Cross Country Healthcare's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 6.14 | About: Cross Country (CCRN)

Cross Country Healthcare, Inc. (NASDAQ:CCRN)

Q4 2013 Earnings Conference Call

March 6, 2014 10:00 AM ET

Executives

Emil Hensel – CFO

Bill Grubbs – President and CEO

Analysts

Tobey Sommer – SunTrust

Josh Vogel – Sidoti & Company

Ty Govatos – TG Research

Henry Schein – BMO Capital Markets

Brandon Fazio – UBS

Operator

Good morning, and thank you all for holding. Welcome to the Cross Country Healthcare Full Year and Fourth Quarter 2013 Earnings Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer portion. And I would like to remind all parties the call is now being recorded, if you have any objections please disconnect at this time.

And I would now like to turn the meeting over to Mr. Emil Hensel, Chief Financial Officer of Cross Country Healthcare. Sir, you may begin.

Emil Hensel

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 is Bill Grubbs, our Chief Executive Officer.

On this call, we will review our fourth quarter and full year 2013 results for which we distributed our earnings press release last evening. 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 expects, anticipates, believes, appears, 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 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 Statements section of our press release for the fourth quarter of 2013, as well as under the caption, Risk Factors in our most recent 10-K and our other SEC filings.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties and 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.

Also, our remarks during this teleconference refer to non-GAAP financial measures. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for, or superior to financial measures calculated in accordance with U.S. GAAP. General information related to these non-GAAP financial measures is contained in our press release.

And now, I’ll turn the call over to Bill.

Bill Grubbs

Okay. Thank you, Emil, and thank you for everyone for your interest in Cross Country Healthcare.

First, I would like to start by thanking Emil for his 23 years of service. As we announced in our press release last evening, he will be retiring as a Director and as our Chief Financial Officer.

Emil started with the company after it was acquired by WR Grace, I think at the time we were about $80 million in revenue, and Emil has been with us as we have grown through the WR Grace time, a private equity ownership and through the process of going public. Emil has been through three CEOs, many acquisitions and divestitures and all of the ups and downs and the economic cycles.

He was more than a CFO having first been involved in operations many years ago, but mostly he was the person that helped the company to grow by building our infrastructure and financial systems and controls. I spoke to Joe Boshart the other day, our Former CEO, who worked with Emil for 20 years and although he said a lot of positive things about Emil, but the one that stood out was that Joe said he slept well at night knowing that Emil is a man of integrity and would keep the company on the right track financially.

So on behalf of the Board, management, all of our employees and the shareholders, I want to thank you Emil for your 23 years of service and I wish you well in retirement.

On April 1st, Bill Burns will join Cross Country Healthcare as our new CFO. Bill brings over 20 years of finance experience and as both public company and staffing industry experience. Emil has agreed to remain with the company has a special advisor through June 3rd in order to assist us with a smooth and orderly transition. I welcome Bill to the company, and again, Emil, we wish you well.

So I will provide a review of the quarter and then an update on our strategic initiatives and the progress we are making so far. Emil will cover full year results later, and I’m happy to take any questions you have on the quarter or the year.

Let me start with an overview. Revenue in the fourth quarter was $109 million down 2% from the prior year and up 1% sequentially. And although organic revenue not including the acquisition we made in early December was slightly below expectations this quarter. I’m pleased with our progress, our financial discipline, our new pipeline and the progress we made on our initiatives and I will talk about those a little bit later. And those right now are favorably impacting our growth in 2014.

We did finish Q4 with positive momentum and that has continued into Q1. Our revenue in our Nurse and Allied segment was up 1% year-over-year revenue declined 6% at physician staffing, and 11% in Other Human Capital Management segments.

Adjusted EBITDA margin was 1.6% within our guidance of 1% to 2%. Remember in Q3, our adjusted EBITDA was 2.7% because of the cost cutting initiatives earlier in the year, I previously announced that we would be reinvesting most of the cost savings and new growth initiatives which we have done.

At the end of the year, we incurred non-cash impairment charges related to certain trade names as well as a change in the valuation of our deferred tax assets. Emil will clarify some of these issues later in the call.

As a result loss from continuing operations after taxes in the fourth quarter was $35.5 million or $1.14 per diluted share, excluding acquisition costs as well as the non-cash valuation allowance on our deferred tax assets and impairment charges income from continuing operations and loss per diluted share would have been approximately breakeven.

Gross profit was 26.2% up 120 basis points from the prior year’s quarter. The margin improvement was primarily driven by lower insurance cost and lower housing cost in our staffing businesses. Our team continues to do a good job in driving efficiencies in our housing program. And also as well as increase in the bill/pay spread in our Nurse and Allied segment excluding the recent acquisition, and partially offset by higher physician provider fees. As I mentioned earlier in our Nurse and Allied Staffing business year-over-year revenue was up 1% and 6% sequentially organically revenue was down 4% year-over-year and up slightly sequentially.

