Executives
Roy Krause - President and Chief Executive Officer
Mark Smith - Executive Vice President and Chief Financial Officer
Analysts
Mark Marcon - Baird
Andrew Steinerman - Bear Stearns
Jeff Silber - BMO Capital Markets
Mike Carney - Coker & Palmer
Spherion Corp. (SFN) Q1 2008 Earnings Call April 29, 2008 9:00 AM ET
Operator
Good morning and welcome to Spherion’s First Quarter Earnings Conference Call. (Operator Instructions). This conference is being recorded. If you have any objections, you may disconnect at this time.
Now I will turn the meeting over to Mr. Roy G. Krause, President and Chief Executive Officer. Sir, you may begin.
Roy Krause - President and Chief Executive Officer
Thank you, Sherry. Good morning. Welcome to Spherion’s first quarter conference call. Before we begin our prepared remarks, Mark Smith, our CFO, will read the Safe Harbor Statement. Mark?
Mark Smith - Executive Vice President and Chief Financial Officer
This call may contain statements that are forward-looking in nature and accordingly are subject to risks and uncertainties. Factors that could cause future results to differ from current expectations include risks associated with the company’s ability to implement its business strategy, acquisitions, competition, changing market and economic conditions, currency fluctuations and additional factors discussed in this call and in our filings with the SEC. The company’s actual results may differ materially from any projections discussed on this call.
Additionally, we may make statements referencing certain non-GAAP financial measures. Management believes the non-GAAP measures are useful in evaluating our operations, but should not be considered an isolation or as an alternative to financial measures or performance as determined by GAAP. A reconciliation of non-GAAP measures to our GAAP financial results has been provided in our press release, which you can find in the Investors section of our website.
We will make references throughout our presentation today to organic revenue changes and have included calculations of organic revenue changes on our non-GAAP reconciliation schedule. These organic revenue calculations compare actual current year revenues to prior year revenues adjusted to include the results of the acquired companies prior to acquisition on a pro forma basis.
Roy Krause - President and Chief Executive Officer
Thanks Mark. As we reported to you, our first quarter started solidly and many of our key operating metrics were favorable throughout the quarter. Segment operating profit margin expanded 20 basis points compared with last year due to a higher mix of professional businesses and revenues grew 25% all within our higher margin business reflecting our recent strategic investments. Total year-over-year organic revenue comparisons were also up slightly. As the quarter progressed, however, we did see slowing in our revenue trends particularly in commercial temporary staffing and permanent placement.
Current economic conditions appear to be causing both large and small clients to hesitate or pullback and are generally precluding price increases. However, we continue to take market share and our recent acquisitions are generally performing as planned. During this economic downturn, we planned to continue to make investments in our higher margin service lines, while adjusting our cost structure where gross profits are not growing. For the first quarter, adjusted earnings from continuing operations were $0.05 per share compared with $0.07 last year.
As I mentioned the quarter started in line with our expectations in January. Of revenues in February and particularly in March in commercial temporary staffing fell short of our expectations. However, in the first quarter, our top-line results again compared favorably with our North American diversified competitors. I believe this bodes well for us as we should we better positioned for increased growth and operating leverage when the economic cycle ends. We believe that our past efforts of focusing on to mid and small size deals and generating more revenue from higher margin professional services has helped our revenue trends be less volatile over the past 12 months. In fact, small and mid-size accounts now represent 51% of our total revenue compared with 47% in the prior year.
Overall, gross profit dollars in the first quarter grew by 21% and gross profit margin was 22.2% compared with 22.9 last year. The year-over-year decline of 70 basis points is the same reduction that we reported on a year-over-year basis in the prior quarter. The decline was driven by a lower mix of permanent placement revenue and lower commercial temporary staffing margins, partially offset by a greater proportion of the business now being in professional services and recruitment process outsourcing. Professional services now make up 46% of gross profit margin dollars compared with 38% last year.
During the first quarter, we continued our efforts to leverage SG&A spending against increasing gross profit dollars. In Q1, total SG&A as a percent of gross profit improved 70 basis points compared with last year. However, in light of economic headwinds, we’ve began to adjust our cost structure in the areas of the business where we are not seeing gross profit growth. Mark will cover some of the specifics related to cost savings in a few minutes. This improved expense leverage allowed us to produce a higher segment operating profit margin of 2.2%, a 20 basis point improvement over last year. I was encouraged by this improvement as Todays Office Professionals’ back office was not completely shut down until the end of the first quarter and the Technisource back office was operational all quarter. The cost savings associated with both of these back office closures will help to improve our SG&A leverage and segment operating profit margin going forward.
