AMN Healthcare Services Inc (AMN) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare third quarter 2010 earnings call.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions) As a reminder, the conference is being recorded.

And I'll now turn the meeting over to our host, Ms. Amy Chang. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to AMN Healthcare's third quarter 2010 earnings call. A replay of this webcast will be available at amnhealthcare.com\investors, and will be available until November 24th, 2010. 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 those -- 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 31st, 2009 and other 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 Developments subsequent to this call may cause these statements to become outdated.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 Salka, AMN Healthcare's President and Chief Executive Officer.

Thanks so much, Amy. Good afternoon, everyone, and welcome to AMN Healthcare's 2010 third quarter earnings conference call.

As we shared in our press release earlier today, AMN reported our strongest quarter of the year and again led our industry with a second quarter of sequential growth. We have a lot of good news and insights to share and will provide you with more details on the drivers of that growth.

In addition to our organic performance, we also closed on the acquisition of Medfinders on September 1st. And so we thought you might first like to hear more about our early progress in the integration efforts.

After my comments, Bary Bailey, AMN's CFO, will share additional financial detail and provide an outlook for the fourth quarter. Also joining us in the room for Q&A are Bob Livonius, AMN's President of Workforce Solutions, and Ralph Henderson, AMN's President of Nurse and Allied Staffing.

We know there is a lot of attention on the benefits and synergies being created by the AMN/Medfinders combination. So I thought it would be helpful to have them here to provide you with as much detail as possible. I think you will be very pleased as you learn more about our progress.

I'm often asked whether there has been anything about the Medfinders acquisition that has been different than what we expected. One thing that has exceeded our expectations and, quite frankly, has been a very pleasant surprise, is how quickly and strongly the benefits of this combination have resonated with our clients and with our team members.

From the clients' perspective, the combination instantly improved our ability to offer a broader and deeper array of workforce solution and it has noticeably increased our ability to deliver the largest supply of local and national clinicians. Healthcare facilities are continuing to express growing interest in exclusive managed services relationships where they can improve on their internal efficiencies by using one company to many all of their supplemental clinical staffing needs. And AMN is now positioned as the number one provider in this space.

From a team member perspective, I've been very impressed with how quickly and collaboratively our teams have come together. Combining forces has already shown immediate benefits and enabled AMN to grow into the market recovery and an even stronger position. Together the company has over 110 managed services contracts to be the exclusive provider of supplemental nurse staffing to over 350 healthcare facilities nationwide.

As staffing needs grow at each of these facilities, AMN will have the opportunity to fill a higher percentage of their growing demand. We continue to focus on our managed services programs through adding new client contracts as well as converting current clients to these exclusive contracts.

The nurse staffing businesses of AMN and Medfinders were complimentary and not just duplicative. Prior to the acquisition, AMN was the strong leader in travel nurse staffing with no local per diem presence. On the other hand, Medfinders had a very solid per diem presence in several markets, but a relatively small footprint in travel nursing. This made it challenging for them to fill the travel nurse needs at many of their MSP clients.

With these complimentary strengths, the company can now increase its collective direct fill rates across MSP clients. In fact, we're already doing this. For example, in just the two months since the companies have been combined, we have doubled, and, in some places, nearly tripled our travel nurse direct fill rates and placements at key MSP accounts. This is a direct and immediate benefit for our clients from our stronger capabilities.

As we've communicated with you before, our target is to achieve at least $2 million in incremental annualized EBITDA from these increased direct fill synergies by the fourth quarter of next year. The seeds for other incremental revenue synergies are already being planted with our addition of per diem staffing services to several of our travel nurse contracts.

On other integration fronts, we continue to make very good progress towards achieving the $8 million in annualized cost synergies by the fourth quarter of next year. The bulk of these savings will come from the consolidation of corporate back office functions. This effort is already underway and will be going into phases through the remainder of this year and next.

Another significant piece of the cost synergies will come from the consolidation of the travel nurse and allied operations and implementation of a shared service model. The travel nurse consolidation was largely completed this week and the travel allied consolidation is anticipated to be completed by the end of the first quarter of 2011. AMN has a proven track record of integrating acquisitions and we are confident that we can be successful in achieving the anticipated synergies.

At this time, I would like to give an overview of our business highlights and market trends. Excluding the impact of the acquisition, third quarter consolidated revenues were up sequentially by 4% which, in comparison to our public reporting competitors, would indicate we are continuing to expand our market share. This represented the second sequential quarterly growth in consolidated revenues and the third sequential quarterly growth in our largest business of nurse and allied staffing.

In the third quarter, the nurse and allied business generated $93 million in revenues, which included 5% organic growth compared with the prior quarter. Organic sequential volume growth was a main driver with pricing remaining relatively stable. Our travel nurse business produced the greatest growth with 6% sequential increases in volume and revenue. This growth is being fueled by the increasing benefit of our managed services offerings and our strong client relationships.

Orders during the third quarter continued to be above prior year levels. And what's encouraging is that we have seen similar growth in orders at our MSP clients and our traditional travel nurse clients, non-MSPs, across the country. This is usually a sign of an increasingly healthier market environment.

