On Assignment Inc. Q3 2008 Earnings Call Transcript

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On Assignment Inc. (NASDAQ:ASGN) Q3 2008 Earnings Call October 30, 2008 9:00 AM ET


Peter T. Dameris – Chief Executive Officer, President

James L. Brill – Chief Financial Officer

Michael McGowan – President, Oxford Global Resources, Inc.


James Janesky – Stifel Nicolaus & Company, Inc.

Tobey Sommer – Suntrust Robinson Humphrey

Jeffrey Silber – BMO Capital Markets

Andrew Fones – UBS

Josh Vogel – Sidoti & Company


At this time I’d like to welcome everyone to the On Assignment third quarter 2008 earnings conference call. (Operator Instructions). I would now like to turn the call over to Jim Brill, Chief Financial Officer, please go ahead sir.

James Brill

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

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

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

Peter Dameris

I would like to welcome everyone to the On Assignment 2008 third quarter earnings conference call. With me today are Jim Brill Senior Vice President, Chief Financial Officer, and by telephone Mike McGowan President of our IT Engineering Group.

During our call today I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by myself and Mike. I will then turn the call over to Jim for more detailed review and discussion of our third quarter financial performance and our financial guidance for the fourth quarter of 2008. We’ll then open the call up for questions.

As we have suggested over the last five quarters, the strength of our business model has us well positioned to perform in most economic environments. Although the US economy has meaningfully weakened, we still believe that our performance demonstrates that we are not as closely correlated to GDP and or labor market growth as others.

The strength of our business model continues to be based on one, our lack of any significant contribution from permanent placement and conversion fees, 2% in the third quarter of 2008. Two, our diverse client base, our top 10 clients on a consolidated basis in the third quarter represented 6.9% of our revenues and by segment, 14% in life sciences, 19.5% in healthcare, 23.5% in physician staffing and 11.7% in the IT and engineering group.

Three, the relative strength of the end markets we serve i.e., life sciences, healthcare, IT and engineering. Four the specialized skill sets we recruit for in each of the end markets we serve. And finally that professional staffing continues to be the strongest sector in the staffing industry and white collar unemployment is under 3%.

The key indicators of demand we monitor weekly i.e., the amount of permanent placement and conversion fees earned, the number of assignments and or terminations, our bill pay expansion or compression, the amount of time it takes for a customer to make a hiring decision on a qualified candidate and the number of hours worked or being worked by a billable employee each week have weakened but not to such a level that does not permit us to grow.

As we evaluate near term growth opportunities for each of our operating segments demand still exists; however, external economic and industry forces are causing growth to slow. In our life sciences segment, spending by our large pharmaceutical clients continues to be constrained.

However, throughout the quarter we continue to see material sciences, chemical and biotech clients provide a beneficial lift to the life sciences group to partially offset the slowdown in spending from our pharmaceutical customers. We continue to be confident that we are managing this segment appropriately for both the short and the long term.

In our IT and engineering group demand continues to flatten and new orders have slowed, but we are still performing well and expect to grow in the fourth quarter over last year. Finally our healthcare and physician staffing segments appear not to be affected as severely by the current economic slowdown as other groups. And these groups are gaining share in the markets they serve.

Specific operational accomplishments in the quarter included, our physician staffing division expanded their year-over-year quarterly growth rate to 23.4% versus 15.5% in the third quarter of ’07. Two, our nurse travel group grew 8.5% year-over-year and expanded its gross margins to 22.8% from 22.3%. Three, our Allied Healthcare Group grew 6.2% year-over-year and finally our IT engineering group grew 11.5% year-over-year.

With regard to SG&A we continue to monitor the markets we serve and the levels of investments we have or are making for future growth. Recently we have slowed investment in new personnel to support future growth. Should economic circumstances dictate we will further manage our SG&A to generate appropriate levels of cash flow.

With that said, success in 2009 may very well be measured by sustaining current levels of EBITDA and cash generation versus absolute year-over-year growth. We believe we are very well positioned to have one of the best opportunities in the staffing industry to grow or maintain our EBITDA as we do not have significant currency translation risks. Two, we are not a bulk seller of human capital and, three, we only have 2% of our total revenues derived from permanent placement and conversion fees.

Now let’s review the third quarter results. The third quarter results quarter’s performance again resulted in record revenues for the company of $161.9 million. Revenues grew 8.9% over the third quarter of ’07. Net income excluding our non-cash gain of $503,000 or $0.01 per share after tax related to the mark-to -market of our $73 million interest rate swap, was approximately $6.6 million or $0.18 per share.

Revenue generated outside of the U.S. was approximately $9.6 million or 6% of consolidated revenues in the third quarter versus $7.2 million or 4.9% in third quarter of ’07. Consolidated gross margins in third quarter were 32.6% up from 32% in the third quarter of ’07. Our consolidated hourly bill pay spread in the quarter also increased year-over-year.

