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Cross Country Healthcare, Inc. (NASDAQ:CCRN)

Q1 2010 Earnings Call Transcript

May 6, 2010 10:00 am ET

Executives

Howard Goldman – Director, Investor and Corporate Relations

Joe Boshart – President and CEO

Emile Hensel – CFO

Analysts

Frank Pinkerton – SunTrust

Paul Condra – BMO Capital Markets

Jim Janesky – Stifel Nicolaus

Operator

Welcome to the Cross Country Healthcare first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today's conference is being recorded and if you have any objections, you may disconnect at this time.

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 our 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 Emile Hensel, our Chief Financial Officer. On this call we will review our first-quarter 2010 results, for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our website at www.crosscountry.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 expects, anticipates, beliefs, estimates and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results in 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 first quarter of 2010, as well as under the caption "Risk Factors" in our 10-K for the year ended December 31, 2009.

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 as expressed or implied in such forward-looking statements. And now, I will turn the call over to Joe.

Joe Boshart

Thank you, Howard. And thank to everyone listening in for joining us this morning. As reported in our press release issued last evening, our revenue for the first quarter of 2010 was $121 million, down 31% from a year ago. Net income was $1.1 million, down 63% from the year-ago quarter. EPS was $0.04 per diluted share and cash flow for the first quarter was $10.3 million. On a sequential basis, revenue was down 2% from the fourth quarter of 2009, which was primarily the result of two less billing days.

So at this point we believe we have weathered the worst of the downturn in our operating environment and have emerged in an attractive competitive position, given the relative strength of our balance sheet and our recent organic market share gains. Two years ago on our quarterly public conference call and reiterated several times subsequently, we outlined our strategy to investors, which was to grow our market position and our margins in our core nurse and allied staffing business, make strategic acquisitions in high-growth, high-margin businesses, opportunistically buy back our shares and maintain a strong balance sheet to provide financial flexibility.

While these strategic objectives may not have sounded particularly exciting at the time, our discipline in staying true to these objectives has resulted in our relative outperformance, vis-a-vis competitors. And at all times, we maintain control of our destiny by staying well within the covenants and commitments we made to our lenders in the past. As a result, we believe we currently have the lowest borrowing cost among major competitors in our industry.

In 2009, despite the worst operating environment in almost two decades, we maintained profitability in every quarter, even after including a significant cost to right size our organization, which were accounted for as ordinary operating expenses. At the same time we re-engineered processes and improved the capacity of our operating platform so that when substantial staffing volume growth does return, we expect to be more efficient and more profitable than in the past in a healthcare market that continues to have very attractive long-term characteristics.

Our present challenge is to maintain the same level of discipline in our management approach while also being open to compelling M&A opportunities now that the market appears to have found a bottom. While we are not happy with the results we reported last evening, we believe they should be looked at on a relative basis. To wit, our gross margin in the first quarter was up 270 basis points from the prior year and when looked at over the past two years relative to public competitors, it is clear no one has done a better job on this critical metric.

Even with this focus on margins, we believe our market share in travel nurse and allied staffing has increased versus all major competitors during 2008 and 2009.

We ended the quarter with a debt leverage ratio comfortably within the maximum leverage allowed under our credit agreement. And more importantly, during the second quarter we made the final earn-out payment for the MDA acquisition of $12.8 million using cash on hand and expect to end the quarter with less debt than we began the quarter.

Although the national labor market and hospital admission trends remain weak, evidence of a modest improvement can be seen. The enactment of healthcare reform should remove the uncertainty that has hung over our market for more than a year. While many aspects of reform will take years to implement, what we do know appears to have favorable implications for our business.

For example, near universal coverage should improve the volume of admissions to acute care hospitals, our primary customer base, which is likely to increase demand for nurse staffing. In addition, the large increase in insured population should increase demand for primary care physicians and nurse practitioners, which should also benefit our allied physician staffing and permanent placement business.

In summary, our business is healing. We are in excellent competitive position and I believe our future is as bright as ever. With that, I would like to turn the call over to Emile, who will update you in more detail on our first-quarter financial performance. Emile?

Emile Hensel

Thank you, Joe and good morning everyone. First, I will go over the results for the first quarter and then review our revenue and earnings guidance for the second quarter that we provided in the press release issued last evening. Revenue in the first quarter was $121 million, down 31% versus the prior year and 2% sequentially. The year-over-year decline reflects the very weak demand that we have been experiencing for the past 18 months. The sequential decrease is due to two fewer days in the first quarter as compared to the fourth quarter.

Our gross profit margin was 27.7%, up 270 basis points over the prior-year quarter, but down 60 basis points sequentially. The year-over-year margin improvement was due to a change in business mix among segments, coupled with improvements in the bill-pay spread as well as lower housing expenses.

