change geographically on the IT side, and that's predominantly because we're not in the financial services industry, otherwise you'd be seeing big challenges in the northeast.

Healthcare, however, we do derive a fair amount of revenue from the west coast and California, as is well documented, has had some significant budget deficits, and for instance we do work with some noteworthy county hospitals in California, and they are doing what it takes to survive until they can get more funding. So the west coast has been weaker than other regional segments United States.

Mark, do you have anything to add about physician demand.

Mark Brouse

The only area where we’ve really been able to see any kind of measurable impact is, as Peter indicated, California. We see high unemployment and as a result it’s driving decline enrollments in many health plans and decline in admissions and that’s affected us there. Other than that, whatever impacts exists are somewhat uniform.

[Frank] for Tobey Sommer – Suntrust Robinson Humphrey

Could I get any color on CapEx looking forward into 2009?

James L. Brill

We’re probably looking at something in the range of $6 million in 2009.

Operator

Your next question comes from Ruthanne Roussel – The Robins Group

Ruthanne Roussel – The Robins Group

One quick question, do you envision any impact on CCRN from the stimulus. There’s going to be, for instance, $19 billion for adopting health electronic medical record keeping, which I know in the past is something that to some degree drove demand for nurses as people being trained to use it?

Peter T. Dameris

As it relates to On Assignment, we do have a growing health information management practice and we internally believe that’s probably the area where we’ll get the biggest impact from the Stimulus bill followed by $10 billion being forwarded to the State of California, which may get the county hospitals moving in a different direction.

The health information management work we do traditionally is a little higher level than what some of the other people have been doing as it relates to providing supplemental staff of nurses, while full time nurses are taken off of assignment so they can be trained on electronic reporting.

So ours is more chart reading, medical transcription specialist, cancer registry specialist versus bringing 20 nurses to fill the floor while 20 full time nurses are taken off the floor to go through electronic recordkeeping training.

Ruthanne Roussel – The Robins Group

It would sound then as though there would actually be more in it for you than perhaps for the other competitors that you’ve described.

Peter T. Dameris

Specifically for the areas that we participate in, in the health information management side, I’m not aware that they have any focus in that area. In fact, the dominate player in that space is Kforce, but I’m not aware that Cross Country or American Mobile play in that space.

As it relates to fill-ins for nurses, we don’t do any per diem work, so unless it’s a longer term assignment at least four weeks, we probably wouldn’t get any lift from that. Jim, you want to add something?

James L. Brill

I just might add that there may be opportunity in this whole situation for our IT and Engineering group as well to the extent that people are needed to manage projects at a higher level. That may very well provide some opportunity for that particular segment of our business.

Peter T. Dameris

And we are looking at that, but that has not been a focus in the past.

Operator

Your next question comes from Paul Condra – BMO Capital Markets.

Paul Condra – BMO Capital Markets

My first question is with regards to nurse staffing, I know some hospitals maybe have sort of legal limits for how low they can go in terms of how much they are staffing their hospitals, and I’m just wondering in health staffing in general, are you seeing any of those limits being approached, does that provide any kind of floor for you or does that fit into your equation in anyway?

Peter T. Dameris

Paul, not to be too cynical, but I think they forgot what those levels are.

Paul Condra – BMO Capital Markets

So it’s no then?

James L. Brill

Well, there’s an issue with regards to levels we don’t know where these various hospitals are, but in extremis you’re going to do whatever you can do to try and keep the doors open and not go under financially, but yet still remain providing reasonable patient care.

Peter T. Dameris

I’m still very positive longer term, but in the short-term, the nursing business has acted more irrationally than any of the other flavors of staffing that we participate in. These hospitals short-term are flexing their staffing levels down unless there’s a need or, for lack of a better word, their caught, that the levels are meeting their economic needs versus their clinical needs.

There’s more demand than they are actually staffing to right now. For the first time in six or seven years, they’re actually laying off internal staff. And demand, we’ve gotten some early indications that after a pretty big drop in patient synthesis, there’s a little bit of a positive popup in February, which will help matters as well.

Paul Condra – BMO Capital Markets

A popup in terms of, I’m sorry?

Peter T. Dameris

Patient admissions.

Paul Condra – BMO Capital Markets

Okay. I just had another question about the primary care and thanks for the information about that, but how much of your locum staffing is in primary care?