Adjusted EBITDA was $18.8 million for the quarter up 17.1% from the same period last year. Once again our strong financial performance was achieved without any significant contribution from perm placement and each of our divisions expanded their bill pay margins.

Exiting the quarter, physicians staffing, healthcare and IT engineering segments continued to have the strongest end market demand, followed by life sciences. Geographically growth opportunities continue to exist outside the United States. Since making a significant investment in our IT engineering group's European operations revenues have organically increased 158% year-over-year in constant currency.

Our weekly assignment revenue which excludes conversion, billable expenses and direct placement revenues, averaged $11,823,217 for the first three weeks of October of this year. That compares to $11,395,737 in weekly assignment revenues for the same three week period one year ago.

Operating leverage continued to improve during the quarter. Our adjusted EBITDA margin reached 11.6% up from 10.8% in the third quarter of ’07. And we again grew our gross profit in operating income faster than our revenues. We also increased our productivity and gross profit per staffing consultant over the last quarter and last year.

Before turning the call over to Mike, I would like to give you a brief review of operations. Our position staffing division had another tremendous quarter. Revenue grew 23.4% over the same quarter last year and 8.2% sequentially over Q2 of ’08.

The division marked its 10th consecutive quarter of consolidated revenue growth. Industry experts have predicted growth in 2008 to be in the mid-teens for physician staffing. This projected industry growth rate makes our performance even more gratifying and reinforces the strength of our broad-based approach to the physician staffing market.

The division's efforts to increase margins have also been successful. Internal processes and reorganization have led to an increase of 85 basis points in margin for Q3 over Q2 from 30.7% to 31.6%, while year-over-year gross margins increased 250 basis points.

We expect the economic turmoil to have a muted impact on our physician group. On the one hand there will be slightly reduced demand for physician coverage as healthcare organizations see declines in elective care. On the other hand the economic downturn will keep more physicians in the workforce.

As physicians re-evaluate their retirement portfolios, many will decide to keep working a few additional years or to work part-time instead of retiring completely. These physicians are excellent candidates for locum tenens work. So we anticipate an increase in supply.

Bottom line the factors that drive the physician staffing business, increased demand for work life balance and flexible work options among physicians, a growing physician shortage, the unbalanced position of physicians and physician's unique role as revenue drivers for healthcare organizations will not be impacted by the economic recession.

Turning to nurse travel, we continue to make progress in diversifying our client base and expanding our gross margins and market share. Our third quarter nurse travel revenues were up 8.5% year-over-year. Our nurse travel gross margin increased 56 basis points to 22.8% and gross profit dollars grew by 11.2% to $7.6 million in the third quarter of ’08, from $6.9 million in last year’s third quarter.

We expect to continue to perform well in nurse travel for the remainder of the year. Because of the changes we’ve made in our operations and the diversification away from the two large clients mentioned in previous earnings calls. Supply constraints and erratic hospital buying behavior continued to be a drag on this sector and recently the quality of new orders has slipped. With regard to revenue diversification, we billed over 369 clients in the quarter, up from 359 a year ago and only 294 two years ago.

Our top 10 customers now represent 27.5% of revenues up slightly from the 27.1% in the same quarter last year, but down significantly from the 48.7% two years ago. We continue to experience demand across a broad customer base, although at a less robust level, with orders essentially even with last year. And we have experienced a 1.4% year-over-year increase in bill rates. We are seeing the strongest demand for our services in the central states and demand in California is lower than in previous years.

In our life science segment I’m pleased to report that the internal steps we took to focus on more productive portions of the scientific staffing market permitted us to limit the year-over-year decline in revenues. Revenue in the life science segment was $33.9 million which represents a 5.7% sequential increase over the prior quarter and a 1.4% decline year-over-year. On a divisional basis U.S. operations generated $28.5 million representing a 6.3% sequential increase and a 1.1% decline year-over-year.

European revenues were $5.4 million, increasing 2.4% sequentially and declining 3.8% year-over-year. We attribute this sequential growth to such factors as, one, greater attention to growing a stable industry such as the biotechnology, food and beverage and chemical customer base. Two, an increase in the number of new client engagements, three, an increase in direct hire activity throughout the U.S. and Europe and four increased demand in the northeast region of the United States, a region previously reported as most affected by the softness in the U.S. market.

Gross margins for life science segment was 34.2% for the quarter, which represented an increase of 119 basis points sequentially and a 55 basis point increase year-over-year. The increase was driven by an expansion in bill pay margin during the quarter. We attribute these results to our disciplined culture, pricing policies, cost controls, direct hire activity and the type of customers we engage.

Moving onto the fourth quarter the life science segment continues to have demand for its services. However, the recent tightening of capital resources in both the U.S. and European markets has resulted in a renewed uncertainty and greater attention to cost containment previously seen in the first half of the year.