After couple of quarters with anemic demand, we saw a strong demand for the end of Q3 and all through Q4 driven by new electronic medical records projects and increased orders from our MSP customers. Our book-to-bill ratio was 102% in Q4 and is running at a 105% in Q1 2014. As a result, we are now seeing our nursing head count grow and we expect that to continue.

We continue to experience decreased demand in our physician staffing business in Q4, revenue was down 6% year-over-year, and 8% sequentially due in part to seasonality. However, we did see positive trends in December with revenue up year-over-year that trend has continued into the first quarter.

Our Other Human Capital Management Services segment was down 11% year-over-year and essentially flat sequentially. Our search business showed weakness throughout the quarter, our education business showed sequential growth. Our search business continues to be sluggish in Q1; however, we are seeing positive trends in our education and training business.

Since these were our first public statement since the acquisition we made in early December, let me make a few comments regarding that. On December 2, 2013 we acquired The Allied Health business of On Assignment for $28.7 million. Our strategy – our stated strategy outline the need for us to grow our Allied and per diem businesses in order to be competitive in those sectors and to serve our existing customer needs especially in our MSPs.

The acquisition brings us approximately $40 million of additional Allied business which more than doubled the market share we had previously to the acquisition as well as 23 new office locations that provide a platform for per diem growth and an opportunity to cross sell all our services.

In addition this business gives us access to smaller local customers as well as ambulatory care facilities that we didn’t previously have and which we view as growth areas in 2014. We are on track for completing the integration by the end of the second quarter and the business has continued to perform well. The business is expected to be $0.04 accretive in 2014.

In a couple of minutes, Emil will give you more detail on Q4, the full year and some guidance on Q1.

For the last couple of quarters, this is where I provided an update on our strategic initiatives. I rather than do that let me give you a big picture view on where we are so far in 2014. Remember we are still providing guidance on a quarter-by-quarter basis, but I think some general commentaries in orders since my focus has been on 2014, since I became CEO in July of last year.

All of our businesses have shown momentum coming out of Q4 into Q1 with one exception, our search business which has continued to underperform and although we are working on improving this business, it is only about 3% of our revenue and has a minor impact on our overall numbers.

The strong book-to-bill ratio from the end of Q3 to Q4 for our Nurse and Allied business is starting to show results in our working healthcare professional numbers in Q1. This business had strong Q1 last year based on a very strong flu season, so year-over-year comps are tough to beat. However, we expect sequential growth from Q4 and expect good momentum going into Q2. Of course, this business will also benefit from a full quarter of the acquisition as well.

The acquisition is also performing well in Q1 going forward though when the integration is complete we will no longer track, we will discuss this business on a standalone basis. So we will lose this ability to that after the integration is complete. Our physician business had year-over-year growth in December and that trend continued so far this quarter. We made a number of changes in investments into this business and they are starting to produce results.

Our education and training business is also on a positive trend and should show year-over-year growth in Q1, although they have had many cancellations due to the bad winter and the bad weather this winter.

Let me talk about the weather impact on all of our businesses. So here is some specifics to that. We had 56 seminars in our education training business were cancelled so far this quarter due to weather issues, 12 of our per diem and Allied branch offices were closed in average of 2 business days. Two of our Travel Nurse and Allied Staffing locations in Massachusetts and Pennsylvania were closed for 2 to 3 business days and our physician staffing office in Atlanta was closed for 3 business days. Although it’s difficult to term the exact financial impact of these closures, we estimate our revenue reduction of $1.5 million to $2 million for this quarter.

Getting back to our initiatives in 2014, managed service programs or MSPs continued to be an area of focus for us. We are not yet seeing significant increase in our MSP pipeline although we have some decent activity right now. The ramp up time for our new investments in this area is typically 6 to 9 months. These new investments are on track so far and we expect to see an increase in the pipeline by the end of Q2 and into the second half.

So overall, I’m pleased with how we came out of 2013 and the progress we made with our strategic initiatives, I believe we will continue to see improved results in Q1, and I’m feeling good about 2014 overall. In fact, I will come back after Emil gives guidance for our Q1 and talk a little bit more about our progress.

At this point, I will turn the call over to Emil, our Chief Financial Officer to go with the fourth quarter in more detail and our first quarter guidance.

Emil Hensel

Thank you, Bill. Let me first turn first to the results for the fourth quarter. Revenue in the fourth quarter was $109 million down 2% from the prior year and up 1% sequentially. Our fourth quarter revenue includes $3.4 million from the acquisition of On Assignments Allied Health business which closed on December 2nd.

Organic revenue in the fourth quarter came in below our expectations primarily due to a less robust demand environment in our physician staffing and search businesses. Our gross profit margin was 26.2% up 120 basis points from the prior year and 10 basis points sequentially.

