AMN Healthcare Services Inc. Q1 2008 Earnings Call Transcript

May.13.08 | About: AMN Healthcare (AHS)

AMN Healthcare Services Inc. (NYSE:AHS)

Q1 2008 Earnings Call

May 7, 2008 05:00 pm ET

Executives

Christopher Schwartz - VP Financial Reporting and IR

Susan Nowakowski - President and CEO

David Dreyer - CFO

Analysts

Jim Janesky- Stifel Nicolaus

Jeff Silber - BMO Capital Markets

Michel Morin - Merrill Lynch

Tobey Sommer - Suntrust

David Bachman - Longbow Research

Dawn - J. P. Morgan

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to the AMN Healthcare first quarter 2008 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time.

(Operator Instructions)

Also, as a reminder, today's call is being recorded. I would now like to turn the conference over to your first speaker, Mr. Christopher Schwartz. Please go ahead.

Christopher Schwartz

Good afternoon. I would like to welcome everyone to AMN Healthcare Services conference call to discuss the company's earnings results for the first quarter 2008. For the call this afternoon, we have Susan Nowakowski, AMN's President and Chief Executive Officer; and David Dreyer, AMN's Chief Financial Officer. A replay of this webcast is available at amnhealthcare.com/investors and will be replayed until May 21, 2008. Details for the audio replay of the conference call can be found in our earnings press release.

I would also like to mention our policy regarding forward-looking statements. As we conduct this call, various remarks that we make about future expectations, plans and prospects constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. Any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

It is possible that our actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those identified in our annual report on Form 10-K for the year ended December 31, 2007 and our current reports on Form 8-K, which have been filed with and are publicly available from the SEC.

Results reported in this call may not be indicative of results for future quarters. These statements reflect the company's current beliefs and are based upon information currently available to us. Developments subsequent to this call may cause these statements to become outdated. The company does not intend, however, to update the guidance provided today prior to its next earnings release.

I will now turn the call over the Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Susan Nowakowski

Thank you, Chris. Good afternoon, everyone and thank you for joining us today. We appreciate your interest in AMN Healthcare and in taking the time to participate in our earnings call.

Overall, first quarter results are in line with the strategic course management has set for the company. We began the year with an aggressive and focused plan to drive near-term growth and to continue to make investments in our long-term strategy.

As we finished the first four months of the year, I am pleased to report we have made important progress towards achieving our goals, both operational and financial. Through organic growth and the addition of Platinum Select, our revenues grew year-over-year across all business segments. We improved our consolidated gross profit margin and EBITDA margin over the prior year.

Despite the sluggish economic environment, we continue to feel positive about the current and long-term growth opportunities in each of our service segments. In particular, we are most encouraged by the increased levels of demand for our travel nurse and allied professionals since the beginning of the year. Most of this demand pickup occurred during February and March, setting us up in a solid position as we enter the second quarter.

Our consolidated revenues of $294 million for the first quarter came in at the top end of our guidance range, while earnings per share of $0.28 actually exceeded our guidance. During the first quarter, our nurse and allied staffing business revenues grew by 2% over last year. The year-over-year improvement was due to the partial quarter contribution from the addition of Platinum Select.

Our organic growth was under prior year by 2%, driven primarily by a drop in the number of long-term international nurses on assignment and a decrease in radiology technicians. Our short term travel nurse revenues, excluding international, was flat with prior year and up just over 1% sequentially.

Embedded in these numbers is a very positive trend in our nurse choice brand, which places nurses in urgent, quick start, short assignments. We experienced double digit year-over-year and sequential growth in this service offering. While this is a small piece of our business today, growth in these types of short-term urgent assignments is usually a sign of stronger future growth in the traditional travel nurse business. Pricing remained relatively strong, with an increase of 3% in revenue per traveler per day over prior year.

Since the beginning of the year, demand has been strengthening across the country, with the best year-over-year growth in the western and central regions. In particular, the greatest demand growth came in some of our key states, such as California, Arizona and Texas. The eastern region also had some pockets of growth. But some states, in particular Florida, continue to be challenging.

Some of the external factors helping drive the positive demand trends seemed to be a slight lift in hospital admissions, the onset of a late flu season, the opening of new units, and the wearing effects of hospitals who may have been too tightly staffed during the last year. But we have also made some internal changes that have helped us drive this demand increase and convert more orders into placements. We have reorganized certain facets of our sales teams, we have ramped up our internal recruiting and training efforts, and we have become more aggressive in our approach to VMS relationships.

The results are encouraging, with the number of new facility contracts exceeding our expectations, the number of preferred relationships rising and the aggregate number of orders up significantly since the beginning of the year. We have been able to convert this increase in demand into greater placements for future assignments. Year-to-date placement volume in our short-term nursing division is above prior year levels.

Turning to our international division, we remain optimistic that the continued impact of a bottleneck immigration environment will be resolved. Foreign educated nurses are a very significant source of staffing for healthcare facilities nationwide. While we are not anticipating a solution in 2008 in our guidance estimates, we are encouraged by some recent Congressional action. On April 29th, the Emergency Nurse Supply Relief Act was introduced. As we've mentioned on prior calls, we have maintained a small but critical infrastructure team in order to manage our pipeline of nurses who are in a waiting pattern to come to the US.