During the first quarter of 2008, we began the integration of Technisource; the acquisition was completed in December of 2007. I am pleased to report that this past weekend we successfully completed the computer conversions onto Spherion systems and now all offices of Technisource are using the standard Spherion systems and processes. Particularly pleasing to us is the fact that this acquisition grew its top-line by 11% in the first quarter, while we were training associates to use new systems and business processes. I want to thank the Technisource associates as well others working on the integration for their focus and performance during this period of change and extra administrative demands.
We will know in a short time whether the US economy is actually in a recession, but it is apparent that the impact of the slowdown expanded in the first quarter. We’ve been through the periods of economic uncertainty in the past and believe that our emphasis on pricing discipline, account size, and skill mix will help us manage through this period and still maintain a strong business going forward. In particular, the strength shown by year-over-year growth in our legacy Technisource business, growing specialties in professional recruitment, and a vibrant RPO pipeline are indicative of the areas of opportunity available in this market.
We’ll continue to diversify our large account business and emphasize the customers that our ability to provide qualified candidates and our appreciation for superior service is more critical than ever in these uncertain economic times.
Overall, our strategy in 2008 will not change. We’ll continue to diversify our large account business and pursue higher margin, small and mid-size business, to maintain our goal of performing better than the market. Additionally, as we complete the integration of these acquisitions, we will manage our cost to return to the benchmarks that worked well for us in the most recent years.
Now, I would like to turn the call over to Mark to review our financial results for the first quarter in a little more detail. Mark?
Mark Smith - Executive Vice President and Chief Financial Officer
Thanks, Roy. In the next few minutes, I’ll talk through our segment results, some balance sheet and cash flow items, and finish up with some additional comments on guidance. So, starting in the first quarter, our Staffing Services revenues were 372 million or about 64.5% of total revenue. On an organic basis, Staffing Services revenues were about flat year-over-year as our acquisition of Todays Office Professionals and several franchise buybacks would have added about $45 million of revenue to our prior year reported revenue on a pro forma basis.
Also due to a delivery model changed, we moved several former Managed Services account to Professional Services effective the beginning of 2007, accounting for about $9 million of the managed services revenue change from year-to-year. On an organic basis, revenues were up about 2% in January, flat in February, and down 1.4% in March, which was a five-week month.
Within Staffing Services revenues in our targeted small and mid-size customers segment were down about 5% year-over-year while our larger accounts grew. Gross profit margins in Staffing Services were 18.5% compared to 19.2% last year. This decrease is exactly the same amount as we saw in the fourth quarter of 2007 compared with the fourth quarter of 2006. The 70 basis point decrease in the quarter was due to lower pay/bill spreads. The pay/bill decline is primarily related to customer mix changes as I mentioned earlier that several larger higher volume, temporary staffing accounts grew during the quarter, offsetting increases from the addition of Todays Office Professionals at a higher GP rate than the average for the segment.
We look at just Temporary Staffing; margins were 15.6% this quarter, compared with 16.2 last year. Within the context of the current market environment, improvements in Temp Staffing margins will be the result of customer mix changes, resulting from the growth of Todays Office Professionals and other small and mid-size customer acquisitions.
Managed Services gross profit margins increased to 31.9% of revenue in the quarter from 28.9% last year. The increase again this quarter related to revenue growth in our RPO business, which grew 27.9% year-over-year.
SG&A and Staffing Services was 66.9 million compared with 61.9 million last year. Segment margin was a 0.5% down from 0.8% in the prior year. We will begin to benefit from further Todays synergies in the second quarter and other cost actions are being taken within Staffing Services to mitigate the impact that lower margins are having on segment returns.
We move on now to our Professional Services segment, where we reported revenues in the quarter of 204 million. Professional Services revenue increased 63.2% on a GAAP year-over-year and 0.5% on an organic basis and now represents 35.5% of total company revenue. The 2007 acquisitions would have added about $69 million of revenue to our prior year reported revenue on a pro forma basis. On an organic basis, growth in our small to mid-size accounts and in our legacy Technisource business more than offset declines in perm placement and large accounts.
