AMN Healthcare Services Inc (AMN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMN Healthcare third quarter 2009 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, VP of IR, Ms. Amy Chang. Please go ahead.

Thank you, Beth. Good afternoon, everyone. Welcome to AMN Healthcare's third quarter 2009 earnings call. A replay of this webcast is available at AMNhealthcare.com/investors and will be available until August 20, 2009. 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, 2008, and other quarterly and periodic reports which have been filed with and are publicly available from the SEC.

The 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 it. Developments subsequent to this call may cause these statements to become outdated.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 to Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Thank you, Amy. While there are early indicators of improvement in some of our markets, the prolonged, negative economic environment and in particular the high levels of general unemployment persist in creating constraints on our business. The team at AMN Healthcare remains steadfast in our execution of the nuts and bolts of serving our customers well while also investing the time and resources necessary to position the company to be a stronger, value-added partner for our clients.

As a recognized leader and innovator in the industry, there continues to be opportunities even in today's challenging environment to strengthen our leadership position. There are four key areas in which we are diligently focused. First, we continue to build stronger client relationships and are aggressively pursuing and delivering on preferred provider and managed services contracts. Second, we are making progress in our new market expansion initiatives to further diversify our service lines. Third, we are streamlining our business model including our operational and cost structure to improve our margins and profitability as the market resumes growth. And fourth, we have strengthened our balance sheet by paying down our debt and maintaining strong operating cash flow enabling us to take advantage of future market expansion opportunities.

Our ability to remain agile and execute well in the short-term while keeping an eye on nurturing our new service lines will allow us to emerge from this economic cycle as a stronger leader, to be better a partner for our clients, and well positioned to capitalize on new market opportunities.

Consolidated revenue for the third quarter of 2009 was $166 million, a decrease of 47% from prior year and 16% from prior quarter. The primary driver of the year over year and sequential decline was the decrease in nurse and allied staffing revenue which was down 62% from the same quarter last year and down 26% sequentially.

While this was in line with our earlier predictions that volumes in this segment would further decline in July and August and bottom out in September and October, this stability seems to now be sustainable. As we look to November, we are seeing consistent, and in some weeks slightly increased, traveler accounts.

Our nursing and allied orders grew through the third quarter and gained particular momentum in September and October. While still below last year, today's nursing orders are the highest that they've been in 2009 and appear to be picking up week by week. This is consistent with some of the healthcare facilities reporting stable admission levels and anticipating higher admissions in the near term. It is difficult to predict the trajectory of future order growth, but even at the current order levels which are above our traveler count, we believe there is opportunity for growth as we go into 2010.

The uncertain economic environment and high general unemployment rates have made it easier for facilities to recruit and retain permanent healthcare professionals as well as (inaudible) and part time clinicians. However, most agree these conditions are not sustainable. As the overall economy improves and probably more importantly their perception of the future economic environment improves, we anticipate healthcare professionals will return to part-time work and retirement, resulting in increased demand for temporary assignments and supply.

Despite the near term challenges, the long-term fundamentals that drive our industry have not materially changed. The basic model of patient care delivery through nurses, allied professionals and physicians will continue and we will need more clinicians in the future, not fewer, to serve the growing aging population. Patient flow from greater access to healthcare is also expected to increase as reform initiatives are implemented. While there is still much uncertainty around what exactly will be passed in Healthcare Reform, the outcome is still anticipated to increase the demands on clinicians and should be positive for the healthcare staffing industry.

Based on these macro economic dynamics, it is not a matter of if there will be increased demand for clinicians, but more a matter of the timing and severity of the shortages that are looming ahead. This is evident as hospitals continue to stay focused on physician recruitment and the long term expansion of the clinical services.

While the long-term fundamentals are still very compelling, the short-term lower demand for temporary clinical staff has heightened the importance of delivering a superior client experience. We want our clients satisfied and recognizing the differentiated value we bring every day. Throughout this year we have been successful in strengthening and building relationships with clients and aggressively pursuing preferred provider and managed services agreements.

We have found that as facilities rationalize the number of providers they work with, we are benefiting from our strong historical relationships, our relentless focus on quality, our innovative reputation, and the financial stability we have as the industry leader.