While allied healthcare staffing is still a relatively small piece of our overall business, it is becoming a larger percentage of our nurse and allied service line, and is one of the faster growing markets within the industry. Within our allied business, we have seen very strong growth in the demand and placement of therapy specialties. Offsetting this a bit is a contraction in the demand for radiology technicians, which has been felt across the industry.

While we intend to continue to provide professionals in both disciplines, we have been reallocating resources to put more emphasis on the faster growth specialties within therapy. To further bolster our strength in the therapy specialties, we completed our acquisition of Platinum Select on February 15. Platinum Select has an excellent brand reputation in the allied industry and a very entrepreneurial team. Today, the integration process and response to the acquisition has been very positive and Platinum is on track with their growth expectations for the year.

Every year, we seek to expand our business model into new healthcare disciplines and market channels within each of our business segments. During the quarter, we expanded our allied service offering with the launch of a permanent placement service for therapy specialties, and the addition of recruitment and placement of clinical laboratory technicians for short-term travel.

Moving now to our locum tenens staffing business. Revenue increased 7% in the first quarter compared to last year. There were several bright spots within locum where growth continued on a double digit track. But overall, we were pulled back to single digit growth due to a couple of weaker divisions. In aggregate, our volume, which we measure as days filled for the quarter, was slightly higher with a 1% increase over last year and 2% over last quarter.

Primary care, our largest division, continued to experience solid sequential and year-over-year growth. However, after experiencing 28% revenue growth in radiology in 2007, the current demand in pricing for radiology locums is now being impacted by the lagging effect of lower reimbursement rates paid to imaging centers. From the information we are hearing from clients, the volume of imaging reads has not slowed. But the willingness of nonhospital-based imaging centers to use outside labor to manage the work load has tightened.

In addition, our anesthesia and surgery divisions were impacted by lower inpatient and outpatient surgery volumes during the first quarter. The effects of this decline were more pronounced in our western region. We do believe that there is opportunity to improve performance through better internal execution in these divisions. And we are already on a better track, with volumes expected to grow moderately in the second quarter and throughout the remainder of the year.

As we look forward to the second quarter, we are expecting double digit revenue growth sequentially, with particular strengths in primary care and behavioral health. Progress in our expansion into new emerging specialties for locum has been positive. These specialties include orthopedic surgery, dentistry and hospitalists. While still a small percentage of our business, we experienced growth in excess of 30% year-over-year. This year, we have added resources to build dedicated teams to maximize these opportunities long term.

These are the types of seeds we like to plant every year to nurture opportunities for new revenue sources in the future. We believe there continues to be an overall healthy environment for growth in the locums industry and our full year and long-term outlook has not changed.

Turning to physician permanent placement. This business generated revenue growth of 6% year-over-year. While the revenue growth was modest, at single digits, it was in line with our expectations. And more importantly, the drivers of future growth were in line with our expectations.

The number of new contracts increased 6% sequentially, which will help drive future revenue from search and placement activities. The greatest percentage growth in new searches was experienced in the specialties of internal medicine and OB-GYN. Our highest demand specialties continue to be in family practice and internal medicine.

Although our smallest segment in terms of revenue, physician permanent placement, continues to be our most profitable, with EBITDA margins for the quarter running at approximately 25%.

Every week, you will likely see a national report or an article acknowledging the continued struggles fueling the physician shortage. For example, last week there was an article on the front page of the Wall Street Journal describing a cultural shift taking place in US medicine, in which younger physicians are more frequently seeking to balance work and family life. This is just one of the factors that continues to impact the shortage of physicians and even more so the reasons for an expected deepening of the physician shortage for years to come.

As the national leader in the placement of permanent and temporary physicians, we believe we are well positioned to help the healthcare community to contend with these difficulties. And with that, I would like to turn the call over to our CFO, David Dreyer. David?

David Dreyer

Well, thank you, Susan and good afternoon. We reported revenue of $294 million for the first quarter, which was 3% higher than both the first quarter of last year and the previous quarter. Diluted earnings per share was $0.28, as compared to $0.23 for the same quarter last yea and $0.26 for the prior quarter.

Revenue generated by our nurse and allied staffing segment this quarter was $204 million, compared to $200 million last year and $197 million last quarter. These increases were driven primarily by a 3% and 1% increase in revenue per traveler per day, as compared to the first and fourth quarters of 2007 respectively.

Average travelers on assignment decreased by 2%, compared to the first quarter of 2007, but increased 4% compared to last quarter. The sequential increase was due mostly to the addition of Platinum Select on February 15. Excluding Platinum Select, the nurse and allied segment traveler account was flat with last quarter's volume, reflecting continued reductions in our international traveler account from retrogression, offsetting growth realized in our short-term nurse division.

The lower year-over-year traveler count is reflective of both the decline in international travelers and the lower demand for nurses during the second half of 2007. However, recent volume trends suggest that in the second quarter, our organic nurse and allied volumes should begin resuming back to sequential growth despite a continued decline in international traveler account.