Gross profit margins in Professional Services were 29.1% in the quarter, down from 32.8% last year, due almost entirely to the acquisition of Technisource and a lower level of Perm Placement revenues. Perm Placement revenues represented 6.4% of total segment revenue this year compared to 10.8% last year in the first quarter. SG&A in the Professional segment was 48.7 million compared with 34.5 million last year, and the segment margin was unchanged from last year, both this year and last year being at 5.2%.
Unallocated corporate costs were 4.2 million in the quarter, which was about the same as the fourth quarter ‘07 level and up from last year’s first quarter level of 3.2 million. We estimate that unallocated corporate costs will continue to run in the approximate $4 million per quarter level or about $16 million for the year, which is the same level as in 2007 for the whole year.
Amortization of intangibles was 2 million and will continue at this level throughout the year. Interest expense was 1.7 and should decline as we continue to pay down debt. Tax rate in the quarter was 40% compared to 49.1 last year. We expect the rate to remain at approximately 40% as we move through ‘08.
Let me talk about balance sheet and cash flow. We ended the quarter with net debt of 76.5 million. Cash flow from operations was 8.2 million for the quarter. DSO was 52 days excluding Technisource, which was not yet on our systems during the quarter. Technisource added one day to our overall DSO and we now expect improvement in the Technisource receivables now that that business is settling onto our systems and business processes.
CapEx in the quarter was 2.6 million, and I think in our last call, I commented that our ‘08 CapEx was expected to be in the 13 to $15 million range and based upon current conditions, we are going to pull that forecast back to the 10 to $12 million range.
Let me finish my comments by making a couple comments on our guidance for the second quarter. Revenue guidance is 570 to 585. On an organic basis, this guidance represents a year over year decline of between 1 and 4%. Gross profit margins should improve about 80 to 90 basis points sequentially, due to burden improvements as tax caps are attained, and we should see about 1 to $2 million of cost reductions, SG&A reductions due to acquisition synergies and other cost actions being taken.
The most significant sensitivity to our guidance is the performance of Perm Placement. The midpoint of our guidance range assumes Perm Placement revenues approximately flat with the first quarter. Movement above or below this level of Perm will impact where we end up within the guidance range.
Adjusted earnings per share from continuing operations are expected to be between $0.06 and $0.11 per share, again at a 40% tax rate and with shares of around 55 million, and the 6 to 11 excludes about $1 million of final acquisition integration costs.
Roy, back to you.
Roy Krause - President and Chief Executive Officer
Thanks, Mark. 2008 is clearly going to be a year where our operational discipline will be tested and we believe that our focus over the last several years has set us up for a successful year despite the challenging economic conditions, specifically with respect to our four strategic initiatives. First on targeting growth, we continue to believe our emphasis on smaller accounts and reducing the average size of our large accounts is why we are maintaining our overall revenue base better than the market would indicate.
Secondly, on increasing margins; overall this quarter, gross margins declined year over year. But the decline was the same 70 basis points as we experienced in the fourth quarter despite the impact of lower Perm revenues. We believe that gross margins will continue to be challenged in the lower paid assignments and that real margin improvements will result from increasing Professional Services and RPO revenues.
Increased operational efficiency, cost actions in the second quarter will be aimed at balancing SG&A and gross profit growth without diminishing the company’s prospects for future growth, but respecting reasonably attainable revenue levels.
And finally, on financial discipline, we’ll maintain the financial discipline that we’ve had. Our net debt position at the end of the quarter was 76 million, and it was down substantially from the end of the year, and we’ll also continue to purchase a stock under the previously announced plan.
As we move past the integration of Technisource, our efforts will be on organic growth and operation efficiency. We believe that we can operate successfully through this slowdown by organically building our traditional recruiting and staffing business, among smaller accounts while maintaining a reasonably diversified business in a larger account base. We’ve improved our business mix with roughly 36% now in the professional area and we’ve seen the impact on segment margins. While our bottom-line performance wasn’t up to our expectations this quarter, today Spherion is stronger and better positioned to continue to change its business mix and effectively operate in a cyclical industry.