The total number of client facilities with orders also continues to show sequential increases reflecting another positive demand indicator. The allied disciplines we provide also contributed to our growth with about a 5% sequential organic increase in volumes in the third quarter. The biggest driver of this increase continues to be in the rehab therapy specialties which have the greatest demand, supply, and balance.

Including the one month impact of acquisition, third quarter nurse and allied revenues were up 23% sequentially. This includes the Medfinders addition of $7 million in revenues associated with the local per diem business and $7 million for travel nurse and allied for the month of September.

Our locum tenens segment delivered third quarter revenues of $70 million, which included 3% organic growth over the last quarter plus $2 million from one month of the Medfinders locums business. While organic growth rate continues to be at the top of the industry, it did fall a little short of our expectation which is the main reason we came in at the lower end of our revenue guidance for the quarter.

Days filled volumes increased organically by 4% in the quarter with modest increases across all specialties and the strongest gain being in primary care. Days sold, which is our best indicator of future placement opportunities, were sequentially flat during the quarter with some weakness in dentistry, radiology, and surgery, and offset by improvement in primary care.

While we have experienced modest growth in our locums business since the beginning of the year, most of our competitors have lagged, which is a sign that the overall market has not yet resumed to a normal state. Our growth should be a good sign that the overall market growth is soon to come. And there is strong agreement in the industry and among analysts that he long-term demand and supply dynamics of the physician staffing business are still quite strong.

In physician permanent placement, third quarter revenues were $8.7 million, which included a 3% increase over the prior quarter on an organic basis. Placement volumes have increased slightly, but the demand for new searches seems to be showing some signs of weakness. This is a reflection of the continuing uncertain economic environment and our internal challenges in rebuilding our sales team after the severe hit to the industry over the last 18 months.

One of the strategic benefits that came with our acquisition of Medfinders, was our entry into the delivery of home healthcare services. This move advances our long-term strategy of extending into businesses that address significant pain points for our current clients.

Acute care facilities are focusing more on the transition of patients to a quality recovery setting to avoid readmits. At the same time, healthcare providers are coming together to coordinate patient care to improve outcomes and efficiencies. In both cases, home healthcare providers can play a significant role in the patient care delivery chain.

In the third quarter, the company added approximately $5 million in revenues from home healthcare services for the month of September. On a pro forma basis, the home health business declined approximately 2% sequentially in the third quarter. This was primarily a result of the closure of an office in Pueblo, Colorado and the consolidation of that business into our Colorado Springs office.

While our markets are still relatively constrained, we are pleased with our team's ability to build our market share and deliver industry-leady growth. The combination of our relatively stronger organic growth and the benefits of the Medfinders acquisition should set us up well to continue our evolution and grow at a faster rate as our industry conditions become stronger. AMN is now solidly the leading provider of exclusive managed services contracts which gives us an important platform and credibility to deliver innovative workforce solutions that integrate into our clients' processes and help them to improve their efficiencies.

Before I turn the call over the Bary, I'd like to take a moment to thank all of our team members for their tremendous efforts and talents. The industry leading performance that we're reporting today is a direct result of their passion and commitment to our clients and healthcare professionals. It has been very inspiring to watch the AMN and Medfinders teams come together so quickly and so effectively. We are already seeing the results of their proactive and collaborative efforts and we want to thank them so much.

At this time, I would like to turn the call over the Bary Bailey. Bary.

Thank you, Susan, and good afternoon, everyone. Since we have already communicated quite extensively on the acquisition of Medfinders and the related issuance of equity and the amendment and extension of our credit facility, I will leave any discussion regarding this to the Q&A and refer you to materials provided to the SEC and on our website.

So now then let's turn to our third quarter performance. Susan just provided us with an overview of the top line performance for the third quarter. Overall, gross margin of 27.4% in the quarter continued to hold up well consistent with the third quarter of 2009, although slightly down compared to last quarter. Gross margin was negatively impacted by the pay bill spread in our locum tenens business partially offset by the higher margin Medfinders business reflected in our results for one month, which added 50 basis points.

Excluding costs associated with the transaction and integration of the two companies, which totaled $6.3 million in the third quarter and $1.1 million in the second quarter, SG&A increased $6 million sequentially. Excluding Medfinders SG&A cost, SG&A increased only $1.3 million or 4%. This increase in SG&A is directly tied to increases in employee cost associated with increased commissions on higher revenue, some increases in staffing, and an extra payroll day.

In the first month of the acquisition, while integration efforts are well underway and on track, we did not expect and have not reflected any significant synergies. The benefits will be realized over the next several quarters with the majority being realized on a run rate basis by the middle of next year.

Our nurse and allied segment revenue increased sequentially by 23%. Excluding the impact of the acquisition, which was included for one month, the nurse and allied business grew 5%. Travel account increased essentially the same percentage.