We also expect to achieve year-over-year quarterly volume growth during the second half of 2008. Revenue generated by our locum tenens staffing segment this quarter was $76 million, an increase of 7% compared to last year and relatively flat to last quarter. The year-over-year increase in revenue was due to a 1% increase in days filled, combined with a 6% increase in revenue per day filled.

Revenue for our physician permanent placement segment this quarter was $13 million, which was 6% higher than last year and just over 1% higher than last quarter. Looking forward, increases in the number of producing sales team members and new searches are expected to result in more meaningful revenue growth in the second quarter and full year 2008.

Consolidated gross profit this quarter was $77 million, representing a gross margin of 26.4%, compared to 25.5% reported last year and 26.6% reported last quarter. The year-over-year increase in gross margin of 90 basis points was due primarily to an improved pay-to-bill spread in the nurse and allied and locum tenens staffing segments. Compared to last quarter, gross margin declined slightly due in part to having one less billing day. This was partially offset by lower provider compensation in the locum tenens staffing segment where gross margin increased by 60 basis points sequentially.

On a segment basis, gross margins for the first quarter were 24.0% for nurse and allied, 26.7% for locum tenens and 61.6% for physician permanent placement. SG&A expenses this quarter were $55 million or 18.8% of revenue, which compared to 18.7% last year and 19.6% last quarter. SG&A as a percentage of revenue was relatively consistent with the first quarter of last year but decreased 80 basis points compared to last quarter. This decrease, compared to last quarter, was due primarily to favorable insurance experience within the nurse and allied segment during the quarter and a $700,000 restructuring charge recorded last quarter related to our international division.

Net interest expense this quarter was $2.8 million, down from $3.3 million last year and about the same as last quarter. The decrease compared to last year was due to continued reductions in our debt outstanding. The effective income tax rate this quarter was 41.2%, as compared to 35.3% reported last quarter and slightly higher than the 40% effective rate we previously guided for 2008.

As discussed on the last call, there were a number of favorable adjustments made in the fourth quarter as we finalized the full year federal and state tax provisions. For 2008 we are now anticipating a full year effective tax rate of approximately 41%, which mostly reflects the impact of our recent acquisition of Platinum Select.

We had an average of 34.2 million fully diluted shares outstanding during the first quarter. As we announced earlier today, we are planning a share repurchase program of up to $38 million, which we expect to be substantially completed by the end of 2008.

As the actual number of shares to be acquired and the timing of these repurchases is dependent on our available operating cash flow, it's uncertain what the actual accretion will be in 2008. However, we estimate that there may be up to $0.01 to $0.02 benefit to 2008 earnings. After completion of the repurchase program, we estimate that the resulting lower share count will provide annualized accretion of at least $0.08 per share.

Turning to our financial position. This quarter we generated $17 million in operating cash flow, which, in addition to cash on hand and use of our revolver was used to fund the acquisition of Platinum Select. As a result, total debt outstanding as March 31, 2008 was $146 million. The resulting first quarter leverage ratio is 1.5 times. DSO at the end of this quarter, excluding the acquisition of Platinum Select, was 60 days, compared to 59 days last year and unchanged from last quarter. The one day increase in DSO compared to last year reflects mainly the higher proportion of revenue earned during the month of March, as compared to the first two months of the quarter.

Now, I'd like to provide you with our revenue and earnings guidance for the second quarter and full year 2008. Our 2008 guidance, given last March, already included Platinum Select estimates. While we are not planning on separately reporting on Platinum Select, given its relative size, we are reporting this quarter only that it contributed approximately $7 million of revenue in the first quarter and is expected to generate approximately $15 million of revenue in the second quarter. We expect Platinum Select to contribute to AMN's earnings mostly in the second half of 2008.

Second quarter revenue is expected to range from $313 million to $316 million and diluted earnings per share is expected to range from $0.26 to $0.28. As we noted earlier, our first quarter earnings per share included approximately $0.02 from favorable insurance experience, which we expect to normalize going forward.

We reaffirm our full year guidance of $1.25 billion to $1.3 billion in revenue and earnings per share of $1.16 to $1.22. As in the past, we expect to have better visibility on our projected growth during the second half of the year when we report our second quarter results. We look forward to updating you on our outlook at that time. Su?

Susan Nowakowski

Thanks, David. Before taking your questions, we would like to reiterate that the shortage of healthcare professionals remains all too real. The gap continues to grow. It affects the ability of healthcare providers to deliver quality care. It affects the clinicians themselves and ultimately it affects patients. We are confident that AMN, as the industry leader, will continue demonstrating the strategic and operational ability to deliver greater client value in what is truly an ever-changing and demanding environment. And with that, we would like to now open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Janesky with Stifel Nicolaus. Your line is open.

Jim Janesky- Stifel Nicolaus

Yes, thank you. A couple of questions. David, did you say that the insurance adjustment was about $0.02 a share in the quarter?

David Dreyer

Yes and we had favorable experience in our insurances. It was basically a professional liability for nurses and the health insurance for nurses that was about $0.02 impact favorable to the first quarter results.

Jim Janesky- Stifel Nicolaus

Okay. So that's why despite the sequential -- or I don't want to put words in your mouth. But is that why, despite the sequential increase in revenues expected in the second quarter over the first quarter, why earnings per share are roughly flat?