Combined with the seasonal challenges faced in the fourth quarter, we are cautious and committed to generating positive results. As we go forward into the fourth quarter our focus will continue to be on individual productivity, growing our contractor base, maintaining gross margins, increasing new client engagements and ensuring SG&A levels are in line with business trends.

In the Allied Healthcare division, revenue for the third quarter of ’08 were $14.6 million which represented a 6.2% year-over-year increase and a slight decline over the prior quarter. We attribute the year-over-year increase to better management, greater contribution from newer business lines and tighter operational execution. The slight sequential decline is attributable to, one, fewer elective procedures and postponement of preventive care due to the softness of the broader U.S. economy, and two, the unforeseen bankruptcy of a hospital serviced by our health information management business line.

Overall the business climate during the quarter was productive, offering good opportunities for continued growth. Gross margin for the quarter was 31.8%, which represents a 52 basis point decline over last year and a 73 basis point decline sequentially. However, our bill pay margin increased year-over-year. We attribute the decline in gross margin to less perm placement fees and an increase in other contract employee expenses and worker's compensation insurance expense.

Moving to the fourth quarter, demand in Allied Services remains steady and outside of expected seasonal factors unique to the fourth quarter. We are optimistic about the remainder of 2008. Upgrades in the quality of staffing consultants, pipeline of new business opportunities, investment in new business lines, such as rehab therapy combined with greater attention to performance metrics and training is expected to sustain our growth trends and improve our competitive advantage.

I now turn the call over to Mike McGowan the President of our IT and Engineering group.

Mike McGowan

As Peter mentioned the IT and Engineering division delivered strong third quarter financial results. Our revenue growth and bottom line contribution once again exceeded our expectations for the quarter especially in light of the overall economic environment.

Revenues in the third quarter were $56.4 million, an 11.5% increase over the third quarter of 2007 which was an equally strong quarter last year. Approximately 76% of the increase in sales was due to more billable consultants on engagement and 24% was due to increased bill rates.

We experienced sequential revenue growth in the third quarter of 2008 compared to the second quarter of 2008 and except for a small decline in the first quarter of 2007 we have had sequential revenue growth each of the past 19 fiscal quarters.

During the third quarter we billed 780 different client companies and no single client accounted for more than 2.3% of our revenue. We averaged over 853 billable consultants during the quarter compared to 787 billable consultants in the third quarter of 2007, an 8.4% increase.

Our average bill rate in the third quarter was over $124 per hour, 2.7% higher than the third quarter of 2007. We saw no unusual project cancellations during the quarter and our average length of assignment remained at approximately five months.

Gross margin for the third quarter was 38.1%, 35 basis points higher than the third quarter of 2007 with gross profit increasing $2.4 million or 12.6%. Our bill rates and gross margins continue to be among the highest in the staffing industry.

Our client and industry concentration remained at the same low level as it has from an historic basis. As I just mentioned, no single client accounted for more than 2.3% of our third quarter revenue with minimal concentration as well from an industry perspective.

During the quarter we had relatively few consultants in the financial services, mortgage and insurance industries. From an overall industry perspective, we experienced increased business within the specialized technical growth industries including medical equipment manufacturing, appliance manufacturers, peripheral equipment manufactures and pharmaceuticals.

Business declined slightly from firms in cyclical and consumer-based industries such as machinery manufacturers, semiconductors and retail trade. The strong sales and gross performance combined with our close monitoring and control of operating expenses resulted in a strong bottom line profit contribution for the third quarter and the first nine months of 2008.

During 2008 we have expanded three of our Oxford International telecenters, two in the United States and our telecenter in Cork, Ireland. During the past quarter we also opened a new European telecenter in the Netherlands. These investments in Europe over the last 12 months are realizing positive results as our current revenue run rate has more than doubled since last year at this time.

Our internal sales consultants drive our business and are a significant investment necessary for turn and future growth. While the average number of sales consultants increased during the first two quarters of 2008, we decreased the average number somewhat in the third quarter primarily through normal attrition through the economic uncertainly in both the United States and Europe.

We averaged approximately 410 sales consultants during the third quarter of 2008 compared to 447 in the second quarter, 440 during the first quarter and 424 during the third quarter of 2007. We monitor our operational activity daily and will continue to ensure that the size of our sales staff is in line with current and future economic conditions. In addition, we continue to invest in ongoing management and sales training programs and technology projects that we expect to increase productivity, sales and profitability in the future.

Oxford specializes in recruiting senior consultants in four technical disciplines, information technology, software/hardware engineering, mechanical and electrical engineering, and telecom. During the third quarter of 2008, we experienced positive growth in each of these disciplines over the same period of 2007 of 6%, 8%, 27%, and 34% respectively.