At this point, I would like to open up the call for your questions.
Question-and-Answer Section
Operator
Thank you. (Operator Instructions). Mark Marcon of Baird, your line is open.
Mark Marcon
Good morning, Roy and Mark.
Roy Krause
Hey, how are you, Mark?
Mark Marcon
Good, thanks. Just wondering, could you tell us a little bit more about the Perm trends and how you saw that unfold both on the Staffing and the Professional side? And then, what did you see going into the early weeks of April?
Roy Krause
Perm trends have been spotty, we certainly saw the pullback. We’ve seeing some – just recently some great opportunities in Financial Services, even though you would expect that that would pullback. So, it’s very predictable. I don’t think we can call a specific pullback number, and that’s why we gave guidance relative to about flat. Perm is about 3 or 4% – 3% now I guess of our total business. So, it’s not that material, but it has a big effect on the margins clearly. But the pullback was pretty broad-based across all areas. We did see it stronger I guess in Commercial Staffing than we did in the Professional area. So, I think you can expect that trend to continue as we go into the second quarter. Mark, do you have anything to add?
Mark Smith
Yes, Mark, the one thing I’d add it’s more from kind of thinking forward is, we – last year from the first to second quarter, we saw – there was a pretty decent sequential increase in Perm and just looking at the week-to-week trends in the current numbers, we are not seeing that same kind of sequential increase. So, when we gave you the guidance I talked more from where we are in the first to where we’d be in the second and if we are flat with the first, it will be a reasonable decline on a year-over-year basis, just because of the ramp we saw last year.
Mark Marcon
Sure. Well, and obviously the economy is a lot weaker now than it was a year ago?
Roy Krause
It is weaker, but it is still surprisingly hard to find people, okay? The reduction in the recruiting expenses exactly as much as people might expect, skilled labor still also hard to find.
Mark Marcon
Okay. And then, can you talk a little bit about the Temp gross profit trend that you are seeing in your small market accounts?
Roy Krause
We saw more of a volume pullback there than a margin pullback.
Mark Marcon
Okay. Both on Professional as well as on the Staffing side?
Roy Krause
Well, Professional actually grew, okay, on a volume on a small account basis. And we define small accounts for this – what we are talking about here as less than $5 million. Okay.
Mark Marcon
Yes.
Roy Krause
And we actually saw an increase in large account business in Commercial Staffing and that is what impacted the margins as much as they did in the first quarter. If you looked at our top 60 accounts, approximately half of them were up and half of them were down in the quarter, the largest Commercial Staffing accounts. And, that’s up – the ones that were up, were up actually more than obviously the ones that were down. So, we actually saw a growth, which was a little surprising to us, but the pullback from the run rates were significantly higher than we had anticipated. Historically, we get kind of a 5 to 8% pullback on our portfolio, and, I think market was almost 13% this year, sequentially from Q4 to Q1.
Mark Marcon
Right. Can you talk a little bit about, given the economic uncertainly, how much you would anticipate the expense base could falloff, it certainly sounds like there is going to be some natural expense reductions just due to the integration of Technisource and Todays, is there -- is that the full effect of 1 to 2 million that you talked about on the call or is there is more above and beyond that might come to fruition?
Roy Krause
Right. I think it’s the more above and beyond that, clearly, we are looking at our metrics and what drives individual performing branches. And our goal, first of all is to get the metrics up in those branches and create opportunity, because we want to come out of this thing stronger. So we are not on a program to reduce branches necessarily or anything like that. But, we do believe that there are costs that can be taken out of Commercial Staffing as well as Professional Staffing because we had ramped up their anticipation of higher volume level. But let me give – let Mark kind of walkthrough the synergies and the accretion we expected from the acquisitions and maybe that will give some context for it.