The year-over-year margin improvement was due primarily to a combination of lower housing and field insurance costs in our staffing businesses partially offset by higher provider fees and expenses in our physician staffing business.

SG&A for the quarter was $26.9 million down 0.4% year-over-year, but up 6% sequentially. The sequential increase is due partly to the impact of the acquisition and partly to higher compensation expenses reflecting lean investments in growth initiatives that Bill mentioned earlier.

Equity based compensation expense was approximately $500,000 in the fourth quarter down 24% from the prior year. Adjusted EBITDA as defined in our press release was $1.8 million representing 1.6% margin.

Interest expense of $215,000 was down 50% from the prior year reflecting the repayment of our revolver balance from the proceeds of the sale of the clinical trial services business in the first quarter, but up 13% from the third quarter due to the debt drawn down needed to fund part of the Allied Health acquisition.

In conjunction with our annual testing of indefinite lived intangible assets, we recorded pretax non-cash impairment charge of $6.4 million related primarily to trade names used in our physician staffing segment. Revenue in the segment came in below our expectations due to a soft demand environment resulting in a lower revenue forecast which is the basis for calculating the fair value of our trade names.

Pretax loss from continuing operations was approximately $7.3 million as compared to a loss of $1.3 million in the prior year and pretax income was $0.8 million in the prior quarter. The current quarter includes approximately $500,000 of acquisition-related expenses in addition to the previously mentioned $6.4 million impairment charge.

In the fourth quarter, we recorded $31.2 million valuation allowance on our deferred tax assets based primarily on accumulative loss position. This non-cash charge does not impact our ability to utilize our $78 million pretax, tax NOLs which expire in 16 to 20 years. Once we have sufficient positive evidence for future taxable income we will be able to diverse some or all of this allowance.

Loss from continuing operations after taxes in the fourth quarter was $35.5 million, or $1.14 per diluted share. Income from discontinued operations was $0.3 million; net-loss was $35.2 million or $1.13 per share. Excluding acquisition cost as well as non-cash valuation allowance on our deferred tax assets and impairment charges net income and earnings per diluted share would have been approximately breakeven as shown in the table labeled reconciliation of non-GAAP financial measures in the press release we issued last – yesterday.

Turning to the balance sheet, we ended the quarter with $8 million of cash and cash equivalents $8.6 million of debt and the current ratio of 2.1 to 1. Days sales outstanding was 51 days down one day from the prior year quarter, but up two days from the third quarter. Net cash used in operations was $2.9 million reflecting the two day sequential increase in DSOs. For the year as a whole, net cash provided by operations was $8.7 million. Capital expenditures totaled approximately $1.1 million in the fourth quarter and $1.8 million for the year as a whole.

Revenue for the full year 2013 was $438 million down 1% from prior year while adjusted EBITDA from continuing operations was $8.4 million up 110% from prior year. Net-loss was $1.12 per share as compared to $1.37 per share loss in the prior year.

Let me drill down next into our three reporting segments. In our Nurse and Allied Staffing segment, we averaged 2,531 field FTEs in the fourth quarter including 226 FTEs from the acquired business. On an organic basis, our average field FTEs were down 6% from prior year and up1% sequentially. Segment volume came it at high-end of our guidance range provided in our October call and reflects a consistent strengthening of our booking activity that started in the middle of the third quarter. For the fourth quarter as a whole the book-to-bill ratio averaged 102%. The book-to-bill ratio is averaging a strong 105% so far in the first quarter. Segment revenue in the fourth quarter was $71.2 million which include a $3.4 million from the Allied Health acquisition that closed in December.

On an organic basis, segment revenue was down 4% from prior year and up 0.6% sequentially. Organic revenue per FTE per day was up 2% from the prior year due to higher bill rates and down 0.5% sequentially due to fewer average hours’ work per FTE. Segment contribution income as defined in our press release was $5 million in the fourth quarter representing a 7% contribution margin up 190 basis points from the prior year and down 10 basis points sequentially. The year-over-year margin improvement was due to a combination of lower housing and insurance cost as well as the continued widening of the bill pay spread partially offset by an increase in SG&A due to compensation expenses. For the year as a whole, segment revenue was $279 million up 0.4% from the prior year; our contribution income was $19.2 million up 69% from prior year.

Let me turn next to our Physician Staffing segment. Revenue was $28.9 million in the fourth quarter, down 6% from prior year and 8% from prior quarter due to lower volume partially offset by pricing improvements. Physician days filled were down 8% from prior year reflecting the soft demand environment and 10% sequentially in part due to seasonality.