To this point, we are very pleased to have been recently selected as the exclusive managed services provider to staff travel and per diem nurses for the California Kaiser Foundation Hospital. Kaiser was seeking a strong partner who would consistently provide a high level of service and quality clinicians across their numerous acute care facilities. We are very proud to be partnering with Kaiser and look forward to finalizing contract details and beginning this new relationship effective January 1st. We believe this to be one of the largest managed services nurse staffing contracts in the country. These preferred client relationships position AMN well to capture more market share as demand continues to recover.

Another example of execution today that will position us for future growth is our recruitment process outsourcing service line which was launched less than a year ago. Although still a small division, this service line continues to grow steadily and differentiates AMN in the marketplace as an innovative solutions oriented partner for our clients.

As the economy rebounds and attrition rates begin to rise, hospitals will ramp up their permanent recruitment again. RPO will enable us to help our clients by providing a solution that extends beyond our traditional travel staffing services.

Our locum tenens segment achieved third quarter revenues of $75 million which is 12% lower compared with prior year and 5% lower than last quarter. The sequential decline was driven primarily by a double digit decrease in anesthesia volume and to a lesser extent in surgery, radiology, and primary care. These were offset by an increase in behavioral health. The decline in the anesthesia market began in the third quarter and appears to be widespread throughout the industry, affecting anesthesiology groups and contract management firms as well as locum tenens providers. One driver being cited is the lower levels of surgical volumes, particularly in elective surgeries.

Because of the lack of hospital and ambulatory surgery expansion in 2009, the contract management firms and the anesthesiology groups have also seen a halt in the number of new or expansion contracts. These new business implementations have been a historically strong source of demand for locum tenens for this specialty.

In addition, clients seem to have experienced more success hiring anesthesia professionals into permanent positions. Even within our own supply of anesthesiology locums, it appears the economic environment and lower demand has created a desire to seek more employment certainty and during the middle of the year we saw a larger number accepting permanent positions.

Our anesthesia business currently comprises approximately 15% of our locum tenens volume. For now it appears the step down in anesthesia demand has stabilized, albeit at levels for the fourth quarter at about 40% below prior year. Over the past few weeks we have seen a pickup in our demand. However, it is still difficult to assess how long it will take for volumes to recover to the prior levels. The biggest drivers for resumed growth in this area will likely be tied to surgery volumes and improvement in general economic conditions.

In conjunction with the end of the federal government's fiscal year, a new locum tenens contracting program became effective on October 1st. These program changes resulted in a temporary disruption to our government business. While this had only a small effect on our government business in the third quarter, this will have a greater impact on the fourth quarter. We do expect to recover much of this business over the next several months.

Overall in our locum tenens segment, revenue per days filed was down slightly by 2% both year over year and sequentially which was due primarily to the continued mix shift away from our highest bill rate group of radiology. Days filled volume for the quarter was down 10% over prior year and 3% sequentially. Our overall days available, which is an indicator of current demand, has recently dropped to a lower level compared with prior year. This is consistent with other industry reports published in the past month. Despite the lower demand levels, our recruitment and placement teams are doing an excellent job of recruiting candidates and increasing fill rates which are higher than last year across all specialties.

In addition, through efficiency improvements and careful expense management, the team was able to grow operating income year over year. In addition to focusing on daily execution, we continue to dedicate resources to new areas that will fuel our future growth in the local tenens market. For example, in the third quarter we experienced solid growth in dentistry which is one of our newer specialties. Last quarter we re-entered the private sector emergency medicine staffing market and have continued to make steady progress.

We have had success growing our new days available and are working to build our available supply to fill this demand. In physician permit placement, third quarter revenues were $8.7 million which is 31% below prior year and 2% below prior quarter. While there aren't any notable direct comparisons, theses results appear to be in line with other executive retain search companies. The year over year shortfall is primarily due to lower overall searches, placements, and pricing. Although hospitals continue to focus on physician recruitment as a strategic part of their growth initiatives, in 2009 they have been relying more on their internal hiring of physicians in order to lower their costs. Here, like in nursing, we have seen improvement in our leading indicators. In the third quarter we experienced a sequentially spike in the new retained searches. We expect this increase in new searches to be sustainable and to translate into increased placements over the coming months.