The sequential decline is due to seasonal factors related to the reset of payroll taxes. The preceding margin comparisons reflect a reclassification to direct costs of certain prior-year SG&A expenses in our Cejka Physician Search business, to conform with the current year presentation.

The full-year impact of this reclassification would have reduced our 2009 gross profit margin by 70 basis points. SG&A expenses in the first quarter were down at 17% from the prior year, reflecting our efforts to reduce overhead expenses during the past year. On a sequential basis, SG&A expenses were up 1.5% due to the reset of payroll taxes. Our SG&A expenses in the first quarter included approximately $600,000 in equity-based compensation expenses as compared to approximately $300,000 in the prior-year quarter.

Net interest expense was $1.1 million, down 38% from the prior-year quarter and 19% sequentially, reflecting the continued delevering of our balance sheet made possible by our strong operating cash flow.

Depreciation expense was down 7% from the prior-year quarter, due primarily to a substantial amount of fixed assets becoming fully depreciated during the past year, coupled with fewer new assets being placed in service as a result of significantly lower levels of capital expenditures.

The effective income tax rate was 14% in the first quarter as compared to 58% in the fourth quarter. The low tax rate was anticipated when we provided our guidance for the first quarter and resulted from certain one-time discrete items that affected us favorably this quarter and unfavorably in the prior quarter. The effects of these discrete items were amplified by the relatively low book pre-tax income in both quarters. For the remainder of the year we expect our tax rate to be in the low to mid-40% range, which is comparable to our 2009 full-year tax rate. That income in the first quarter was $1.1 million or $0.4 per diluted share. This compares to $0.10 in the year ago quarter and $0.1 in the fourth quarter of 2009, which includes impairment and legal settlements charges of $0.4 per diluted share.

Turning to the balance sheet, we ended the quarter with $57 million of debt and $13 million of cash and short-term cash investments. Our leverage ratio as defined in our credit agreement was 2.0 to 1, well under the 2.5 to 1 ratio allowed. Amount of cash, our debt to total capital ratio was 14% and the current ratio was 3.0 to 1.

Day sales outstanding were 50 days, down four days from the prior year and two days sequentially. We generated $10.3 million of cash from operating activities in the first quarter. Capital expenditures totaled approximately $300,000 in the first quarter. Some of the cash from operations was used to repay a net of $5 million of debt during the quarter, with the remainder held as cash reserves in anticipation of the last remaining earn-out payment on the MDA acquisition. Subsequent to the end of the quarter, we completed the $12.8 million earn-out payment entirely out of cash on hand.

Let me drill down next into our four reporting segments. Revenue for the Nurse & Allied Staffing segment was $64.7 million, down 38% versus the prior year and 1% sequentially. The average 2,368 field FTEs in the first quarter, down 35% versus the prior year, but up 2% sequentially.

The year-over-year decline of staffing volume reflects the steep drop in demand as we experienced in 2009, which we believe was caused by a combination of a weak national labor market, a reduction in surgeries and the impact of the liquidity crisis on our hospital clients.

Net weeks booked in the first quarter were down 30% versus the prior year. The sequential volume increase is the result of the improvement in relative bookings during the second half of 2009. The revenue per FTE per day that we reported for the first quarter declined 5% from the prior year due to a 3% decline in the average hourly bill rate in the travel nurse staffing business from the prior-year quarter and a relatively higher mix of per diem staffing, where a significant portion of the hours come from certified nurse assistants who are billed and paid at lower average rates.

Contribution income, as defined in our press release, was $5.9 million in the first quarter, down 41% from the prior year and 18% sequentially. Segment contribution margin was 9.1%, down 40 basis points from the prior year and 190 basis points sequentially. The year-over-year margin decrease is due to negative operating leverage, partially offset by improvement in the bill-pay spread and lower housing expenses. The sequential decline in margin is due to higher professional liability insurance, higher compensation costs partly as a result of the reset of payroll taxes, as well as the impact on housing expenses of two fewer days in the first quarter.

Let me turn next to our physician staffing segment. Revenue was $31.1 million in the first quarter, down 19% from the prior year and 6% sequentially. Physician staffing days filled were down 19% from the prior year and down 10% sequentially. The recession and the weakened housing market appeared to have delayed the retirement plans of many older physicians, these factors, along with a reduction in the number of surgeries has resulted in a decrease in demand for temporary physician. The decline in demand was particularly large in anesthesiology which is historically has been MDA's largest specialty area.

Contribution income for the first quarter was $2.9 million, representing a 9.3% contribution margin, up 80 basis points from the prior year but down 220 basis points sequentially. The year-over-year margin improvement was due to changes in specialty mix, coupled with strong expense control. On a sequential basis, the margin decline was due to a favorable professional liability accrual adjustment in the fourth quarter.