The average revenue per physician days filled was up 5% from prior year and 1% sequentially. Segment contribution income for the fourth quarter was $1.8 million representing a 6.2% contribution margin, down 180 basis points from the prior year and 80 basis points sequentially. The year-over-year margin decline was due to a decrease in permanent placements as well as higher provider fees and expense reimbursements; the sequential decline was due primarily to a favorable professional liability accrual adjustment in the third quarter. For the year as a whole, segment revenue was $121.4 million down 2% from prior year and contribution income was $8.6 million down 19% from prior year.

Revenue for the Other Human Capital Management Services segment in the fourth quarter was $9.1 million down 11% from the prior year and essentially flat sequentially. The year-over-year revenue decline was due primarily to fewer retained search sales in our Physician Search business and secondarily to a less seminars held by our Education business.

Segment contribution loss was $133,000 as compared to income of $534,000 in the prior year and $55,000 in the prior quarter. The decrease in contribution income was due to negative operating leverage in our search business partially offset by margin improvement in our Education business. For the year as a whole, segment revenue was $38 million down 8% from prior year our contribution income was $745,000 down 62% from prior year.

This brings me to our guidance for the first quarter. 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 or restructuring charges.

We project the average Nurse and Allied Staffing field FTE count to be in the 3,050 to 3,100 range in the first quarter. Consolidated revenue is expected to be in the $119 million to $121 million range. We expect sequential revenue growth in our Nurse and Allied segment in the high teens roughly evenly split between organic and acquired growth and essentially flat revenue from our Physician Staffing segment and our Other Human Capital Management Business segments.

We expect our gross profit margin to be in the range of 26% to 26.5% which includes the expected negative impact of the payroll tax reset as well as the favorable impact of the acquisition and adjusted EBITDA margin to be in the 1% to 2% range which assumes no additional weather related closings or cancellations.

As Bill mentioned earlier there was an estimated impact so far this quarter a $1.5 million to $2 million in revenue from the weather and $400,000 to $500,000 of adjusted EBITDA impact. Our adjusted EBITDA margin guidance without the weather impact would have been 1.5% to 2.5%.

Interest expense was expected to be approximately $250,000 in the first quarter. Depreciation and amortization expense is expected to be up sequentially by approximately $250,000 reflecting the impact of the acquisition.

Let me turn the call over to Bill for some concluding remarks.

Bill Grubbs

Okay. Before we go to questions, I wanted to comment on our guidance. I’ve already received from feedback that there were some higher expectations for Q1. Let me tell you, nobody is more impatient than I am to see positive momentum. But from my perspective, we’re actually right on track where we’re expected to be.

Let’s review how we got here, in June, right before I became CEO, we started a cost cutting initiative, we saw those results show up in our Q3 numbers. We reinvested those savings into growth strategies in Q4. And although there has not been a huge amount of time for those investments to impact our results, they are starting to take hold.

Let me talk about Nurse and Allied, our Nurse and Allied Staffing had a very good Q1 last year because of a strong flu season. We still may end up with year-over-year growth for Q1 this year, but if we don’t, we will have year-over-year growth in Travel Nursing for the quarter and Nurse and Allied will have year-over-year growth for February and March, that’s giving us momentum going into Q2.

Physician Staffing had year-over-year growth in December and quarter-to-date through January and February, we’re also up year-over-year and we’re seeing more demand in this area. Our Education and Training business is also on a good track and we might still have year-over-year growth even with the weather impact. We would have definitely had year-over-year growth without the weather impact. But, we average about 400 seminars per month and we had 56 cancellations in February, that’s a lot for us to absorb. But, even with that we still may end up with year-over-year growth in our Education business. We’re hoping that these weather issues are a one-time issues, but regardless the underlying trend is pretty positive.

So, I feel pretty good about our progress, our two largest business, Nurse and Allied and Physician seem to be on a very positive track. Our Education business seems to be on a positive track and it’s only our Physician and Executive Search business that is underperforming today. And we will have good sequential growth overall in Q1 and specifically in Nurse and Allied. But also our MSP business is expanding and growing and although most of our investments will take six to nine months to ramp up, we’ve been successful in three areas, one, we’ve expanded the scope of services in seven of our MSPs and we also won a new facility a very large facility in one of our existing MSPs as well. We’ve had increased order flow in our MSPs, and we’re filling a higher percentage of our MSP position.

If you remember at the beginning of Q3, we were filling about 76% of all the orders we got, at the end of Q3, we’re filling about 80%, last week we filled 85%. So we’ve seen a pretty good uptick in our MSP business and it’s currently at a run rate of about – approximately $150 million on an annualized basis, which is about 50% of our Nurse and Allied business and 30% of our business overall.

So our guidance would have been a $121 million to $123 million in revenue and 1.5% to 2.5% adjusted EBITDA without the weather impact, that is exactly where we expected to be and we expect to continue with steady progress and improvements in subsequent quarters.