David Dreyer

That's exact right if you normalized, basically, and this was things like favorable claim settlements. It was not anything unusual. But we're not assuming that in our guidance in the second quarter. So yes, to correct, that would make the second quarter comparative to more like $0.26 in the first quarter.

Jim Janesky- Stifel Nicolaus

Okay. Thanks.

Susan Nowakowski

The other contributor, Jim, is the fact that we have the full quarter of Platinum revenue in the second quarter. But because of amortization, it offsets that a bit. So more of the accretion and EPS impact from Platinum, albeit still small, will be in the second half of the year.

Jim Janesky- Stifel Nicolaus

Okay. So, we should have amortization going up in the second quarter and throughout the rest of the year, right?

David Dreyer

That's right.

Jim Janesky- Stifel Nicolaus

Okay. What about housing expense? You made a comment on that. I don't know if it was in the prepared remarks but I did read it in the press release. In 2007, there was a bump in housing, as in some cases you were trying to increase the supply of nurses willing to travel. What are the trends now and how do you expect that for the rest of the year?

Susan Nowakowski

We expect it to be pretty stable through the year from where we are today. There's a few puts and takes within housing, some very favorable trends. Our average daily rent costs are actually very stable and came down from the fourth quarter. Our vacancy rate, which actually drives a fair amount of incremental expense, is down year-over-year in March for the first time in many, many quarters.

So, we've got some good favorable trends. But at the same time, we've seen an increase in our furniture and utilities, largely due to rising fuel costs and the furniture companies desiring to pass those on. Also, seen a little bit of a bump up in our subsidy costs, which is when we pay a traveler a stipend rather than going into our housing. Some of that is driven by the increased costs that they're experiencing with fuel and utilities and sort of some of the same things that are affecting us and some of it is competitively driven.

But we don't expect any of those costs to particularly escalate through the year. I think they'll be relatively stable. If anything, we'd like to think that we can continue to get some benefit from the stabilizing rent prices and some good progress our team is making in reducing vacancies.

Jim Janesky- Stifel Nicolaus

Okay. And then turning towards hospital admission rates and the favorable trend that you experienced in the first quarter. How sustainable do you think that is, Susan? And what are you hearing from your hospital clients with respect to not only their expectation for hospital admission rates, but how willing are they to use travel nurses again? Because there continues to be a push back, is what we hear.

Susan Nowakowski

I think you'll hear that forever. In that hospitals are always trying to find the best balance between their core permanent staff and flexible staffing. And we want to make sure that they understand that we're going to provide a value for them but they're evaluating other opportunities. So, I'm not sure you'll ever finish -- I've been doing this for 18 years and I've heard it every single year. So, I don't know that that will ever change.

But it is interesting that you mentioned the increase in admissions and five hospital systems reported over the last couple of weeks and they all reported increases in admissions relative to last year. And that's certainly what we are hearing anecdotally from our clients as well, and I think that drove some of the increase. But we've seen that increase sustain. There is always a little drop off in April and May as the flu season comes to an end and we've seen that. But they've remained relatively strong.

The other thing that we hear from clients is some of what's driving that increased demand is the increase in opening of new units, both today and the anticipation of new units being opened in the future. The over hiring, potentially, of new grads from last fall and they may have actually become a little bit too heavy with the lower experienced nurses and are desiring to bring in more experienced nurses, which as we've said before, travelers generally have higher experience levels than those new nurses that they're hiring. So, that's a positive for them.

And we've been signing many more new contracts. Our new contracts are above our expectations for this year and the number of preferred agreements that we're signing is up first quarter and even more so in the second quarter. So, all of those trends tell me that this is not something that the hospitals believe will subside over the coming quarters.

Jim Janesky- Stifel Nicolaus

Okay. Thank you.

Susan Nowakowski

Thanks, Jim.

Operator

Thank you. And our next question comes from Jeff Silber with BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Can you hear me?

Susan Nowakowski

Yes, Jeff.

Jeff Silber - BMO Capital Markets

Great, fantastic. Just a couple questions. Susan, I think in your prepared remarks, you mentioned something about being more aggressive on the VMS side in the nursing business. I was wondering if you can provide a little color on that?

Susan Nowakowski

Sure. Really, two key parts to the VMS strategy. One, is working with vendor management software organizations that are not direct competitors with us but are trying to provide the facilities with better tools to manage and get a view as to the utilization of their outsource staffing. And we had probably been more conservative in our approach in working with those organizations in the past. And we've been able to work through some of those issues over the last couple of quarters and have signed, I think, more favorable contracts where we're more comfortable going after that business aggressively. And it's translated into increased orders and increased placements for us. And I think sort of a win-win situation for us and those organizations. So, we've seen some good success there. It's opened up some new facilities that we hadn't been -- that we hadn't had access to over the last year.

The second is in our own direct vendor management system offering where we go in and provide an either on-site or even more so remotely full service vendor management program. We already actually operate a couple of the largest vendor management programs across the country; one with a large dialysis center system and then several throughout California. So, we certainly have a good track record and history. But we hadn't been out there selling it as aggressively as I think some of our competitors, so we ramped that up during the last couple of quarters. And as I mentioned, we've seen some good success from that.

Jeff Silber - BMO Capital Markets

And roughly how large is your VMS business, either as a percentage of revenues or a percentage of your nursing business?