Revenue in our clinical trial services segment was $15.2 million, down 28% from the prior year but up 2% sequentially. Contribution income was $1.6 million, down 28% from the prior year but up 72% sequentially. The environment for clinical trial services was weak during 2009, stemming from a slowdown in clinical trials caused largely by economic factors and financial market conditions, along with uncertainty concerning research and development activities following the recent wave of mergers and acquisitions in the pharmaceutical and biotechnology sectors.

In our business, we are seeing gradual improvement in the core clinical staffing component of this business, while the drug safety monitoring and regulatory compliance advisory businesses remain weak.

Revenue for the other human capital management services segment was $10.4 million, down 7% from the prior year and 3% sequentially.

Contribution income was $1 million, essentially flat on a sequential basis but up 10% from the prior year. The year-over-year improvement in contribution income reflects the relatively strong performance of our education and training business.

This brings me to our guidance for the second quarter of 2010. 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 or other business combinations, impairment charges or valuation allowances or any material legal proceedings.

We project the average nurse and allied field FD count to be in the 2150 to 2200 range in the second quarter, implying a 7% to 9% sequential volume decline for the nurse and allied staffing segment, partly due to seasonal factors. On a consolidated basis, revenue for the second quarter is expected to be in the $117 to $120 million range.

We expect approximately 28% gross profit and 5% EBITDA margins in the second quarter. Interest expense is projected to be approximately $1.1 million and our effective tax rate is expected to be in the low to mid 40% range.

Bases on these assumptions, earnings per diluted share are expected to be in the $0.2 to $0.4 range. Additionally, we expect our debt leverage ratio, at the end of the second quarter to be around 2.0 to 1, well below the 2.5 to 1 allowed under our credit agreement.

This concludes our formal comments. At this time, we will open up the lines to answer any questions that you may have. Lory?

Question-and-Answer Session

Operator

Thank you. At this time we are ready to begin the question-and-answer session. (Operator Instructions) Our first question comes from Tobey Sommer with SunTrust.

Frank Pinkerton – SunTrust

Hi. This is Frank, in for Tobey. In your prepared remarks on the nursing side, you mentioned a higher mix of per diem. I wanted to see if you could give any additional color about that, or any visibility you see there?

Joe Boshart

Yes. Frank, the per diem is roughly flat year-over-year and because of the declines in the travel nursing business it has, by definition, taken a higher share of the overall revenue that we report. I think most clients are more inclined to take less risk. If you take a step back and look at some of what's been reported already, companies that are in the high-cost segment of nurse staffing have suffered the most. I think it's a very cost-conscious market right now and one that wants to take the lowest commitment it can get. And per diem is, by definition, the lowest duration of temporary staffing commitment that a hospital can make. So I think, as a result, it has tended to have better dynamics, better trends over the last 18 to 24 months.

Frank Pinkerton – SunTrust

Okay. Great. And on the physician side, you mentioned anesthesiology and surgery being slightly weaker. Any stabilization in that as you look out across, even in the next quarter or two, any signs that that's stabilizing?

Joe Boshart

Well, I think it has been stabilizing; it's just stabilizing at a significantly lower level than what we were historically accustomed to. It isn't getting worse, it doesn't appear to be getting better either.

Frank Pinkerton – SunTrust

Okay. Great. And one quick numbers question. What's the share count embedded for guidance?

Emile Hensel

$31.5 million.

Joe Boshart

Shares.

Emile Hensel

All right. Shares, right.

Frank Pinkerton – SunTrust

Thank you very much.

Joe Boshart

Okay. Thanks, Frank.

Operator

The next question is from Paul Condra with BMO Capital Market.

Paul Condra – BMO Capital Markets

Hey. Excuse me. Great. Thanks for taking my call. I wondered if you could comment, are you seeing any changes in the length of nurse contracts or any trends there that you could identify.

Joe Boshart

Yeah. They have become shorter as – consistent with the answer I just gave. The hospitals tend to be leaning more towards a lower length of commitment. That has been a trend that has been in place for a while. I don't think it's getting, as we speak, worse, it's just historically we were very close to 13-week contracts on average and today that is closer to 12 weeks. Many of the physicians in our system have – and are two-month or eight-week durations, so it is a reality of the current environment, but one that we've been able to navigate and making adjustments to the package that we offer to nurses. That allows us to, as you can see, maintain or even grow our margin.

Paul Condra – BMO Capital Markets

And has that declined – I'm mean, has that happened pretty steadily over the past year or so or have you seen it sort of accelerate at certain points or slow, anything like that?