So that concludes our prepared remarks. At this point operator, can we open it up for questions please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today is from Tobey Sommer from SunTrust.

Tobey Sommer – SunTrust

Thank you. Emil congratulations and good luck in retirement.

Emil Hensel

Thank you very much Tobey.

Tobey Sommer – SunTrust

I wanted to ask about pricing primarily in the Nursing business, but to the extent you want to make comments about other businesses, that’s fine. And I asked the question in the context of average revenue per day down in the quarter, some color that you could provide in that with respect to that would be helpful. Thanks.

Bill Grubbs

Let me start with the actual bill rate and bill/pay spread and then I don’t know – I don’t remember what the stat on the average per day. But, Tobey overall our Travel Nursing in particular, the bill rates are up, they’re up about $0.23 from last quarter and they’re up this quarter about 0.5% and are up about 2% from the same quarter last year, a little above $65 average bill rate on the Travel Nursing.

And the bill/pay spread has also improved and that’s a fourth quarter in a row that we’ve been able to increase the bill/pay spread that’s up about 2% from last quarter and almost 4% from the same quarter of last year. So we feel pretty good about the Travel Nursing pricing overall. Emil, what do you have for the average?

Emil Hensel

Well, I think we need to factor in the impact of the acquisition because the average bill rates for our Allied Health business that we acquired are significantly lower than our overall average for the segment as a whole. If you look at it just on an organic basis, revenue per FT per day for the segment would have been up approximately 2%.

Bill Grubbs

Well, that’s what I forgot about that. So the average bill rate by the way Tobey in the new acquired business is about $30 an hour about – less than half of what we have in our Travel Nurse business.

Tobey Sommer – SunTrust

Perfect. That’s helpful. My next question has to do with the book-to-bill that you described in the quarter and then kind of quarter-to-date and I think 105% so far in the first quarter. Is there a – any color you could provide on how that trend looks within the first quarter by segment?

Emil Hensel

That number Tobey refers to our Nurse and Allied segment only.

Tobey Sommer – SunTrust

So it’s specific, okay.

Emil Hensel

To that. I should point out though that seasonally that’s an extremely strong number, we’ve been tracking this statistic for the past nine years and 105% is the highest we had. We had one other year that we – for the same reset we have 105%. So this is a very strong number.

Tobey Sommer – SunTrust

Refresh memory if you could Emil since you looked at the historical data recently, in a typical year wouldn’t 1Q will be down sequentially?

Emil Hensel

It has been in the last three or four years with one exception I think when we were recovering from the great recession. But, the guidance that we have for the current quarter, even on an organic basis is close to 10% so it’s significantly better sequential story than we’ve had in the past year.

Bill Grubbs

But Tobey, we’re not too surprised. We’ve been stating for a couple of quarters at the end of Q3 we had very strong book-to-bill ratio and all through Q4. But remember Travel Nursing and Travel Allied are booked 30 60 sometimes at the end of the year 90 days ahead you get a lot of orders for January even in the September, October timeframe. So that strong book-to-bill ratio, we do would past or eventually catch up, you can’t carry on with a strong book-to-bill ratio, not see a catch up eventually. So you’re seeing that in the sequential Q4 to Q1 with very high single-digit if not double-digit sequential growth.

Tobey Sommer – SunTrust

Okay. The last question I’ll ask and I’ll get back in the queue is, could you describe the progression of cost synergies from the Allied acquisition throughout 2014 and there are any kind of knowable either quarters or months in which maybe – you get a little bit of cost savings? Thanks.

Bill Grubbs

In the Allied acquisition?

Tobey Sommer – SunTrust

Yes.

Bill Grubbs

Well, the Allied acquisition really that didn’t come with our cost synergies. In fact, we didn’t really pick up any corporate support functions with it. So we picked up a business, if you look at the 8-K filing, we picked up a business that last year did I don’t know $40 million of revenue and a little over $4 million of contribution. We actually had to add cost into that in order to service that business. So we got $3.5 million EBITDA number out of that business.

So there is really no significant cost, since we are combining it with a couple of our offices. So there are some offset to the cost we had to add in there with some cost savings from seven or eight of the offices that we’re combining together, actually I think it’s nine offices we’re combining together. But to be honest with you, the offset isn’t enough. We actually had to add cost into run this business.

Tobey Sommer – SunTrust

Thanks very much. I’ll get back in queue.

Operator

Thank you. Our next question is from Josh Vogel from Sidoti & Company.

Josh Vogel – Sidoti & Company

Thank you. Good morning everyone. And good luck Emil.

Emil Hensel

Thank you, Josh.

Josh Vogel – Sidoti & Company

My first question is regarding the valuation allowance. I was just curious where have your expectations changed, was this is – did you have to take this allowance due to timing, or did it relate to the MDA acquisitions, curious if you can give some detail there?