Throughout the year we have been very proactive and disciplined in adjusting our infrastructure across all business lines. Both in direct response to the short term market trends as well as to make permanent and strategic improvements to our business model.

In the third quarter we completed the implementation of the facility consolidations and brand rationalization discussed in our previous earnings call. These moves will further streamline our business model and improve our profitability to better leverage our infrastructure in the future. While our third quarter travel nurse count was impacted by these strategic branding decisions, these changes will benefit us as we move forward and we are better able to leverage the strength of our continuing brands.

Through the year we have maintained our focus on execution by staying close to our customers and aggressively pursuing preferred relationships. In addition, we have made solid moves to streamline our operating expenses and improve our cost structure which has enabled us to continue growing our new service offerings while still maintaining respectable operating margins. These efforts position us to continue our track record of balancing disciplined execution in the short term while building on our long term strategy of investing in client focused innovation and new market opportunities. These organizational transitions have taken a tremendous amount of resolve and hard work on the part of our very passionate and talented team members. These changes simply would not have been possible without their commitment and sacrifice. I'd like to thank each and every AMN team member for their continued commitment in serving our clients and pursuing our mission.

At this point I would now like to turn the call over to Barry Bailey, our CFO, who will give you more detail on our third quarter results and our financial position. Barry?

Thank you, Susan, and good afternoon, everyone. Susan has provided you an overview of the top line performance for the quarter overall and by segment. In the second quarter earnings call we indicated we expected revenues to decline approximately 15% in the third quarter, with actual results coming in at 16.5%. While our nurse and allied business appears to have stabilized more recently based on travelers on assignments and outstanding order volume, we did see further erosion as Susan noted in our anesthesia business within our locum segment.

Rather than move to capture share at any cost in a difficult market, we have focused on the quality of our earnings at both the gross profit and EBITDA level by maintaining the highest levels of service and quality.

Our consolidated gross margin in the third quarter of 2009 was 27.4% versus 25.7% in the prior year and 27% last quarter. The increase from last year and last quarter is primarily due to our higher margin locum tenens and physician permanent placement segments representing a greater portion of our business mix.

As we look forward to next quarter, we expect our overall gross margin to be consistent with what we saw in the third quarter.

SG&A expenses came in at $37 million which was 39% lower than prior year and 2% lower than prior quarter. This lower level of SG&A is largely due to lower employee and office related expenses resulting from cost reduction actions taken this year. Included in SG&A this quarter was a benefit of $1.5 million as a result of the settlement of the cash holdback liability with the selling shareholders MHA Group. This benefit was partially offset by an $800,000 increase in bad debt reserves associated with a large VMS technology provider that is facing liquidity problems. We are taking steps to mitigate our exposure to similar such occurrences.

Looking forward to the fourth quarter, we expect our SG&A spending levels to decline slightly as we experience the full benefit of our cost reductions efforts, although increasing as a percentage of revenue due to the projected decline in fourth quarter revenue.

As I am sure you have already noted, our earnings release tables, we have changed our segment reporting. Reflecting the emphasis on managing costs more correlated with our business segments and segregating our corporate costs, we are no longer allocating corporate costs that cannot be specifically identified with directly supporting one of our three segments. The result is that for the third quarter we are reporting unallocated corporate overhead totaling $3.8 million as compared to $8.2 million for the same period in the prior year, a decline of 54%. I do want to note here that the $1.5 million credit I referenced earlier is netted in the $3.8 million.

Reflecting the new approach to allocating corporate costs, our nurse and allied segment operating income for the third quarter was $4.6 million, representing a 78% decline as compared to the same period in the prior year. The decline in operating income in our nurse and allied segment is greater than the decline we saw in its corresponding revenue due to the fixed nature of certain infrastructure costs associated with this segment. These costs are expected to grow at a slower pace than revenue as the business rebounds which will provide positive operating leverage in the future.

As a result, operating income margins declined to 5.6% from 9.4% in the third quarter of 2008. The nurse and allied gross margin this quarter was 24.4%, 80 basis points higher than the same period in 2008 and 60 basis points lower than last quarter. Traveler volumes declined 26% as compared to the second quarter of this year to $2,704.