Susan Nowakowski

We don't provide that externally. It's certainly not the majority of our business in terms of -- and you do have to really separate the two. Because if the hospitals want to use a vendor management software company, then that doesn't really preclude us from doing business. It does change, though, the way we have to handle some operational things. So we don't mind that increasing as long as we can do it in an efficient way.

And then regarding our vendor management system program, where we're kind of the one-stop shop for all of their needs, that has grown a little bit over the last year. But as you know, it's a very important part of our strategy that we not get too much customer concentration. We want to have more assignments at more locations to offer to our clinicians. We don't believe having that one particular hospital is going to either attract or more importantly, retain the clinicians because they want to take multiple assignments and have selection across the country. A real competitive advantage we have is that we have more assignments available in more locations than any other company within the industry and we want to maintain that advantage.

Jeff Silber - BMO Capital Markets

Okay. That's helpful. If I can shift gears to the physician perm segment. I know there's a lot of moving parts here but margins did go down year-over-year. Is that something should we expect on a normalized basis going forward just to have margins at the first quarter level?

David Dreyer

It's David. No, actually our estimate of margins are still going to be in the 26% to 27% range. While it went down on a year-over-year basis, this level we are at, at the 26.7% for the first quarter is fairly representative of what we've been guiding.

Jeff Silber - BMO Capital Markets

And I'm sorry, I just was talking about the physician perm business, specifically.

David Dreyer

I'm sorry. There's always fluctuations there between the 60% to 61% level and I think that's been fairly consistent. We finished the whole year last year at 61.3%. It was 61.6% first quarter. It's really been consistent in that kind of a range, in the 61% to 61.5% range.

Susan Nowakowski

Jeff, it's driven more by how much direct mail you're doing. And that can shift from -- and how much deferred revenue there is. So that can shift a little bit from quarter to quarter. But I don't think there's a particular seasonal impact that they have.

David Dreyer

They don't and one way we really kind of ultimately measure, while there will be some variation relative to what the gross margins are, their EBITDA margins have been fairly consistent or more consistent in this 25% level rate. It's fairly consistent over several quarters. You'll see them be fairly tight at that level. So, they're managing it down to the earnings level.

Jeff Silber - BMO Capital Markets

Okay. Just a couple quick numbers questions. Jim had asked about the impact on amortization for the Platinum Select business. Can you just quantify how much we should be increasing amortization in the second quarter?

David Dreyer

Yeah. It's basically about $250,000 per quarter, so not significant but it is additive. Partly the timing of that and other costs, insurance costs -- I'm sorry, the interest costs, etc., is why we made comments relative that you would see the majority of earnings really accrue in the second half of the year.

Jeff Silber - BMO Capital Markets

Okay. And in terms of the share count you're using for your second quarter guidance?

David Dreyer

We didn't actually give it. And again, I'm not going to give an estimate relative to the share buyback because we really -- there are so many unknowns, i.e., the pricing, the cash flow required, the timing of when we make those purchases. But given this quarter, at 34.175 for the first quarter, a little higher. That would be like 34.3 or so. And that is again, without any effect of the share buyback, which ought to be fairly minimal second quarter, certainly.

Jeff Silber - BMO Capital Markets

And are there any restrictions on the share buyback in terms of timing? How quickly can you be in the market buying your shares?

David Dreyer

No restrictions in terms of starting. We obviously have board approval and bank approval. So, it's going to start in the second quarter. Again, really more based on available operating cash flow, as that's our intent of how we're going to fund it. The only end point is that we need to complete it by March 31, 2009. And again, depending on how our cash flow works, we plan to do most of it by the end of 2008. But we have until the end of the first quarter of 2009.

Jeff Silber - BMO Capital Markets

Okay. That's very helpful. Thanks so much.

Operator

Thank you. And our next question comes from Michel Morin with Merrill Lynch.

Michel Morin - Merrill Lynch

Yes, hi. Good afternoon.

Susan Nowakowski

Hi, Michel.

David Dreyer

Hi, Michel.

Michel Morin - Merrill Lynch

Just to clarify, the favorable insurance, was that on the SG&A line or does it fall under cost of goods?

David Dreyer

It's both, actually. Probably most of it was in SG&A but it was in the nurse professional liability. And again, a lot of it being favorable claims experience, i.e., we settled some larger claims that were more favorable than what our reserves had estimated. And that was fairly significant. And also, health insurance, nurse health insurance, which we self-insure as well, similar matter. Favorable claims experience and thus we really saw it in both but the most of the variation, you could say, would be probably in SG&A.

Michel Morin - Merrill Lynch

Okay, great. And on the perm side, Susan, I think in your remarks you said that new contracts rose about 6% sequentially?

Susan Nowakowski

Correct.

Michel Morin - Merrill Lynch

Is that typical seasonality, or is that better than what you normally would expect to see during the first quarter?

Susan Nowakowski

It's a little bit better than I think the typical seasonal uptick. You do get some uptick because your fourth quarter you tend have just more people off and less willing to make commitments.

Michel Morin - Merrill Lynch

Okay, great. And then radiology being weak in the allied segment, is there a theory as to why that's happening?