As a result of the growth within these disciplines, our overall revenue mix has changed slightly resulting in the larger percentage of our business in mechanical and electrical engineering and telecom and slightly less in IT and software/hardware engineering. IT now comprises 51% of our business, software/hardware engineering 24%, mechanical and electrical engineering 18% and telecom 7%.

During the third quarter Oxford's IT business was driven by demand for consultants for large ERP vendor installations such as SAP and Oracle and showed increased growth in the need for consultants specializing in best in breed business intelligence systems. Much of our software/hardware engineering volume came from the semiconductor industry from companies that manufacture electronic equipment.

And the key drivers of our mechanical and electrical engineering specialties in the third quarter were for mechanical engineers in the medical equipment industry and for control engineers across multiple industries.

Our outlook for the fourth quarter of 2008 is somewhat cautious. This cautious attitude is a result of the weakened U.S. economy and our forward-looking client survey of market demand and the Oxford Index. This correlate survey of Oxford clients has been highly predictive of actual demand since 2002 and the results of our most recent survey still indicate continued demand in each of our four disciplines and across the industry I mentioned earlier. However, that demand is at a somewhat slower pace than we experienced in the first nine months of 2008.

We believe our market strategy and particularly our telecenter business model within Oxford International allows us to win business with companies that have money to spend, regardless of their geographic location versus being tied to specific vertical markets or metropolitan areas where demand might be soft.

I'll now turn the call back to Peter.

Peter Dameris

Thank you, Michael. Before turning the call over to Jim I would like to comment on our projected fourth quarter growth. For those of you who have followed our company for a number of years, you know that the fourth quarter has fewer billable days and that holidays also impact our business due to customer facility closures. Traditionally we do not expect our first quarter results to grow sequentially.

In addition, due to all the economic and political uncertainty that our economy currently faces, our outlook for the fourth quarter of '08 is a little more cautious than normal. However, we are still optimistic and we currently see demand in each of our four disciplines. The demand, however, is anticipated to be less than we experienced in the second and third quarters of 2008. I'd like to now turn the call over to Jim.

James L. Brill

Thanks Peter. As Peter mentioned, consolidated revenues were $161.9 million, up 8.9% from 2007. There were 63.5 billing days in this quarter, 64 in the second quarter and 62.3 in the third quarter of 2007. However, for nurse travel there were 92 billing days in this travel, 91 last quarter and 91 in the third quarter of 2007. Foreign currency had about a $900,000 positive impact on revenue.

Now let me address some of the variances and their related explanations to the extent Peter or Mike has not. In position staffing the significant revenue growth, which included a 7.7% bill rate increase, was discussed by Peter and as he mentioned, we saw good margin expansion off of the second quarter in last year, which included an increase to the bill pay spread.

Again, as we've mentioned in the last couple of quarters, the actions that we took to turn margins around are working well. I think Peter did a thorough job of addressing both revenue and gross margin in the life sciences and Allied Healthcare. In the nurse travel group the 8.5% revenue growth was driven by an increase in bill rate as Peter mentioned, and an increase in the number of nurses on billing.

The 56 basis point increase in nurse travel gross margin was due to an increase in the bill pay spread, a reduction in housing and automobile expense, partially offset by an increase in worker's compensation expense due to a couple of large claims and an increase in other contract employee expenses.

Our IT and engineering segment revenues, as Peter and Mike mentioned, were driven by both and increase in bill rates and an increase in billable consultants. The increase in gross margins was driven by an increase in the bill pay spread, lower employment taxes and an increase in conversion fees, partially offset by an increase in other contract employee expenses.

Conversion and direct hire revenues totaled $3.3 million in the quarter or 2% of revenue, as compared to 1.8% of revenue in the second quarter of 2008 and 2% in the third quarter of 2007. Total SG&A expense for the third quarter was $39.2 million or 24.2% of total revenues, which is down from 24.9% last quarter, and 25.8% in the third quarter of 2007.

The $900,000 increase from the third quarter of 2007 is primarily related to an increase in costs as a result of the increase in revenues. Net of a $1.4 million reduction in amortization of intangibles related to the acquisitions, to $2.4 million. Also included in SG&A in the quarter is $1.6 million of equity-based compensation expense, and $1.2 million of depreciation.

Our operating income of $13.6 million, or 8.4% of revenues for the quarter, compared to $11.8 million or 7.6% of revenues last quarter and $9.2 million or 6.2% of revenues in the third quarter of last year. As we have previously discussed the second quarter of 2007 as required by our bank agreement we entered into a two year interest rate swap for $73 million, which fixed our 90-day LIBOR equivalent rate at 4.94%.

The increase in market value of this instrument was $503,000 in the quarter and this non-cash income item is included in non-operating income and thus excluded from EBITDA. Our tax rate for the quarter was 41.8%, net income was $6.9 million or $0.19 per diluted share. We believe it's meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters.