Mark Brouse

I don’t have the numbers in front of me, but I believe it’s around 10% or 11% is our primary care number. We view it as an area that has a lot of opportunity for us going forward because we do believe it’s an area where the demand will be very high, particularly if any level of health care reform is passed. If we see increased access, that’s going to hit primary care demand first.

Peter T. Dameris

If you call back, we can give you that. It’s also, I think, as of the third quarter, it’s listed in our investor presentation on the web.

James L. Brill

If you check our investor presentation, we’ll be doing the conference next Monday in Arizona, if you check that presentation, it will be up on the web by the time we do the conference and we’ll have the fourth quarter breakout for various physician specialties in that presentation.

Paul Condra – BMO Capital Markets

Just one more and I’ll jump off. Just in terms of closing offices, you’re not planning to do any of that and I was just wondering, is that completely off the table or just maybe you could talk about the business cost advantages or is that something that is not advantageous for you to do at all?

Peter T. Dameris

We’ve spent a lot of time training and expanding our footprint and we are managing our investment dollars prudently. That is not our first preference and that’s not where we’ve looked first. As we said in our prepared comments, we have taken a sizeable amount of SG&A out primarily by renegotiating with third party vendors and lowering our staffing levels of recruiters and salespeople.

But to the extent that we need to move from a local presence to coverage on a long-line basis, we’ll do that if economic conditions dictate, but at this point we have not.

Operator

Your next question comes from Josh Vogel – Sidoti & Company

Josh Vogel – Sidoti & Company

Jim, can you remind us what the current size of the credit facility is and I was just wondering if there were any debt covenants that we should be keeping a closer eye on?

James L. Brill

There is the debt facility is $125 million term and a $25 million revolver. The next covenant change that comes up is at the end of September 2009.

Peter T. Dameris

The revolver remains undrawn, we’ve never drawn on it and we’re generating cash on a quarterly basis and we’re sitting at higher cash balances than we reported at the end of the fourth quarter.

Josh Vogel – Sidoti & Company

Jim, you mentioned last year that we should expect, I know you only gave the Q1 guidance, but you said we should expect the amortization to fall from $9 million and change to about $6 million in ’09. Is that what we should still be expecting?

James L. Brill

The amount that we’re talking about on the first quarter will drop off a slight bit over the year, but it’ll be around $6 million.

Josh Vogel – Sidoti & Company

And then it should probably half in 2010 to about $3 million?

James L. Brill

No. It drops farther than that in 2010. I’ll tell you what, if you’ve got something else I will find it here momentarily.

Josh Vogel – Sidoti & Company

Peter, I missed what you said about through the first two weeks in February about the weekly assignment revenue, can you just give me those numbers again?

Peter T. Dameris

For the first two weeks of February of 2009, excluding conversion billable expenses or direct placement revenues, we averaged $9,339,479 and that compares to $11,094,670.

James L. Brill

Past the 2010, it drops to about $1.7 million in 2010.

Josh Vogel – Sidoti & Company

Okay. And just lastly, I was looking at the balance sheet and obviously the goodwill balance is pretty significant. I was wondering if you were working with your auditors and discussing a possible write-down?

James L. Brill

Well, we wouldn’t discuss write-downs. As you may know, on an annual basis every public company reviews what the valuation of the various entities are that it has on its balance sheet. We completed that review in the fourth quarter and based on where things stand right now, we will not have a write-down of goodwill in the fourth quarter of 2008.

Operator

You have a follow-up question from Andrew Fones – UBS.

Andrew Fones – UBS

You usually give gross profit per consultant. I was wondering if you have those numbers down by division?

James L. Brill

Actually, we gave them on the call, Andrew. Rather than drag through them all again, we gave them in general and then also for each of the divisions. Give me a call and I’ll be happy to walk you through it.

Peter T. Dameris

You can call us back. It’s in the transcript so we’ll be just giving you the same thing we just won’t hold the call up.

Operator

There are no further questions at this time. Are there any closing remarks?

Peter T. Dameris

We appreciate your time and attention and look forward to speaking to you again at the end of the first quarter. We appreciate it. Thank you very much.

Operator

Thank you all for participating in today’s conference call. You may now disconnect.

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Source: On Assignment Inc. Q4 2008 Earnings Call Transcript
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