Operating income for our locum tenens segment was $7.5 million, an increase over the same period in the previous year of 1% despite revenues declining 12%. The operating margin of 10% was benefited by an increase in gross margin to 27.2% for the quarter which was up 60 basis points compared to last year and 110 basis points compared to the previous quarter. The improvement in operating income in our locums business was driven by continued improvements in our cost structure and by specialty mix somewhat offset by lower days filled.

Our physician permanent placement services operating income of $2.2 million declined 36% as compared to the same quarter last year, consistent with the decline in revenues for the same period. Gross margin in the third quarter was 57.7%, slightly up as compared to the same period in 2008.

Separate from our segments, we recorded $6 million of restructuring charges in the third quarter, consisting primarily of lease related charges associated with facility consolidation and severance payments. Year to date we have incurred $11 million in restructuring charges. We are not expecting to incur further restructuring charges during the requirement.

The Company's effective tax rate for the quarter was 35.3% compared to 34.4% last year and 44.8% last quarter. The sequential decrease reflected in part a catch up tax adjustment last quarter to true up to the full year projected rate. Overall, the Company's tax rate reflects the impact of permanent differences that are not deductible for tax purposes and given the Company's loss position in the current year, results in a lower than expected overall tax rate. The effective rate is significantly influenced by the level of pretax income and the corresponding amount of our permanent differences.

The Company recorded a net loss of $2 million or $0.06 per share. Excluding restructuring charges, the Company's net income on an adjusted basis was $2 million or $0.05 per diluted share. The Company continues to generate strong operating cash flow which was assisted by significant reductions in accounts receivable. During the third quarter we generated $19 million of operating cash flow which was used primarily to pay down debt. Days sales outstanding increased by one day to 53 days but was down by three days compared to a year ago..

We ended the quarter with $77 million of debt outstanding, a reduction of $69 million since the beginning of the year and a debt to EBITDA ratio of 1.1 times, an improvement compared to 1.7 times a year ago. We are in compliance with our debt covenants and have already begun looking at refinancing our current credit agreement as we look at opportunities in the marketplace. In addition, we have been able to grow our cash and equivalents by $15 million since year end to $23 million. I will now return the call back to Susan. Susan?

Thanks, Barry. Now for a brief outlook on our business trends in the fourth quarter. Nursing orders are continuing to grow and the year over year gap is narrowing. As we enter the fourth quarter, nurse and allied traveler counts have clearly stabilized and is showing signs of improvement. We feel very well positioned as we enter 2010.

In locum tenens we experienced lower sequential demand during the third quarter primarily due to the anesthesia market weakness. As we enter the fourth quarter, the anesthesia demand appears to have stabilized. However, as I mentioned earlier, we are expecting lower volumes in our government business. In physician permanent placement, the increased new searches experienced during the third quarter are expected to result in improved placements over the coming months. Overall, pricing and gross margins are expected to remain consistent. Based on these trends and the effect of the normal holiday seasonal volume decline, fourth quarter consolidated revenue is expected to decrease sequentially by 10% to 15%. About a third to half of this decline is what we would consider normal seasonal trends.

As I hope we have been able to convey on this call, we remain very focused on four key aspects of our strategy. Building stronger relationships with our clients, growing our new service offerings, improving our cost structure and operating model, and prudent management of our balance sheet. These key initiatives have enabled us to deliver respectable margins despite the prolonged challenging environment in the short-term while at the same time positioning us for long-term growth and expansion of our leading position. And with that, we would now like to open up the call for questions.

(Operator Instructions). Jim Janesky, Stifel Nicolaus.

Yes, thank you. A couple of questions. Susan, when we look by division going into the fourth quarter, would you expect -- the way I heard it and just correct me if I'm wrong, is that physician perm will probably, the declines will probably get smaller than the third quarter. Locums will go up and nurse and allied will be on, year over year that is, nurse and allied will be about the same as the third quarter? Does that make sense the way I'm thinking?

I think generally nurse and allied on a year over year basis, yes, similar. Certainly the sequential decline is less than what we saw from the second to the third quarter because we've seen a stabilization and even just a slight ticking up in the volumes going into November. And then on the locums pieces, yes a greater decline going into the fourth quarter partially because of that step down that occurred in anesthesia. Partially because of seasonal trends. And then partially because of this kind of government disruption transition that we've gone through.