As outlined in today's press release, EBITDA for the quarter was $17.2 million, excluding equity--based compensation of $1.6 million. Adjusted EBITDA was $18.8 million, or 11.6% of revenue. Adjusted EBITDA was $17 million or 10.9% of revenue last quarter and $!6 million or 10.8% of revenue in the third quarter of 2007.

We ended the quarter with cash and cash equivalents of $48.7 million, up from $40.1 million last quarter. CapEx was approximately $1.43 million, down about $1.2 million from the prior two quarters. Net accounts receivable was $87.6 million at the end of the third quarter and days sales outstanding were 49, equal to last quarter, and down from 50 days last year.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant. For the third quarter we average 742 staffing consultants and gross profit per staffing consultant of $71,139. The life sciences segment generated $105,051 in gross profit per staffing consultant for the quarter, as compared to $101,968 in the third quarter of 2007.

The healthcare segment generated $81,024 in gross profit per staffing consultant per quarter as compared to $73,505 in the third quarter of 2007. The physician staffing segment generated $105,474 in gross profit per staffing consultant in the quarter, compared to $86,935 in the third quarter of 2007. And the IT engineering segment generated $52,419 in gross profit per staffing consultant for the quarter, compared to $45,032 in the third quarter of 2007.

Looking at fourth quarter revenue expectations this year, this year, due to the weakening of the economy we may see broader than normal shutdowns of the customer's offices and facilities which correspondingly affect the number of hours our employees can work. Additionally, Christmas falls on a Thursday which could cause employees to take greater time off and as Peter mentioned, there are approximately two fewer billable days in the fourth quarter versus the third, which equates to about $4.2 million in lost revenues based on our current run rate.

So considering these factors, based on labor markets not getting significantly worse than they are today and normal seasonal trends, we currently estimate consolidated revenues of $152 million to $156.5 million for the quarter ending December 31st, 2008. You should also remember that the fourth quarter last year, our nurse travel segment had $2.6 million in revenue related to labor disruptions at one of our large customers.

Our estimated fourth quarter year-over-year revenue growth rates excluding labor disruptions last year are 2% to 5%. We're estimating consolidated gross margins of approximately 31.85% to 32.1%, SG&A of 38.7 to 39.3 million, including equity-based compensation expense or approximately $1.5 million, approximately $2.4 million in amortization of intangible assets and financing costs and depreciation of approximately $1.4 million.

We estimate net income of $4 to $5.4 million, earnings per share of $0.11 to $0.15 and an effective tax rate of about 42%. Adjusted EBITDA is estimated to range from 14.4 to 16.8 million. As you know, these estimates are subject to the risks mentioned in today's release, and at the beginning of this conference call it did not include any impact related to the mark-to-market of our $73 million interest rate swap.

In order to meet the higher end of our expectation, we need to see weekly trends continue as they are today. And now I'll turn the call back to Peter for some closing remarks before we open up the lines for questions. Peter.

Peter Dameris

Thank you, Jim. Despite facing an increasingly more challenging economic environment we are very satisfied with our success in growing our revenues, expanding our operating and gross margin, generating cash, and growing our revenues faster than our competitors. While the entire On Assignment team is very proud of our results today, we are now focused on 2009 and beyond. We believe that the next year will provide our company a significant opportunity to gain market share and to continue to demonstrate the strength of our business model.

We would like to once again thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress where we are today. I would now like to open the call up to participants for questions. Operator?

Question and Answer


(Operator Instructions). Your first question comes from Jim Janesky – Stifel Nicolaus.

James Janesky – Stifel Nicolaus & Company, Inc

Yes, hi, this question is for Mike McGowan. Mike can you, you’ve been working with Oxford and in the industry for quite some time can you give us an idea of what the expectations can be as we move into, through the fourth quarter and into 2009 what the weaknesses and opportunities are of your company now versus let’s say the last cycle? I mean obviously the technology bubble is the last cycle had a lot to do with probably more significant declines but I think that folks are most worried about the IT segment as part of On Assignment and how that’s going to act in a cyclical down turn?

Mike McGowan

Sure Jim I would be glad to comment on it. I think you’re right. First of all let me go back to the 2001 recession last time. You are right I mean that was the perfect storm if you will, problems within the labor market so the whole Y2K bubble, the Internet bust, 9/11, et cetera.

Caused a lot of problems for us as well as the rest of the industry, so, previous recession to that in 1992, we actually continued to grow revenue and profits so it’s hard to compare the 2001 recession with what we are doing now.

As Peter mentioned and I mentioned we’re seeing a little slower demand but nothing really significant at this point so I don’t really anticipate again a huge issue as I mentioned our model is strong based upon our telecenter model as we can still go and find clients that are continuing to spend money based upon our model and be able to do that.