Mark Smith
Sure. When we’ve talked in the past about the acquisition of Todays in Technisource, we’ve talked about roughly $15 million of total synergies between the two acquisitions, and it roughly broke down between $5 million of front office branch consolidation, management consolidation synergies and that was primarily in the Technisource area and then about $10 million of back office closure cost savings. So, and by the end of ‘07 and into the first quarter the front office side of the Technisource changes had been made and the $5 million of savings associated with that activity started to show up in our numbers and we saw some of that in the first quarter and that 5 million from the front end point of view is in our numbers and being realized at this point. That $10 million from the two back office operations, of the 10 we will see about 4 of it this year, we didn’t really see any in the first quarter, we did – there was a 200,000 or $300,000 reduction on the Today’s side, but that was offset by some ramping up we had to do to start bringing the Technisource in, so we didn’t see any of the Technisource’s Todays back office savings in the first quarter. Going into the second quarter now though – now that we are done with Todays and the Technisource is started to wind down, while we will see about a $1 million sequential improvement from Q1 to Q2 on that basis and then we will continue to see sequential improvement in the third and fourth quarter so that – until we get about $4 million of savings in ‘08 and then we will be at the full $15 million run rate in 2009.
Mark Marcon
Okay, great. And then what other areas could you potentially reduce expenses in?
Roy Krause
I mean the obvious ones are to look at underperforming individuals or branches. But again, we are not planning on reducing materially branches and we expect to continue to invest in recruiters on the Permanent. And on the Staffing side, on the Professional area, we had some nice growth in Professional Services on the Staffing Side in the first quarter and the Mergis area and we continue to – expand on that growth termed as little more opportunistic. But, we will continue to look at recruiters that – and people that are performing under the metrics. Obviously, try to get them up and if we can’t, we are going to reduce head count in that area. But, we are not going to be in a massive branch cutting or consolidation basis – I think we’ve reduced our back office cost pretty substantially over the last several years and as you know, I think it’s about – it’s in pretty decent shape given the ability to pick up this 4 or $500 million of revenue with some pretty minimal increases here in Fort Lauderdale.
Mark Marcon
Last question and then I will hop off here. The DSO’s do think that you can keep them at the adjusted level or is there the opportunity to bring them down even further?
Roy Krause
I think our goal is going to get back to that 50 day thing. I think obviously the economy challenges here at time, so I think most of our disruption that we have – from, going from 50 at the end of the year where we had successfully gotten there to 52 or 53 this quarter is a little bit economy, but it’s also just the acquisitions coming together here. Our range is in good shape, I don’t see a huge amount of credit risk there. Mark, do have any comment to make?
Mark Smith
Yes, Mark, I guess the part of the way I look at it, is we should be at 50 days that’s our goal and with the customer mix that we have being roughly 51% small, 49% large that’s going to keep us in that level. As we moved the customer mix I anticipate us being able to bring it down more but, it really more of a function of how we do on the customer side.
Mark Marcon
Okay. Great, thank you.
Operator
Our next question comes from Andrew Steinerman from Bear Stearns.
Andrew Steinerman
Good morning, gentlemen. How do think Technisource is going to be in the second quarter in terms of revenue?
Roy Krause
Well, we’re consolidated now. So the Technisource segment is going to include our lower level high key staffing business infrastructure business that we had – our business in Technisource coming together, Technisource’s margins were higher, their growth was better than ours this quarter.
Andrew Steinerman
Okay.
Roy Krause
Because of the consolidation, we are not going to see the legacy business any longer. So we are going to be talking about the segment business and in this quarter we actually saw better growth in the higher margin and higher bill rated business and we saw decrease in our infrastructure business. Again, I think it’s more customer related than anything else.
Andrew Steinerman
Great.
Roy Krause
But, I don’t have a prediction on the growth rates.
Andrew Steinerman
Right. But the Technisource first quarter 11% is pure Technisource not consolidated right.
Roy Krause
That’s right. It was – and we were able to give you that information and show it because it wasn’t on our system, okay. So, we have the individual, we had consolidated offices we are running two systems in several offices. Now going forward, we will have the business combined and we will look at the whole segment combined.
Andrew Steinerman
Right, but was there many Technisource offices closed?
Roy Krause
Yes, it was a combination of Technisource and/or Spherion offices depending on physical locations. It wasn’t really closed, it was just a combining...
Andrew Steinerman
Right.
Roy Krause
Of resources within a market area.
Andrew Steinerman
All right. But if you were going to squint at Technisource as you think about the second quarter, do you expect a healthy growth to continue there?
Roy Krause
I think our trends into – the first few weeks of April indicate about the exit rate in March both in Commercial Staffing as well as in Professional Services. So, we were flat in both of those businesses on an organic basis and that is the trend that we can see today.