Within the nurse business, you talked about stability and you did talk about seasonality in the December quarter. But is this, while you did talk about orders stabilizing more than bookings, is there still a discrepancy there between orders and bookings due to all the factors that you cited?

There is still a bit of a discrepancy in that orders have actually been sequentially ticking up for six months now, six consecutive months we've seen an uptick. And as I mentioned, we actually saw quite a bit more momentum in September and in particularly October. But it takes a while to translate that into increased bookings. Now yes, we have seen increased bookings over those months as well, but not to the same magnitude as we've seen orders increase.

And will the Kaiser contract -- will that have an appreciable difference on as we enter the March quarter of 2010? Can you give us an idea of what kind of volume trends they've been running at?

It would probably not be appropriate to share the dollars or volumes for two reasons. One, because it's confidential information with our client. But also because they don't have a perfect prediction of what their volumes are going to be either, Their volumes in 2009 were clearly down from 2008. As we look forward, clearly it's going to add revenue and profitability for us both from our ability to place more of our own travel nurses into those contracts, but also because we will be the master vendor for all subcontractors that book into Kaiser both for travel and per diem. So we'll pick up a little bit of net revenue, it's a small piece, but a little bit of net revenue by providing that master vendor service.

Okay, thank you.

Sorry I couldn't give you a more specific number.

Well, that's no problem, I'm not asking -- I guess just directionally into the March quarter, could we see nurse and allied be up sequentially?

Yes, that is currently our prediction.

Okay, that's what I was looking for. Thank you

Jeff Silber, BMO Capital Markets.

Good afternoon. Forgive me, I came on a bit late and I missed some of the comments. In terms of some of the stability or the momentum you're seeing in the nurse and allied business, does that have anything to do with the H1N1 pandemic that's going on?

It can be partially attributed to the early flu season and H1N1 but it also is clients feeling increased census. And in some cases the anticipation of increased census as well as starting to feel a little bit more pushback from their permanent staff. In fact we've seen that even in statistics. If you look at the BLS number of quits in healthcare, it's actually gone up over the last couple of months. So we think that possibly they've kind of hit the saturation point when they could get more hours out of those part time workers, retired workers, and they're starting to get a little bit more pushback.

Are you seeing any impacts on your specific business in terms of your supply pipeline?

The impact in terms of our ability to recruit more supply?

In terms of just once you have somebody and all of a sudden they call in sick. Has that been an issue?

Oh, no it has not yet, but we are watching that diligently, because as you may know, in several states they have implemented guidelines which suggest that if a healthcare professional comes down with H1N1 they have to take seven days off of work. And so we obviously have to be in contact with our clients as well as our providers to make sure that we can not have too much exposure there and extend their contracts, etc.

Okay, great. Actually that's helpful. If I can move onto gross margin trends. If I'm just looking sequentially by division, it looks like gross margins went up, locum tenens from second quarter to third quarter, but went down in the nurse and allied and the perm business. Can you give a little bit more color by division what happened there?

Sure, I'll let Barry jump in on that.

From the standpoint of locums, and I think we've mentioned this on a call, is it's driven in part by mix. We've done significant work around managing the costs, but it has been impacted by the mix of business. So that's driving it particularly sequentially. And I think we're seeing that as well relative to the nurse and allied. We did have an impact of a small adjustment to workers comp expense as a catch up to the insurance side of the equation in the third quarter. That contributed somewhat to that, about 50% of that impact.

I'm sorry, that was 50% of the divisional impact or of the total increase?

Of the divisional impact.

Okay and that was in the -- which division again? Forgive me?

I'm sorry, nurse and allied.

That's what I thought, I just wanted to double check that. Okay, that's helpful. In terms of the potential disruption in locum tenens because of the government business, roughly what percentage of that division is government related?