So I don’t anticipate at this point a significant threat if you will at this time if you will, based on what we’re seeing today.

Peter Dameris

Jim, you know, this is Pete I would have to add from my experience from the [Metamore] days it’s just, it’s important to reiterate that our model is just so much different than a lot of the other IT staff augmentation firms in that you actually saw our margins expand.

You actually saw the client concentration decrease, no customer makes up more than 2.3% total revenues for Mike McGowan so for us to have a significant retrenchment we’re going to have to loose 350 customers.

So that’s some of the, we’re not immune but our revenue dispersion or distribution is just much different than the average IT staff firm. You’ve heard some of the other IT staffing firms talk about aggregating lower margin business and focusing on net operating margin dollars. We’re able to expand our operating leverage without having to compromise our gross margins because of the sales we recruited to and our diverse customer base.

James Janesky – Stifel Nicolaus & Company, Inc

And shifting gears a little bit to capital structure, what are the plans, what plans to you have rather, for your cash and can you give us an idea of how your debt is structured and are there any plans to change the structure of that debt going forward

Peter Dameris

Yes, I'll address the capital usage first and then I'll let Jim walk you through our credit facility. We're building our cash reserves. We're seeing some attractive opportunities. It takes time to build trust and confidence on both sides of the equation on acquisitions, so this slower period doesn't hurt us because we're getting to know people.

With that said there's nothing pending. At the appropriate time, if the credit markets continue to become more rational and we can amend the credit facility to provide for a larger share repurchase program, we'd certainly look at this because as you can tell, I mean we're at peak levels of EBITDA and we're at trough levels of valuation so it would be very attractive to be able to acquire some of our own stock at this point.

And with that, Jim, why don't you walk them through the tenor of our credit facility.

James L. Brill

Sure. I'd say it's a seven-year term loan with a $20 million revolver and an accordion feature. You know how much cash we have on the balance sheet today. There is an excess cash flow, payment requirement. We actually made that last year before the end of the year which allowed us to not have any further principle reductions which quite frankly are fairly modest on a quarterly basis going forward.

As Peter mentioned we'd like to have a little more flexibility with some of these things and so as time goes on and the credit markets allow we'll continue to look at the facility and potentially look for some more flexibility in it.


Your next question comes from Tobey Sommer – Suntrust Robinson.

Tobey Sommer – Suntrust Robinson Humphrey

Thank you. Peter, I was wondering, if we look at the collection of businesses you have, they vary in terms of length of visibility, but kind of how much visibility do you have in revenue for the fourth quarter and then which segments may even be getting glimpses into the first at this stage?

Peter Dameris

Yes, it's a good question, Tobey, and it has to do with kind of when we book an assignment and on the one hand, and then on the other hand the length of the assignment. So absent a complete U-turn, because the length of our assignments tend to be longer in nature than most staffing firms, we feel pretty good about knowing where the fourth quarter is going right now.

To remind everyone, as it relates to the business that we book in our position staffing business, any work that our recruiters and sales people work on today, we won't generate typically a penny of revenue for three months. So we have a pretty good view of what's going on into January, February and March for the physician group. Now, reminding you all as to the business model on the IT, and the nursing side, we probably have greater visibility as to the trends in the marketplace because any work we perform today we traditionally are generating revenues in five to six business days.

So in IT and nursing if they're saying a slow down in orders, that's more of a real time indicator because it's an immediate translation into revenues. And then on the life sciences and the Allied Healthcare side, that's kind of in between those two posts that I just gave you. They typically, two to three week lag and those assignments tend to be more in the three month range.

So we feel like we have pretty good visibility into the fourth quarter. We are seeing some deterioration in the nursing business, demand. We're not seeing the lift that you would get as hospitals start to staff up for the expected absenteeism of their full time workforce during the holiday season and we're seeing a lot of anecdotal information from the CNOs saying that the patient admissions and censuses are coming down.

But with that said, we're offsetting that by continuing to expand our customer base, and remember we're just trying to put one or two nurses per customer, so fourth quarter, pretty good visibility; on the healthcare side pretty good visibility into the first.

Tobey Sommer – Suntrust Robinson Humphrey

So if we're to look at and try to think about your business on terms of variable versus fixed costs as you do experience changes in demand and given the current climate those changes may be on the negative side, how can we think about the proportion of business that expense that you can adjust to try to track that demand?

Peter Dameris

I'll let Jim answer it first and then I'll add something to it.

James L. Brill

Tobey, I think the best way fro you to try and understand what our SG&A looks like, because that, about 68% of our SG&A expense is compensation related, so compensation and benefits. And obviously that's a variable expense.