Andrew Steinerman
Okay. And Mark, when you look at the guidance, the revenue figures that you gave for the second quarter 570 to 585 versus the first quarter 576 so when you look sequentially is that all organic, the way I think of it is Technisource closed in ‘07 right, so that would be all organic when you look sequentially?
Mark Smith
The sequential change would be all organic, that’s right.
Andrew Steinerman
Okay, thanks a lot.
Operator
Our next question comes from Jeff Silber from BMO Capital Markets.
Jeffrey Silber
Thanks very much, it’s Jeff Silber. In terms, just a follow-up on the guidance question, can you give us a little bit more color by segment both from the revenue and margin line?
Mark Smith
Okay. Jeff, I’ll walk you through some of the thinking here and make some comments on segment though. I’ll walk you through where we were from the first and get you to the midpoint of guidance for the second quarter. So we are at, in the first quarter we are at $0.05 and 576. And at the midpoint of our guidance range, revenue would be flat with first quarter. But I would expect to see about an 80 to 90 basis point improvement in gross margin across the whole company due to lower burdens associated with employees reaching SUTA or state unemployment thresholds. That 80 to 90 basis point burden relief or pullback would add about 4 to $5 million dollars of margin and about $0.04 to $0.05 cents per share from the first quarter level of earnings. Perm revenue flat with the first quarter would be consistent with an EPS level toward the higher end of the guidance range, mid to higher, while the lower end of the guidance range would reflect Perm being down 2 to 3% sequentially or about 20% in total on an organic basis.
Let me talk a little bit about the segment top line so you can understand where we are thinking that two segments will end up. The high end of the guidance range would be consistent with year over year growth of about 22% and down 1% organically. On a segment basis, Staffing Services would be up on GAAP basis about the same amount as it was up in the first quarter year over year. And Professional Services would be up a little bit less than in the first quarter, and that’s because remember that we bought Resulte effective I believe at the end of April last year, so we had two months of Resulte in last year and one not. So on a GAAP basis we’ll be up a little bit – we’ll be up less than the 63% that we reported this year. At the low end of the guidance range, both segments’ year-over-year growth rate would be lower than the high end by about 300 to 400 basis points each, and down organically in the 3 to 5% range, at the low end of the guidance.
Gross margins will improve due to SUTA relief as I mentioned first, and obviously be sensitive to current levels. The lower end of the guidance range would also be indicative of a customer mix change again towards larger volume accounts and lower pay bill spreads, especially in Commercial Staffing. That’s a way to view second quarter. SG&A is on absolute dollar basis. We had 120 million of SG&A in the first, and we should be flat to down from that level in the second quarter. And then, Jeff, segment margins should improve at all points within the guidance range with the larger percentage improvement being within the Staffing Services area. So hopefully that gives you some color on where each of the segments will end up on top line and what will happen from a margin point of view.
Jeffrey Silber
Yes, actually that’s very helpful. As long we are talking about numbers, just one more number question. In terms of stock-based comp, what was that in the quarter and what do you expect that will be for the year?
Mark Smith
Stock-based comp in the quarter I think was $1 million and – let me just make sure on that. We were just short of $1 million, and I would expect it to stay at that run rate through the rest of the year.
Jeffrey Silber
Okay, great.
Mark Smith
Just one second here
Jeffrey Silber
Yes.
Mark Smith
It was $1 million bucks.
Jeffrey Silber
All right, fantastic. Now in terms of your larger accounts, I just want to make sure I got this correct. Your large account business was up in Commercial year over year. But it was down, did you say was down in the Perm business or was it down in the Professional Staffing business?
Roy Krause
Professional Staffing had a decrease in large account business and in Perm.
Jeffrey Silber
Right.
Roy Krause
But increase in small accounts.
Jeffrey Silber
Okay.
Roy Krause
Commercial Staffing, you are right. Large accounts grew and smaller accounts pulled back on a year-over-year basis, okay?
Jeffrey Silber
Got it. Was there anything specifically going on in the different verticals? I mean, are these the same accounts, they’re just buying different staffing services differently?
Roy Krause
I think there were a couple of new accounts that accounted for some of the increase in Commercial Staffing, but generally it was just account specific, some people expanding, some people contracting. So like I said, out of the 60 largest accounts we had, it was pretty evenly split between 30 accounts growing and 30 accounts contracting. And generally, though we saw more contraction, net contraction I guess I should say in Professional Services on the large account side.