Susan Nowakowski

It's twofold, I think. One is that the facilities themselves are more strapped with lower reimbursement rates and trying to squeeze more productivity out of the staff that they have. That's probably impacting us even more at the physician level because these imaging centers are often owned or in partnership with radiologists and they themselves are willing to work more hours and take less vacation and cover the time.

With the technicians, it's a little bit to do with supply as well. Because you can become a radiology technician with a matter of six months to a year depending upon what certification you're seeking. And so, we have seen the supply of that type of clinician kind of move more quickly when the demand rises. So as the demand for imaging techs rose over the last three to four years, you did see more individuals coming in and becoming certified. So, it's a bit of an -- I wouldn't say it's an excess supply but it's more supply that's coming to the markets to help fill the perm positions.

Michel Morin - Merrill Lynch

Great. And then just finally, on the locums side, the revenue per day or …

David Dreyer

Revenue per day filled?

Michel Morin - Merrill Lynch

Yeah, it's up 6%. Is that a function of bill rate increases or is there mix coming into that? And is that possibly impacting the volume growth that was a little bit sluggish?

Susan Nowakowski

It's a little bit of both. There have been pricing increases across all of our divisions. So, certainly, that's helped us. And then there's a little bit of a mix shift that's actually offset the pricing a little bit.

David Dreyer

It is predominantly pricing, though. It's not that we had -- even though the radiology, as Susan explained, really the majority of that 6% increase year-over-year for revenue per day filled is pricing related.

Michel Morin - Merrill Lynch

Great, thanks very much.

David Dreyer

Sure.

Susan Nowakowski

Thanks, Michelle.

Operator

Thank you and our next question comes from Tobey Sommer with Suntrust.

Tobey Sommer - Suntrust

Thank you. I wanted to ask a question about the locums business. You did cite an article that was in the press recently talking about younger doctors wanting to get a better work/life balance. I was wondering in the supply of either new candidates or existing locums, doctors with whom you have a dialogue, if you're seeing that younger population increase?

Susan Nowakowski

No, we're not necessarily seeing more of them coming to the locums business. But what we are seeing is the supply of locums remain relatively strong. Now, there's never enough. If there were, we'd be placing people at a faster clip because you're always short of supply. But the trend within the physician market of an aging physician population actually plays to our favor.

You have, I think, about 40% of physicians that are 50 or older today. And that is the most attractive demographic for us to come into the locums business because they're often frustrated with the increased burdens of Medicare, Medicaid, malpractice, being in practice with other physicians. And this is a way for them to maintain that work/life balance.

Your younger physicians might be more tied down with family commitments and less able to actually travel. So, that's probably why we continue to get our greatest supply from that kind of semi-retired demographics.

Tobey Sommer - Suntrust

Right. Thank you. That's helpful. I also had a question about the price increase on the physician side, is that a typical seasonal time for you to initiate a price increase? And could you comment on if that is some increased pricing you think is industry-wide or perhaps, as the largest is your brand commanding a little bit of a premium?

Susan Nowakowski

I think it's more the latter, Tobey. I'm sure there are pricing increases occurring across the industry because of the strong demand that we see. But we don't have a particular point in time during the year when we raise all of our rates. It's really more of an ongoing process. We're usually negotiating rates on a per physician basis. We might have a range within a contract. And occasionally, we'll have a particular price point.

But you're usually trying to match the bill rate with the actual experience and contributions of that physician. So, it's something where we're always trying to do a better job of negotiating better rates in conjunction with the quality and the experience of the clinician we're providing.

David Dreyer

And Tobey, if your question was related just to locums, the pricing really shows up on the year-over-year basis with the revenue per day filled. And on a sequential basis, it really wasn't as apparent. So, that was probably most relevant to the year-over-year comparison.

Tobey Sommer - Suntrust

Thank you, that's helpful. And I wanted to ask a question about cash flow for the year. Is there anything unusual or should we just anticipate the typical seasonal cash flow that improves in the latter quarters of the year?

David Dreyer

Our cash flow in the first quarter was really nothing unusual. The fact that it was maybe lower than historical balances was forecasted. I think the only -- there's nothing substantially different in our operating cash flow going forward. There is, again, you'll see changes quarter to quarter affected by how the ramp up of our receivables and also the accrued liability is relative to when payroll dates and other things like that hit.

The only other thing I probably would just slightly acknowledge, while the book effective tax rate went up slightly, we in prior years were a very low, low cash taxpayer. Not that we're huge but it's definitely been going up and so that's also added to our not operating cash flow but to our overall cash flow requirements as well.

Tobey Sommer - Suntrust

Thank you. David, I think you mentioned that the tax rate, does that vary from your assumption when you gave the full year guidance the first time?

David Dreyer

It did. When we gave the full year guidance, I said assume 40% for the full year and for the first quarter. Basically, I just corrected that now to say the 41% rate. It was really related to two things. When we acquired Platinum Select, their effective tax rate was a little bit higher. So it had an effect.

But two, with GAAP reporting there's a FIN-48 where you also need to evaluate all of your tax positions, which we've done. And so there's a modest effect from that analysis as well.