Peter Dameris

What I would add to that, Tobey, is unlike other staffing firms like Robert Half or K-Force, which do a very, very good job at permanent placement, as well as just contract labor, they have dedicated full time workforces to contingent search and perm placement. We do not. So you'll see, when you see them taking hundreds of heads out of their business because of the dramatic drop off of perm placement, one, you won't see that because less than 2% of our revenue comes from perm or conversion and two, we have I think out of 742 staffing consultants we may have two, three that are permanently related or dedicated to perm placement.

Tobey Sommer – Suntrust Robinson Humphrey

So perm was under 2% of revenue in the quarter, or?

Peter Dameris

Perm and conversion was under – was at 2% for the quarter.

Tobey Sommer – Suntrust Robinson Humphrey

At 2%, okay. And then I had two other questions and I'll get back in the queue. One, what is the timeliness of the data that you get to look at in the business? Are you looking at dailies or weeklies? And then secondly, I was going to kind of follow up on a previous question and ask what kind of tells should we look for and changes in demand on the IT side? Would that be SAP, Oracle implementations and things that we hear from those companies?

Peter Dameris

Okay, we'll tag team that. I'll let Mike handle as much of that as he wants, but let me go first. We look at data daily and weekly and we look at data with regard to starts, listings, fills, terminations. So we're seeing things on a daily basis and we measure people's productivity daily. Key performance indicators, the daily revenue generating activity on a daily basis. They have flat – they have dashboards that show exactly what they're doing and how they're tracking against internal objectives and prior periods. Mike, you want to add to where we're tracking?

Mike McGowan

Sure, and the same thing for Oxford. I mean, we look at the data and information and what we call production on a daily basis, so in fact nearly every hour. So we know exactly what's going on across the entire system. Regarding your question in terms of where we will see potentially some slow down, it's in the exact area you mentioned, primarily within the large ERP installations. In fact, we're starting to see that a little bit and we did see a little bit in the third quarter. We're starting to see it a little bit in the fourth quarter here, primarily the SAP large implementations.

Still doing a lot of upgrades and that sort of thing, but primarily right now that's where we're seeing some of the slow down.


Your next question comes from Jeff Silber – BMO Capital Markets.

Jeff Silber – BMO Capital Markets

I just wanted to get a little bit more color on your fourth quarter guidance. I believe you had said if we take out the strike-related business from last year, you're expecting organic growth on a year-over-year basis of about 2% to 5%. Can you kind of rank the different segments along that strata? Which ones you think will grow faster? Which ones you think will grow slower?

Peter Dameris

Yes, Jeff, we don't give specific percentages but I will give you kind of some qualitative comments. Clearly it's the strongest growth contributor will be the physician staffing, probably then followed by nursing IT and then watch sciences and Allied Healthcare.

Jeff Silber – BMO Capital Markets

That's helpful. Then I have the same kind of question on gross margins. It looks like you're looking for gross margins to be up year-over-year. What gives you the confidence that that will continue? And again, two, on a relative basis where do you think you'll see the best performance and the worst performance?

Peter T. Dameris

Yes. Correct anything that I say, Jim, that's not indicative of the question he's asking, but one of it is remember we had an internal issue with gross margins in the physician staffing group last year, which [Mark Brouse]'s team has done an incredible job of refocusing our pricing practices and you've seen a dramatic increase. I think we're probably 500 to 600 basis points higher than any of the other publically traded physician staffing group divisions.

What gives us confidence that we're going to continue to see the margins that we're projecting is our discipline pricing culture is that we know quite clearly on the front end what the profitability is of every assignment that we work on; if it doesn't hit our metrics we don't complete the transaction.

The thing that could cause variability in our gross margins kind of post quarter is as we close the quarters out and we look at the worker's comp and because of the type of business we sell, there's not a lot of worker's comp exposure except in the nursing business. They developed as the actuarial groups develop the incurred but not yet reported. That can have a swing if there's a large incident or two.

We actually had that incident, that situation, this quarter with the nursing group. I have in a couple of larger than kind of estimated increases to reserves that affected their margin a little bit this quarter. Jim, you want to add something?

James Brill

Well I might just say that I think it's appropriate to also look at the quarter-to-quarter movement. We're expecting that it's going to be down a little bit in the fourth quarter. And again, if we anticipate perhaps a little bit of drop off in the permanent placement and conversion revenues, that would negatively impact things.

And there may be a little bit more pressure on pricing and bill rates, given where we're going with the economy, so that's sort of how we're looking at it on a quarter-to-quarter basis.

Jeff Silber – BMO Capital Markets

Do you have time for one more numbers question? What should we be looking for capital spending in the current quarter?

James Brill

It's probably going to be in the range of $2.5 million, something like that.


(Operator Instructions). Your next question comes from Andrew Fones – UBS.

Andrew Fones – UBS

I wanted to ask a question about your consultant count. I think from the numbers you guys, in your remarks, in terms of the consultant counts down about 15% in the third quarter. So I'm just wondering if you could give us some detail in terms of between the different divisions, how the consultant count changed? I think you said you were at 410 on average for the third quarter. If you could give us kind of a sense of where you are now in the fourth quarter?