Emil Hensel

Well, the impairment charge that we took was on trade names related to MDA. And the way we do our annual impairment testing in the fourth quarter. Because the revenue for MDA came in lower than we expected as compared to what last valuation was done a year ago. Even though on growth rates are essentially similar or basically the same as they were in the prior year they’re also lower base. And the impact of that is a lower revenue stream upon which we then calculate a hypothetical royalty rate that determines the value of the trade names that’s just a mechanical exercise and that exercise yielded $6.4 million pretax impairment charge on the trade name.

Josh Vogel – Sidoti & Company

Okay. And what about on the deferred tax asset?

Emil Hensel

Well, the deferred tax asset is more of a technical consideration because we’re in a cumulative loss position. It is very hard to overcome the negative evidence of the utilizability of our deferred tax assets. We fully expect to be able to utilize these assets we have $78 million of NOLs on a pretax basis we have lots of time to use it, 16 to 20 years to use it. So there is not much question in mind that we would eventually be able to reverse these. But under the accounting guidance we really have to book a valuation allowance because we could not overcome the negative consumption – the negative evidence of the three year cumulative loss position.

Josh Vogel – Sidoti & Company

Okay. That’s helpful thank you. And Bill you were talking about improving fill rates on the MSP front. And I may have missed it, I’m sorry, but can you talk about the MSP pipeline in the physician market?

Bill Grubbs

Yes. So we have one locum tenens MSP today. We are in discussions with several of our other existing MSPs to expand it into the locum tenens areas, but we have not closed any of those deals yet. So we still have one locum MSP although this does seem to be interest in that area we’re working on that going forward.

Our pipeline is essentially the same. We have some decent level of activity for new MSPs and if I had to make a guess we’ll close one or two before the end of the quarter. But it’s really the investments we put in there. I don’t really expect those to kick until the end of Q2 maybe into the beginning of the second half of the year. We never had a separate dedicated sales team for our work force management solutions and we do now but again the ramp up time is significant for that.

But we have been as I mentioned earlier very successful at our fill rates. If you remember we use to fill about 85% of our travel nursing jobs about 50% of our allied jobs and 35% of our per diem jobs. We’ve increased in all three areas. We’re now filling close to 90% of the Travel Nursing. We’ve had a couple of weeks on the Allied side that’s been close to 70% fill rate and our per diem is up close to 50% now.

So we’re just doing a better job of that plus we’ve expanded after we acquired the Allied business of On Assignment, and we have now a larger footprint. We’ve gone to some of our MSPs where we have these local Allied offices and we’ve expanded the scope of our services and signed new amendments to expand those services to the local Allied business and we’ve seen success there as well. So our MSP business is growing but mostly off the back of expansion of existing programs.

Josh Vogel – Sidoti & Company

Okay, great. And just couple of housekeeping items. First, do you know, do you have expectations for CapEx for the year and the tax rate?

Emil Hensel

Yes. We expect about $3 million of CapEx for the year and tax rate is a little hard to talk about the tax in percentage terms because of our essentially breakeven pretax numbers that we are expecting. But what I can do is, give you kind of the range of what we think that tax expense is likely to be in Q1. We think it’s going to range between about $150,000 benefit on one end of the spectrum to about $300,000 expense at the other end of the spectrum so it translates to roughly either $0.005 EPS benefit, or a $0.01 expense.

Josh Vogel – Sidoti & Company

Okay. And just lastly as you generate cash, are you going to be focused on paying off the small debt balance we expect interest expense decline throughout the quarters throughout the year?

Emil Hensel

Yes. Absent any acquisitions or otherwise to utilize our balance sheet we will certainly, the second priority the repayment of the debt.

Josh Vogel – Sidoti & Company

Okay, great. Thanks so much. Good luck again, Emil.

Emil Hensel

Thank you.

Operator

Thank you. Our next question is from Ty Govatos from TG Research.

Ty Govatos – TG Research

Hi. Long before I ask the questions, again, best wishes and you’ll be greatly missed.

Emil Hensel

Thank you very much. I appreciate it.

Ty Govatos – TG Research

Can you give us a rundown of what the SG&A might look like in the first quarter and how it will progress through the year?

Emil Hensel

We expect our SG&A expense to – in the second quarter to be in the –

Bill Grubbs

In the first quarter.

Emil Hensel

In the first quarter to be up sequentially primarily as a result of the impact or the full quarter impact of the acquisition as well as some of the growth initiatives that we’ve invested in. The magnitude of the increase on a sequential basis is likely to be about $3 million.

Ty Govatos – TG Research

Okay. And pretty much stay at that level for the year or are there some savings in there?

Emil Hensel

No. That pretty much stays at that level.

Ty Govatos – TG Research

Okay. Other question I guess is maybe for Bill, the other human capital sector, how do you view that whole area now. Are you investing there for growth harvesting the cash flow, can you give us any kind of color on that?