Jeffrey Silber
Okay. And then in terms of either specific geographies or specific end markets by vertical, if you can tell us if there were any diverging trends there as well, that would be helpful.
Roy Krause
I don’t think we saw anything that we could say was a trend. It was pretty much across obviously, there were some issues in the Midwest with the automobile areas that we’ve been talking about in the past. That’s always been a challenge although some of our smaller markets, actually performed better in the mid-US than other places. So, I don’t have a trend that I can give you.
Jeffrey Silber
Okay, that’s great. Thanks so much for the color.
Roy Krause
Thanks, Jeff.
Operator
(Operator Instructions). Our next question comes from Mike Carney, Coker & Palmer.
Michael Carney
Good morning.
Roy Krause
Good morning, Mike.
Mark Smith
Good morning, Mike.
Michael Carney
If we look at the Professional Services, the gross margins, they were down yet you had Technisource included and then the SMid increased a little bit. So, is that just simply a function of a lot lower bill pay spreads in the legacy Professional Services or what’s going on there?
Roy Krause
That one is just the acquisition of Technisource. I mean, our margins were 30 before. We bought Technisource that had lower margins than our total segment did, but higher margins than our technology business and in that margin is the Perm pullback. So two issues, one is we brought in a bunch of revenue at that 29, 27, 28 range, which again on technology was higher than our technology margins which were like in the 24s but (inaudible) Technisource has very little Perm in it.
Michael Carney
I’m just talking actually about the temporary staff and why that was down.
Roy Krause
Again, I think it’s a mix shift between the amount of technology business that was in there versus the mix that was there before between accounting, finance, et cetera, and technology in the past.
Michael Carney
Okay, you are just saying because Technisource had higher margins than – so you are saying the mix of the legacy, there were just declines in the legacy IT business, and those had lower margins than the other businesses previously?
Roy Krause
I’m not sure I understand you.
Michael Carney
I guess if I’m looking at Temporary Staffing and that has been running let’s say it was 25 – almost 26% in Temporary Staffing and Professional Services in ‘07. And now it dropped to 24.2, some of that being a first quarter effect, but there is just more basically than just that.
Roy Krause
You are right that the – I understand your point, you are right. We saw decreases in our other margins, mix change issues where we had less margin in other technology businesses...
Michael Carney
Okay.
Roy Krause
...than we did before. You are right.
Michael Carney
Got it. But the bill pay really didn’t change much then, you weren’t basically buying more business...
Roy Krause
No, no, I don’t think so at all.
Mark Smith
Bill pay in Professional was pretty flat year over year.
Michael Carney
Okay, got it. And then also in the shift of business from Managed Services to the Professional, what was that in – what’s now in your Managed Service outside of Perm, outside of RPO, anything?
Mark Smith
Let me correct one thing I said before. I think when I was given the overall statement, I said that we moved $9 million worth of business effective at the beginning of 2007. We actually – I was off a year. We actually moved that business at the beginning of ‘08. So Mike, what those accounts were, and it’s 9 million in the first, so it’s just a little bit short of a $40 million run rate. Those were technical Managed Services accounts where we were doing that relatively low end help desk, data center type operations and we had included them in our Managed Services area. Those accounts changed their structure, changed the way we were managing them. So we moved them over to Professional, over to Technisource actually. We are managing them a little bit differently and treating more like a temporary staffing assignment as opposed to managed service. So those were the items that we moved. A big chunk of what remains in RPO is our end managed services at the RPO business, which based upon first quarter run rate is at about an 80 to 85 million run rate at this point.
Roy Krause
It represents about – a little over 20 million of the amount...
Mark Smith
In the first quarter.
Roy Krause
...in the first quarter in Managed Services. And what’s left is truly administrative type accounts and our Managed Services account.
Mark Smith
About half of Managed Services now are RPO, and the rest are some call center operations where we are doing some administrative staffing and some support.
Michael Carney
Okay, and then just in the press release, Mark, basically if we look on the IT segment, if we look at the organic growth and it’s down 1% and we got 90 something percent of acquisition and business reclassification growth, basically, we would be saying that the legacy IT business, which I guess includes on a pro forma basis the stuff that was moved from the Managed Services or...