Peter T. Dameris

Yes. The number that you just quoted us, Andrew, was for Oxford only. And as you know, if you reflect back on the productivity metrics we give you, they have the lowest gross profit per staffing consultant, because the way of the business model is we throw a lot more bodies at the recruitment and order origination than our other divisions. And they typically have a higher voluntary and involuntary turnover.

So what we really did in the quarter was allow the voluntary attrition to tick up a little bit and not as aggressively replace. So the vast majority of the tick down and staffing consultant recruiter and sales people head count was at Oxford, it was not equally across the board. And that you need to also put in perspective, because remember from prior conference calls we refer to it as the surge in April of '07. We really pushed to ramp up which served us very well.

If you remember the third quarter of '07, we grew 12.8%. The fourth quarter of '07 we grew 16.1% in that division, and then in the first quarter of '08 we grew 19.3%, so as we see the growth rate having slowed down a little bit, we've taken out some of that headcount that we had really pushed in April. So we're getting back to more traditional levels.

Andrew Fones – UBS

I apologize for not realizing that it was just Oxford, but I think if the total was 742, should I assume that we actually saw a little bit of growth in the consultant count across your other divisions?

James L. Brill

Yes there was a little bit of growth across the rest of the divisions if you look year-to-year.

Andrew Fones – UBS

Where does the count stand perhaps overall currently, if we continue to see a fall off at Oxford, or how should we think about that?

Peter Dameris

Yes, we don't give mid-quarter headcount numbers like that, but what I can tell you we're at pretty consistent levels. We don't have any kind of initiatives to get to a targeted headcount number. We're looking at making sure that the personnel we have are appropriate for the positions they fill, and we're upgrading where people aren't performing to the levels that they need to be. But we're at pretty constant levels right now.

Andrew Fones – UBS

If we look at your guidance for the fourth quarter, you're clearly looking for a little bit of a revenue slow down. Should we, in that environment, assume that you might allow that kind of attrition to continue to bring that number down slightly?

Peter T. Dameris

It's a case-by-case situation, division by division. In some of our divisions we're trying to add headcount and we just can't find the right resources quick enough. But we're not going to overreact because, Andrew, we're still growing, and as we tried to point out in our qualitative basis about our fourth quarter guidance is the fourth quarter traditionally is one of the most seasonally impacted quarters for us because of facility shutdowns and holiday pay and people not being willing to travel away from their homes during the holidays.

So we're just starting this economic cycle and we're still growing. So we're assessing this because we're not going to be penny-wise and pound-foolish. Things aren't coming out of us fast and furious where we can't cut fast enough. We've got the opposite phenomenon occurring at this company. So we're taking a measured approach, and we expanded our operating margin in the third quarter and with that measured approach we'll continue to be diligent.

Andrew Fones – UBS

And then if I could just kind of get a little bit more color in terms of life sciences? I know that in the past you've said that pharma bears a kind of weight on that business. If you could perhaps talk about some of the other industries that you serve from life sciences and kind of what you've seen in those other industries? That would be great, thank you.

Peter T. Dameris

Yes. No, as e kind of point out food and beverage and personal care represent about 16% of the revenues of that division. Agricultural, petrochemical, material sciences represent about 30%. Biotech represents about 20%. So it's a challenge across the board, but it ebbs and flows and we've focused more, as we said in our prepared comments, on the food and beverage and the material sciences and the petrochemical area versus big pharma as they have tightened their belt.

Andrew Fones – UBS

Are you seeing attraction in these other areas build would you say?

Peter T. Dameris

Yes, yes, yes.


Your next question comes from Josh Vogel – Sidoti & Company.

Josh Vogel – Sidoti & Company

Just building off a question earlier, as you continue to generate some nice cash flows here and you mentioned that you're looking to build reserves right now, but I was just curious that when you do decide to put this cash to use how would you prioritize between acquisitions, buybacks, and debt repayment?

Peter T. Dameris

Josh, we really can't add anything to the answer we already gave. It's just opportunistically.

Josh Vogel – Sidoti & Company

And on the receivables, can you discuss them a little bit? Are you seeing any delays from clients right now?

Peter T. Dameris

Yes, now again, the way we run our business, Josh, and we give you that kind of client concentration, you didn't see us increase our reserve for bad debt, because we had exposure to the financial service industry, so just look at the data and you'll gather what's going on there.


At this time there are no further questions. I would now like to turn the conference over for closing remarks.

Peter T. Dameris

We appreciate your time and attention, especially this early in the morning, and as you can tell the economy has softened, but we view this as an opportunity for us to continue to expand market share and improve our operational efficiencies. We look forward to reporting our fourth quarter results and thank you for your continued attention.


This concludes today's conference.

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