Bill Grubbs

Yes. We’re looking at, if you look at the physician and executive search that has been underperforming now for a number of quarters. So we’re looking at some initiatives to get that back on track again. And that has to do with restructuring of the sales and looking at some of the cost base and some of the marketing and all that. So that’s kind of a little bit of a turnaround at this point. We believe that that’s a key core business of ours, it is complementary to our locum tenens and our other healthcare staffing businesses and so we need to get that back on track again.

Cross Country education is actually on a decent track we have made some investments mostly in its website and its online capabilities which is we have been predominantly in person seminar business, training business going in the past. Going forward we need to shift more and more online but although a very small part of our revenue is growing at a pretty decent pace.

So we’ve made some investments in that area and we expect that to help contribute to its growth overall and as I mentioned, we hadn’t had 56 seminar cancellations, which is a big number for us. It’s actually on a very decent trend we think that’s going to continue throughout the year.

Ty Govatos – TG Research

Okay. Thanks. I appreciate the time.

Operator

Thank you. [Operator Instructions] Our next question is from Jeff Silber from BMO Capital Markets.

Bill Grubbs

Hello.

Operator

Jeff your line is open.

Henry Schein – BMO Capital Markets

Hey, sorry, I had in mute. This is actually Henry Schein calling on behalf of Jeff good morning guys.

Bill Grubbs

He told me that he wasn’t going to make the call. You’re welcome.

Henry Schein – BMO Capital Markets

That’s good. Thanks. Yes. I just had a question about addition demand, I know you mentioned as a little bit of a spilling over the quarter I mean if you could provide us some color on some of the drivers or factors behind any of that demand slowdown? Thanks.

Bill Grubbs

Yes. I think Emil may have a different specialty list. I have it somewhere, but I haven’t buried. While Emil looks to Outlook. I’ll just talk generally. We don’t know 100% sure it seems to be a variety of reasons one, we did see a trend a little bit in the second half of last year where physicians seem to be more willing, physician quite often are independent, certainly our locum tenens are independent, and many of our physicians work at acute care facilities are independent providers.

Many of them now have decided to take permanent employment in the hospital systems just because of circumstances may be uncertainty with Affordable Care Act and liability insurance for whatever reasons. And I think that drove some slowdown in demand from the locum tenens side. We think that’s passed us now and that trend has stopped.

So as I mentioned we saw year-over-year growth in December that we’ve seen year-over-year growth through the first two months of this year. So the demand certainly is starting to improve. Emil can give you a little bit more color on where some of the ups and downs in our specialties.

Emil Hensel

In the fourth quarter we had year-over-year decline – significant declines in the primary care area reflecting the dynamics of physicians taking hospital employment and the physician and hospitals having less need for locum tenens as a result of that at least in the short-term.

We also saw declines in pediatrics and emergency medicine. These are partially offset by some growth in other specialty areas, anesthesia was up year-over-year, oncology was up and a couple of other areas but the declines outweighed the improvements.

Bill Grubbs

We’ve also Henry adjusted a little bit of – we put some investments into this business and adjusted our go-to-market strategy slightly. We’ve always had a slightly different model on the specialties. And we’ve added some kind of enterprise sales people to go out there and sell locum tenens MSPs as well as kind of the full suite of services. We’ve always sold the services on a specialized basis and we now have a more comprehensive approach to selling this. And we expect that and in fact we think some of the increases are benefit of that investment and we hope to improve on that going forward.

Henry Schein – BMO Capital Markets

Great. Thanks guys.

Operator

Thank you. Our next question is from A.J. Rice from UBS.

Brandon Fazio – UBS

This is Brandon Fazio for A.J. Question is just your thoughts on EBITDA margin compression as you think over the next year to – what do you think you need to report from organic revenue growth standpoint sort of get to margins earnings towards – your long-term goal high single-digits. And also just in investment side, it sounds like you’re pretty much done with the sales force investments, now just sort of moving some of the benefits from those investments, I was just wondering – kind of an update on where those things stand?

Bill Grubbs

I think you’re right. We’ve made most of the investments. The few people that we have hired in January and February that may not have been 100% reflective in the numbers. But basically we have made all the investments and you’re right now is to get them up to speed and get the benefit of those investments and some of that will come in subsequent quarters. So we feel pretty good about that and the goal is, if we get an 8% plus EBITDA over time and go ahead Emil you want to add –

Emil Hensel

Well, for the year as a whole, it’s going to take couple of years to get to that number but we expect to make steady progress throughout the year with our adjusted EBITDA margin rising gradually as the year progresses.

Brandon Fazio – UBS

Yes. Thank you.

Operator

Thank you. And our next question is from Tobey Sommer from SunTrust.