Joe Boshart

I think at this time last year the change was more abrupt. I don't think year-over-year it's significantly lower. In fact it may even be a little higher. I just don't have the information in front of me. Emile, do you have any?

Emile Hensel

I think you're correct. I think that's stabilized.

Joe Boshart

Great.

Paul Condra – BMO Capital Markets

Okay. Great. Thank you. And then, I just wondered, maybe you could comment on the bill rate also. Are you seeing any further pressure there or how does that look?

Joe Boshart

Well, I think it's been remarkable how well bill rates have held up in a very demand-constrained environment. We did, as we reported, Emile just discussed, show 3% year-over-year bill rate declines. I don't expect it to get worse than that. Some of that 3% is really a function of the geographic mix of our business. We're seeing a little more relative strength in markets like Arizona and Florida than we've seen for a couple of years in the mix of our business and those tend to be lower bill rate locations because of the lower cost of housing in those markets.

So not all the 3% is really a function of – year-over-year declines in bill rates, some of it is just a change in where we're actually placing nurses. I'm hearing very few bill rate increases. I do hear of bill rate decreases. So my gut is that the topline will continue to be somewhat negative on a dollar-per-hour basis. But, again, as you can see in our gross margin numbers that we've been able to offset that lower bill rate where it is evident with lower pay rates and it's just the nature of the market today that it is more a function of demand than supply to grow the business right now and we're able to offset any topline pressure with a reduction in our direct cost.

Paul Condra – BMO Capital Markets

Great. That's very helpful. And just to stay on with this topic. In the last quarter, you mentioned that you were seeing about two to three open orders per nurse and this had been below the historical five to ten level. I wonder if you could talk about those trends at all.

Joe Boshart

We're almost at an identical point in demand. The level of demand is essentially the same as it was when we reported in March.

Paul Condra – BMO Capital Markets

Okay. Thank you. And just one more quick one, did you make any other debt payments in the second quarter, aside from the MDA earn-out?

Emile Hensel

Yes. We made – we prepaid an additional $5 million of debt during the second quarter. Oh, the second quarter or the first quarter?

Paul Condra – BMO Capital Markets

Yes. Sorry.

Emile Hensel

No further prepayments in the second quarter.

Joe Boshart

As we said in the – we do anticipate ending the quarter with less debt than we ended the first quarter.

Paul Condra – BMO Capital Markets

Okay. Great. Thank you very much.

Joe Boshart

Thanks, Paul.

Operator

Thank you. (Operator Instructions) The next question is from Jim Janesky with Stifel Nicolaus.

Jim Janesky – Stifel Nicolaus

Yes. Joe, can you give us an idea of – how the nurses are reacting to the improving employment environment. It's not, it certainly isn't a terrific employment situation but it is improving, versus last year at this time, if not for all of 2009. It's just – are there any changes in the way, any changes in turnover or anything you're experiencing?

Joe Boshart

No. If you look at the BLS data, they're a little more favorable or maybe a little less unfavorable than they had been trending. Clearly, there's still a lot of hiring going on in the healthcare sector. Anecdotally, you do still hear of hospitals having waiting lists of nurses that would like to either come on staff or pick up more shifts. So I think, inevitably, that dynamic will change with a strengthening labor market, but when you take a step back the labor market isn't especially strong. It's just not as, horrifically, negative as it was a year ago. It was modestly positive in the last jobs number that came out.

We hope to see a continuation of that trend tomorrow. But I wouldn't – it is not our expectation that we're going to get a real inflection in job creation. And I think that's really what's needed to change the behavior and the psychology of nurses and their willingness to work as many hours as they have been directly for hospital employers.

Jim Janesky – Stifel Nicolaus

You touched upon healthcare reform, there is some uncertainty but it's going to take – There will probably be some changes, of course and then it could take a couple of years to enact. I mean, do you think hospitals will – that the reform could start affecting hospital decision-making ahead of enactment?

Joe Boshart

I think uncertainty was a negative across all our businesses. I think it affected the behavior of physicians. I think it did kind of paralyze hospitals, just not knowing, where we're going. I know that hospitals are concerned about where reimbursement is going to go over the next couple of years. Just anecdotally, we hear that that is a concern. But I think now that the – at least you can understand what the playing field looks like. I actually think that's going to be a positive, directionally, a positive for the business. We'll just have to see how that plays out.

Jim Janesky – Stifel Nicolaus

Okay. Thanks.

Joe Boshart

Okay. Thanks for calling in, Jim.

Operator

And at this time there are no further questions.

Joe Boshart

Okay. Well, we would like to thank everyone for joining us on the call. And we look forward to reporting you on our second-quarter results this summer. Take care.

Operator

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

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Source: Cross Country Healthcare, Inc. Q1 2010 Earnings Call Transcript
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