Tobey Sommer - Suntrust

Thanks, and I'll ask a last question. Thank you for being generous with your time. Susan, from a regulatory standpoint, is there anything kind of ex the visa issue that you would look for once we get through with the Presidential election to a new administration?

Susan Nowakowski

Well, obviously, the notion of universal healthcare is probably what's most discussed. And that's not something that we think would negatively affect our industry. It certainly might change the dynamic of how care is delivered. But if it's going to truly open up access to more individuals, it's likely to increase the need for more doctors and more nurses. And if we're already operating kind of on the fringe with shortages in all areas, I would have to think it will increase the demand for temporary services as well as permanent placements.

Tobey Sommer - Suntrust

Thank you very much.

Susan Nowakowski

Thanks so much.

Operator

Thank you. And our next question from David Bachman with Longbow Research. Please go ahead.

David Bachman - Longbow Research

Hi, good afternoon and congratulations on a nice first quarter.

Susan Nowakowski

Thanks, David.

David Dreyer

Thanks, Dave.

David Bachman - Longbow Research

I wondered if you could give us just a little bit more color on kind of what you're seeing on the ground in some of those key states, California, Texas, Arizona, Florida? It sounds like at least in a few of those areas, ex-Florida, that you are starting to see some positive signs.

Susan Nowakowski

Yes, we are. It's very encouraging. California is actually our largest gainer on both a year-over-year and a quarter-over-quarter basis. And I'm talking kind of as of today. And that's good news because it also tends to be a very attractive place where nurses want to travel. Within California, Southern California, in particular, has opened up more, which is also very positive because Southern California had been a bit weaker last year. So some really good trends there.

Texas has been very strong I think for the whole industry and for us in particular, over the last year. And again continue to see a lot of strength there in terms of the kind of sheer numbers of orders, one of our biggest gainers in a quarter-over-quarter.

Arizona has been a bit challenging. It's good now. It's up year-over-year and on a quarter-over-quarter basis but that's after some pretty sluggish demand in the fourth quarter, which didn't set us up particularly well for that state kind of going into the first quarter for placements.

There are some areas in the northwest, which are particularly strong for us. I think it's a combination of the demand being up, certainly hearing admissions and some new unit openings occurring up there but I also think we had just not had enough resources on that area in the past. And we have a terrific sales team focused on it and they're producing some good results.

Florida is down year-over-year. This might be more than you want, David, but I'll give it to you.

David Bachman - Longbow Research

No, it's great. Thanks.

Susan Nowakowski

Florida is down year-over-year but has been coming up over the last quarter. So, it certainly has affected, I think, the whole industry because that's been a traditional strong seasonal place where travelers want to go and I think a lot of companies have banked on that business. But as I said, it is improving on a kind of quarter-over-quarter basis, as we kind of come into the summer.

David Bachman - Longbow Research

Okay. Great. All that detail is helpful. I appreciate it. I know that you're not counting on any change in the visa situation in '08. But there is some potential for that. If we were to get some relief on that front, what would the ramp-up time be in terms of actually being able to get those international nurses actually placed and back in on the job?

Susan Nowakowski

Sure, it would likely be four to six months by the time we get them through the remaining process. Nurses that are sitting in the pipeline are at different points in the process and so, at the soonest, it would be four months. Most likely, we'd have a good portion of them through in kind of six to eight months. So this would not be a 2008 event in terms of an uplift in revenue.

If this happens in the next couple of months, where this new bill that's been proposed gets approved, it could be November/December but more likely would help us in '09. And at the same time, remember, while the revenue -- we have a revenue pickup, we would be increasing our infrastructure in order to resume our recruitment to help build a pipeline for the future.

David Bachman - Longbow Research

Right. And you rationalized some of that infrastructure at the end of last year, if I recall?

Susan Nowakowski

Correct.

David Bachman - Longbow Research

And then, I know, this isn't you know a big part of the business. But on nursing, can you talk a little about the opportunity or where you're at in sort of the nonhospital based part of the business, whether it's ASC's, dialysis, that kind of thing? And if that's an opportunity at all?

Susan Nowakowski

Sure, it's a great question. And yes, it is an opportunity. Certainly, the acute care setting is our largest and will likely always be our largest component within nursing. But we believe there are some other nontraditional market channels that can give us some opportunity. And we've actually capitalized on some of those.

I mentioned dialysis and we have grown that book of business very nicely over the last year to where it's gone from maybe 1% of our nursing business to a few percent. We are exploring other market channels. For competitive reasons, I don't want to necessarily disclose that before we're ready for a formal launch. But you can look for us later this year to be entering some, what we would consider, new and emerging markets outside the acute care setting.

David Bachman - Longbow Research

Great. Okay. Well, I'll leave it there. Congratulations again. Thanks.

Susan Nowakowski

Thanks, David.

Operator

Thank you. Our next question comes from Andreas Dirnagl with J. P. Morgan.

Dawn - J. P. Morgan

Hi, guys. It's actually Dawn. How are you?

Susan Nowakowski

Hi, Dawn. Great.

David Dreyer

Hi, Dawn.