Tobey Sommer – SunTrust

Thank you. Just a few modeling items. With the first quarter and the full year, what are you expecting equity comp to be CapEx, and I guess you already mentioned the tax rate so I’ll table that one.

Bill Grubbs

Okay. I think we gave the CapEx.

Emil Hensel

CapEx is [$3 million] [ph] for the year. And equity comp is about $500,000 this last quarter we may see a slight uptick in the third quarter from that – our equity grants are typically done on June – in early June but not a significant increase.

Tobey Sommer – SunTrust

Okay. Thanks. It’s helpful. And Bill, from a broader perspective, I wanted to ask you a question and maybe just hear what you have to say about healthcare reform and how your customers were behaving when you became to Board last summer and end of the fall, primarily I guess I’m talking about Nursing. And then, maybe what’s your hearing from them or about their plans not just next month or next quarter but over a couple of year period, where do you see the opportunity maybe for hospitals to utilize nursing a little bit differently?

Bill Grubbs

Yes. So we’ve been – obviously been a lot of discussions in our regular meetings and quarterly updates and so on and so forth. And I think they have a number of responses, but they have believe there will be increased demand. I think President Obama said that 4 million people have signed up for the Affordable Care Act. There will be more. I think the stat was in Massachusetts, but a huge percent have signed up within like the last 30 days of the program in Massachusetts.

So there will be millions of people that come into the system and usually the ones that sign-up especially the ones that have signed up early are the ones that probably need the insurance more than the young healthy people that may or may not sign-up long-term.

So they’re all expecting an increasing demand, they seem to be prepared. They seem to have looked at what happened in Massachusetts. Massachusetts had a large increase in emergency room attendance after they implemented the similar program. The people here are seem to be ready for that, they believe that if these people come into the emergency room, if you’ve got a broken leg, they’ll treat you, if you’ve got a sore throat they’ll send you down the street to their walk-in clinic that they’ve invested in over the last four or five years. We’ve seen a lot of investment in these hospital systems into clinics. We’ve seen a couple of them actually build clinics right next to their emergency room, so they can actually shift the people over.

And what they’re saying is that it’s hugely expensive to treat somebody in an acute care hospital generally, even more expensive to treat them in the emergency room by being able to put them into a clinical or an ambulatory center an environment it’s cheaper overall environment, but also they will tend to be treated by a physician assistant or a nurse practitioner. And so we’re seeing a lot of that trend, they seem to be prepared for that.

The biggest benefit that I have seen though is because they are not a 100% certain of the total impact. They are looking at the use of contingent labor slightly differently. And they seem to be looking at staffing, their core team to 80% or 85% of what their peak expectations of demand would be and using contingent labor in a more strategic way going forward.

And we are starting to see that at several hospital systems that have already implemented programs in a different way similar to that what you have seen in other segments of staffing where IT departments or call centers have used contingent labor more strategically, hospitals have come late to this. We used to be kind of a necessary evil and now they are starting to embrace the concept as a way to be able to flex up and down in the peak and troughs of demand.

So far I haven’t seen any negative. There are some negatives in the hospital systems for reductions and reimbursements and penalties for readmissions and things like that. But, generally they seem to be prepared and ready to use contingent labor the right way and/or get us into the ambulatory business more than they have in the past, which is part of the reason – the strategic reason for the acquisition we made.

The 23 offices we acquired more than half of their business is in non-acute care environment and that gives us a go-to-market strategy that we never had before to service that part of the market.

Tobey Sommer – SunTrust

Thank you. My last question has to do with the amount of time between matching up a nurse and then having that nurse start the travel job. Have you seen any changes in the duration of time between those two events?

Bill Grubbs

No. I think it still – remember the last report, it’s still about 30 days.

Emil Hensel

30, 31 days.

Bill Grubbs

Towards the end of fiscal year, you do start to see a little bit of an extension of that although we didn’t really this year. But as I mentioned earlier in September to October, we started to get orders for January which was a big part of our higher book-to-bill ratio because people start just planning for the next fiscal year when they get into the fourth quarter. But generally, I’m pretty sure my last report it was still about 30 to 31 days’ time we get an order to when somebody starts.

Emil Hensel

That number really hasn’t fluctuated much. It’s ranged over the past 15 or 20 years since we have been tracking it between four to five weeks.

Tobey Sommer – SunTrust

Thank you.

Operator

Thank you. And sir, I’m showing no further questions at this time.

Bill Grubbs

Okay, great. Well, I appreciate everybody’s interest and your questions today. And we look forward to presenting our Q1 results and I don’t remember the details of that sometime in May. Thank you very much.

Operator

Thank you. And a replay of today’s conference will be available through March 20th. You may access the replay by dialing 1800-365-2419 or 1203-369-3679. Please use the passcode 2014. And thank you for joining. You may now disconnect.

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