Roy Krause
Not on the full point.
Mark Smith
Not on – what the organic number is of down 1.5% there is the comparable business this year versus last year. So, including the acquisition and then the movement of the business in the prior year, so it’s on a comparable basis. We talked about Technisource being up 11%, and so the remainder of our IT business was down year over year, and in particular there were a couple of accounts or a couple projects I’d call them that ended in the first quarter that had a significant impact on the legacy business.
Michael Carney
Okay, that’s exactly what I was looking for.
Mark Smith
Legacy Spherion business, right.
Michael Carney
Okay, thanks a lot.
Mark Smith
Okay.
Operator
Our last question comes from Mark Marcon from Baird.
Mark Marcon
Was the RPO business up sequentially?
Roy Krause
Hang on, let me double check. Okay, from the fourth quarter I know we had several – beginnings of several new accounts, but we did see some reduction in run rate on several of our large accounts. Mark is checking the balance. I don’t recall it right now.
Mark Smith
It was up; it was pretty flat sequentially.
Mark Marcon
Okay, all right. And then can you talk a little bit about the insurance deposits that you received and how that ended up working? I’m assuming that you basically got the cash back from the workers’ comp insurance companies and then you basically substituted those with letters of credit. Is that the way to think about it?
Roy Krause
Yes, that’s the way to think about it.
Mark Marcon
Okay. So, that doesn’t truly reflect a change in your actual financial condition in any real aspect then does it?
Roy Krause
You are right. The availability is compromised by the letters of credit.
Mark Smith
The only improvement that we – it was a lower cost to do it that way, and we ended up having more availability on our credit facility by doing the replacement this way.
Mark Marcon
Okay. And what...
Mark Smith
The actual requirement for collateral was reduced. The insurance companies required us to have more cash than they’ve heard of required LC. So, we actually freed up about $10 million of availability by doing this. So, we had a marginal improvement.
Mark Marcon
Yes, that’s a good move. It seems like a no-brainer. What is your available letter – your available credit at this point?
Roy Krause
It’s a little – about 104, $105 million is what’s available to draw on our secured facility, that’s after reducing for the debt, the letters of credit, any payable reserves, et cetera, that have be out there. So, it’s a little over 100 million.
Mark Marcon
Okay. And how would you prioritize repayment of debt relative to buying back stock, given the uncertainty of the economic environment combined with the attractiveness of the evaluation of the stock?
Roy Krause
Well, we’ve been on a pretty standardized program to buy back stock and we’ve been doing it on a pretty consistent basis under this new authorization, and we would expect to continue there and based on that when we would use the rest of our cash to reduce debt. We would – the rates go down a little bit. We should see a little break on interest expense relative to the debt. So, I’m not concerned about our debt level right now. Our D&A is – what is it, Mark? Almost $40 million?
Mark Smith
Our D&A is $30 million.
Mark Marcon
Yes.
Roy Krause
It would be 8 million of the amortization, so almost $30 million so and there is cash coverage there.
Mark Marcon
Yes. Whereas your CapEx is going to be closer to well over 10 to 12...
Roy Krause
10 to 12. 10 to 12, I think Mark said.
Mark Marcon
Yes, okay. So, I mean that’s a nice pad. And then do you – can you talk a little bit about why the small companies pulled back in the first quarter, but the large companies on the Commercial side actually increased or...?
Roy Krause
Again, I think it is significantly pretty company-specific. I think the pullback we saw in general was driven – at least in my opinion about – with the economy. I think the large and small businesses entered the pullback. But we happen to have as I said a subset of our larger account that actually grew, okay. That was somewhat company-specific, people changing operations, methodologies, a lot of different things, and I think that growth was more company-specific than it was any indication of large or small growth.
Mark Smith
Yes, it’s hard – we have 90 – when we do the classification we have 99 at this point large accounts. So, I don’t know that those 99 large accounts represent the macroeconomics – what’s going on in the US at this point.
Mark Marcon
Okay, great. Look forward to following up after the call.
Roy Krause
Okay, thank you.
Mark Smith
Thank you.
Mark Marcon
Thank you.
Operator
Thank you for participating in today’s conference call and have a great day.
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