Dawn - J. P. Morgan

Quickly, I just wanted to focus a little bit on the supply side. For the last several weeks, as you noted, there's appeared to be some anecdotal evidence, not least of which was the Wall Street Journal article this morning that's highlighting at least a temporary relief in the supply softness on the nursing side. But it's focusing on more nurses going back in FTE positions and part-timers taking on more shifts. And I'm wondering how you're looking at that? And whether or not you think this is going to -- or how you think this is going to play out with traveler placements? And maybe, are you seeing any distinction in specific disciplines on the allied side, kind of, in line with that?

Susan Nowakowski

Sure. That's a great question. And as you know, we've always talked about the impact of nurses being second wage earners. And if the economy gets to be too sluggish or unemployment goes too high, it can impact their desire to stay put, work more hours, et cetera and that's been happening, I believe, over the last 18 to 24 months. I'm not sure the article that was in the Wall Street Journal today was anything dramatically new because I think you've actually seen of that occurring over the last 18 months, which likely affected our demand a bit last year.

But we haven't seen anything recently in our supply or for that matter in our demand that would suggest that there's been a very recent change. If you look at the unemployment rate, we've gone from 4.8% to 4.9%. In March it was 5.1%, it was 5.1% again in April. So, as long as we stay within those ranges, we don't believe there would be a really critical change in the propensity of nurses to go perm, work more hours. It's going to occur and you'll find those anecdotal examples.

But in terms of really making kind of a sea change, I think it would take something more in the 6% plus unemployment range, which is what we saw back in the early 2000's.

Dawn - J. P. Morgan

Okay. Fair enough. And then taking that just one step further, in looking at guidance, how are you looking at the economy? Are you anticipating a trend shift in the second half of the year based on a stronger or weaker environment?

Susan Nowakowski

We're not expecting any dramatic change in the second half of the year. In listening to our clients, watching our demand trends and our supply trends today, we believe we're still on course for a sequential pickup from the second to the third quarter.

Now, a lot has to happen between now and then but there's nothing telling us that they expect the second half of the year to be lower or more challenging than the first half. If anything, it's a bit of the opposite. Where they're talking about their increased needs from, as I said, new unit openings and already feeling as though they are stretched with their current staffing and so wanting to make sure they kind of lock in good partnerships to ensure they have the staff in the second half.

Dawn - J. P. Morgan

Okay. Go ahead, David.

David Dreyer

The only thing I would add, it's very insignificant but as we mentioned, things like the cost for moves and furniture rentals in our nursing, things that are affected by the petroleum costs. But again, we're dealing with that. Those are things that we deal with in the billing rates. And so, it's not impacting our margins. It's just an additional challenge to manage to.

Dawn - J. P. Morgan

Excellent. Thank you. And just if I could switch quickly to the bill-to-pay spreads. They were very favorable in the quarter. Can you give us just a little bit more commentary on your discussions with providers and whether you're hitting that kind of 3% to 5% range that you had talked about last quarter?

Susan Nowakowski

We are. As we renegotiate contracts, we're seeing continued, kind of, modest increases in the 3% to 5% range. And we've been successful in being selective about where we pass those on. And we've also needed to utilize some of those bill rate increases to offset rising costs in housing and other areas. So, we expect to be pretty much on track for the remainder of the year based on what we've renegotiated in the first quarter and the second quarter.

Dawn - J. P. Morgan

Okay. That is great. Well, just one last question, David and it was just me not listening carefully enough. I think you said the reductions on the insurance side from the favorable claims adjustments and health insurance was a positive impact of $0.02, is that correct?

David Dreyer

Yes and I just want to be clear again that those are not things that I would call nonrecurring or one-time. These were based on favorable experiences with claims largely again. Most of it was in the nurse professional liability, which is in the SG&A. And also in our nurse health insurance, which we self-insure as well. And the combination of that, which we're not assuming those favorable experiences in the second quarter, was about $0.02 to the first quarter.

Dawn - J. P. Morgan

That's excellent. Thank you very much.

Susan Nowakowski

Thanks, Dawn.

Operator

(Operator Instructions) We do have a follow-up from Michel Morin. Please go ahead.

Michel Morin - Merrill Lynch

Yes, David just a quick one. What was the cash tax rate in the quarter? And the slightly increased tax rate expectation for the year, is that really just on the book rate or is there a change really on the cash tax side?

David Dreyer

Well, the book rate is what we really talked about. But the cash taxes right now, this year in '08 averaging pretty much around the 33% to 35% range. Now, Michel, as you know, in prior years, like '05 and '06, we paid very little, if any, cash taxes. We had a very large benefit from the acquisition of Merritt, Hawkins, where they accelerated their restricted shares. It was a large deduction for us.

Second, our ex-Chairman basically exercised a significant amount of his stock options in '06. And again, that created a very large deduction. So, those items resulted in us paying almost no cash taxes or very little. Now we're normalizing and normalizing is probably in the mid 30% range, while our effective tax book rate is, again as I said, 41%.

Michel Morin - Merrill Lynch

Great. Thanks very much.

Operator

And there are no further questions in queue. Please continue.

Susan Nowakowski

Thank you. And thank you, everyone for joining us today and for your continued support of AMN Healthcare. We look forward to updating you on our progress next quarter.

Operator

Thank you, ladies and gentlemen. That does conclude the conference for today. Thank you very much for your participation and for using the AT&T executive teleconference. You may now disconnect.

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