We have about 20-ish% of our total locums business in government and about 40% of that is through what we would consider subcontracts. And every five years, the federal government, in particular the military, goes through a re-contracting process where they award new contracts to, in this case kind of underutilized, disadvantaged. They had a particular focus this round on metronome types of firms. And we provide directly to the federal government, but some of our business is also through these subcontractors. And so whenever you go through this transition every five years, you have a little bit of a disruption where the -- you've been doing business with the incumbents, you have to establish new relationships with these new firms. And quite honestly, seven new firms were selected, only six of them have ever done business in locums before, so this is not their main expertise. It takes them a little while to I think get in the groove and get relationships established with some of the agencies such as staff care that have been doing this for many years. So we've already seen them kind of smooth out the bumps and seen our demand pick up. And as I mentioned we do expect to be able to really recover and regain most of that business. And in fact, we may be in a better position next year with that business because last time around we had worked with four out of ten, I'm sorry four out of ten of the subcontractors actually had locums experience. This time around as I mentioned, only one out of seven actually has experience. So that probably means there's actually more market share for us to gain in working with them.

Great. I appreciate that. And just one follow up. I know you're not giving specific guidance beyond revenues and some of the color you gave on margins. But based on just back of the envelope calculations, do you think the Company will be running at operating loss in the current quarter?

An operating loss?

Yes.

EBITDA loss? No.

Not an EBITDA loss, but on an operating income loss?

No.

Okay. All right, I've got to recheck my numbers here. All right, thanks so much.

A.J. Rice, Soleil Securities.

Hi, everybody. I've got a couple of questions if I could ask. First of all, I know you had the 35.3% tax rate in the current quarter. Does that carry over then to the fourth quarter? Or is there some other rate we should be using?

That would reflect -- as you know, we have to calculate an annualized rate and apply that, so that would carry forward for the fourth quarter.

Okay, I didn't know whether the annualized rate was the year to date rate or whether it was, and this was a catch up, or whether this is the end. So this annualized rate?

Yes, we did the catch up in Q2. That's why we had that unusual rate then, a higher rate. We've come down to this adjusted rate.

Okay, and then as you look ahead to next year, is there any reason to think it's materially different than 35%?

Well yes, because if you look at a statutory rate, just generally around ours, if you look at our financials, our statutory rate after taking into account state impacts, would be something just less than 39%. But then you add on the fact that we do have permanent differences out there and other adjustments that would increase that rate. It will be somewhat impacted clearly by our overall operating performance that will dictate that ultimate rate. But there's your start point is somewhere just slightly south of 39%. Look at the permanent differences we have and move from there.

Okay. Then next, another detail question first of all. Just on these items that you've isolated out for us, I guess -- I didn't see them in the press release, maybe I didn't notice them -- the $1.5 million, I guess that works out to be a benefit. And the $800,000 negative. Just a little more color on what those were. I'm trying to figure out whether we should think of those as one time or ongoing.

The $1.5 million was the result of a settlement associated with a cash holdback we had when we acquired the MHA operations So that's just an outright. We settled with the original sellers there on some outstanding liabilities and the result was that we were able to reverse this liability essentially and that goes in the P&L.

So that was not a reduction in the purchase price, that was money that you got that became income?

Correct, well, yes, because we have to reverse it. There's no -- we don't have any probable liabilities that would go against that.

Okay. Now the $800,000?

The $800,000 is associated with a technology vendor, a fairly large one that was acting as a vendor manager. It's a fairly large, like I say, vendor in this case. And since they were holding the cash and this will impact a number of our competitors as well, we've because of their position, we've reserved a lot of the cash that was passing through them pending resolution of their financial status. That is a very large adjustment and whether you call that ongoing operations or not, that is a very unusual type of relationship. We are taking steps going forward to make sure that we don't -- do our best to prevent that from happening in the future.

Right, and so that's the magnitude of your exposure pretty much? And you won't have this on an ongoing basis or anything related to this?

Related to this one there was actually a portion of it was taken last quarter, but it was much smaller. As we saw development in that business, we took a very, very aggressive stand relative to it.

Right, so you're pretty much done, is that -- am I right in thinking of it that way?

I guess that's what I'm saying. Yes, we are taken care of on this.

Okay. Then, and maybe asking the question I think was already asked a little differently, if we took your 10% to 15% down sequentially and we take, let's be more optimistic and say 10% down, we hold your gross margin flat, and your SG&A down $2 million to $3 million sequentially -- if I heard what you said, that sounded like what you're saying, we actually get that you'd be about breakeven for the fourth quarter in terms of net income/EPS. Is there any reason to think that we're far off from that?

You're reading our math pretty well.

Okay. All right. And then just on the orders -- just to make sure we understand, because I think we're all trying to get our arms around -- I know you've got a lot of constituencies you're talking to, your own employees, the competitive landscape, and the investment community when you have these calls. When I hear you say that the orders are picking up but we're having a little divergence with the placements or the actual bookings, trying to understand what that means. Is there any dynamic around the quality of the orders that -- I would guess that in this kind of environment the easy positions to fill get filled quickly by local people and the ones that are always hard to fill, getting someone to go to North Dakota in the middle of winter ends up never getting filled. And that sort of stays out there as an open order. Is there any of that dynamic going on with the quality of the orders?

No, I wouldn't call it a quality issue. We feel all of these orders are very real and very placeable. In fact, if you look at where the order growth is occurring, they're in very attractive places. California, Florida, even Arizona which has been very quiet for the last several years is picking up. D.C., Texas. So they've all good places. It does -- you do have a lag time from the time you start to see orders pick up in a meaningful way until healthcare professionals start to believe that that order growth is going to be sustainable because they generally don't want to leave their permanent position for just one job. They'll generally take three or four travel positions. So they want to know -- they actually have a good selection for multiple assignments for them. So we have always seen this lag as the market rebounds. It usually takes a few months for the supply to respond and be willing to book into those.

Now the other factor is, yes, you are right, they are the more challenging orders to fill being ICU, pediatrics, ER, NICU, so they are the greater specialty areas. But we certainly have those individuals in our database and are working hard to re-recruit those people that may have kind of fallen out of the travel industry for the last year.

I see. And maybe just two more quick ones here. If you think about the landscape in terms of the hospitals that are utilizing travel nursing services and how that may have changed in this downturn in the last year, is it that you're placing fewer workers at each hospital or is there a material decline in the number of hospitals that are even accepting travel nurses at all, if you follow what I'm saying.

I do follow and it is a bit of both. The greater impact is that hospitals that are still using travelers are using fewer. But in addition to that, we just have fewer clients with open orders today.

Would it be down sort of similar to the overall rate of decline or less than that? The actual number of hospitals you're dealing with?

It is slightly less.

Okay. And then last question is, I think the last time we had talked you guys were -- one of the things that was on the table and you mentioned you're at 2,700 placements today, that's down a lot from obviously the peak, needless to say. And there was some thought about let's think of ways that we can get more volume over that infrastructure and maybe jump start, vis--vis waiting for the market to come back. And it sounded like you thought there might be some options for consolidation within the industry, etc. Is there any update in your thinking about that or any thoughts about whether that's something that we might see over the near and intermediate term?

No announcement or update to give other than I still do believe that it's an interesting time for companies to look at coming together. I guess a benefit that we see is as things continue on and we kind of hit the bottom of this trough, we see more of the smaller players falling out. We're aware of a couple of companies in the last quarter that have basically shut their doors, some after having been in business since the early 1980s. So this has clearly had a more severe and permanent impact on the smaller companies. So I think as the market rebounds, you will see fewer players and probably more larger players getting a greater part of the market share.

Okay. All right, thanks a lot.

Jim Janesky.

Yes, Susan, as you pursue more and more vendor management contracts, how should we be thinking about pricing around these contracts and then the overall margin profile for the Company?

In terms of pricing, we have found in these discussions that the pricing is relatively comparable to other facilities in their area. They certainly are very cost conscious and want to look to reduce their spend, but they also realize that in order to maintain the recruitment of quality clinicians, they need to have a price that supports a competitive pay rate. So we haven't found that these contracts result in any significant gross margin deterioration. You price and pay accordingly, and so we don't see there being a material impact there.

What will happen to a small degree is as we have other subcontractors placed through us, we will be booking a net revenue figure from the revenue that we collect but then as we turn around and pay those subcontractors, there's a small gain that we'll have. But that will be offset by costs that we have to have in place in infrastructure in order to support that vendor management kind of master vendor position. So we don't see the subcontracting piece of it to be such a big money maker for us. Quite honestly it's more a more part of the overall service that we're providing to the client.

Okay. Thank you.

Thank you. At this time I'll turn the call back over to our presenters for any closing comments.

Well 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.

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