Excluding the impact of the acquisition the nurse and allied gross margin decreased 20 basis points due to higher payrolls costs, including housing. The Medfinders nurse and allied business for the month of September added $14 million in revenue for the quarter and generated gross margin at 28%. The higher gross margin for the Medfinders business reflects subcontractor fees, which we expect will decrease over time as we fill more of the demand under the contracts with our own local and travel staff.

The third quarter nurse and allied segment operating income as reported was $8.6 million as compared to $7.3 million in the immediately preceding quarter.

Our locum tenens segment experienced sequential revenue growth of 6%. Excluding the impact of the acquisition, revenue increased 3% reflecting the impact of a 4% increase in days filled for the AMN business, offset by a shift in demand in the quarter to lower price specialties. The impact of the shift in specialties during the quarter impacted our gross margin and ultimately gross profit, whereby, excluding the impact of the acquisition, gross margin declined 110 basis points and gross profit declined 1.3%.

The Medfinders locums business reflects a higher margin on comparatively lower dollars due in part to the mix of specialties. Locums operating income of $5.4 million reflects a 16% decline from the previous quarter. About 50% of the decline in operating income on a sequential basis was due to lower bad debt expense in the second quarter of this year than we are seeing in this quarter and what we would expect on a normal run rate basis. The balance of the decrease is a result of increased activity but at the lower bill pay spread.

Within our physician permanent placement segment, revenue grew sequentially by 4% with the Medfinders revenue for the month of September contributing about 100 basis points. Physician permanent placement operating income for the third quarter was $1.7 million.

Through the acquisition, the company added a new reporting segment, home healthcare services, which generated revenue of $5 million for the month of September and $500,000 in operating income for the same period. Gross margin on this business was 37.4% for the period reported, consistent with its historical margin levels.

Unallocated overhead, excluding stock-based compensation in the third quarter was $12.6 million, up from $7 million in the preceding quarter and up from $3.7 million in the same period in the prior year. The sequential increase is due to the $6.3 million in costs incurred associated with the acquisition for legal, accounting, operational due diligence, and integration costs I previously mentioned.

The prior quarter included about $1.1 million in such costs and, as a result, unallocated overhead was essentially flat. The balance of the increase as compared to the prior year was largely due to a credit in the prior year associated with the resolution of the holdback from the previous MHA acquisition.

Interest expense in the quarter includes financing fees incurred to accomplish the additional borrowing and were charged off in the quarter directly to interest expense, and this added $5.2 million.

One obvious item that stands out is the impairment of goodwill and certain other intangible assets for AMN. This is unrelated to the acquisition of Medfinders. Every company is required to assess the realizability of such assets on at least an annual basis, which we typically do in the fourth quarter. However, with our stock price at the level it has been for the last several months, we determined that it was appropriate to assess the value in this quarter, taking into account the value of the stock of the company immediately prior to the acquisition.

The effort to assess the value is relatively extensive and we will continue to assess these values. But given the share price and the implied discount rates suggested by that share price, we have estimated that there's a technical impairment of goodwill and certain other identified intangibles totaling approximately $49.8 million, and, as a result, have recorded this charge in the third quarter.

After giving effect to this charge prior to the addition of goodwill from the Medfinders acquisition, AMN had approximately $40 million in goodwill remaining.

Taking into account the write off of goodwill as well as transaction related charges, integration cost and the cost of the financing, we reported a pretax loss of $60.8 million. As a result of this pretax loss, we have recorded a tax benefit. The benefit recorded reflects the impact of certain permanent differences such as the goodwill impairment and a portion of the acquisition related costs.

Excluding the impairment charge, the cost associated with the acquisition and integration, as well as the financing fees expensed in the period, we expect our tax rate on a full year basis to be approximately 66%. This rate is different from the statutory rate in large part due to permanent differences having a disproportionate impact as a result of our near-term lower pretax income. We expect next year's rate to be in the mid-50s range.

For the quarter, we reported our loss per share of $1.48, reflecting the impact of the impairment charge which contributed $1.25 to the loss per share, the transaction and integration charges that contributed about $0.13, and the cost of the financing that contributed $0.09.

In addition, while we did not record an accrual for the dividend on the preferred shares issued in the quarter, we included the impact of what that accrual would have been for purposes of calculating the loss per share. The impact of the implied preferred dividend for one month added $0.01 to the loss per share. Taking all this into account, we had a break-even EPS.

For the third quarter, operating cash flow reflects a use of cash of $15 million due primarily to the acquisition and financing costs related to the acquisition that were not capitalized as part of the transaction, which combined totaled $11.5 million.

In addition, we made a concerted effort during the quarter to refund or escheat credit balances in AR, which resulted in a use of approximately $2 million in cash.

Day sales outstanding, looking at revenue on a pro forma basis, were 54 days as compared to 55 last quarter. We continue to closely manage capital expenditures without limiting important investments. And as a result, capital expenditures for the third quarter were about $1.1 million.

We will continue to manage capital expenditures, but do expect them to increase somewhat due to the integration of Medfinders as we look for opportunities to improve performance through the use of technology.

As of September 30th, our cash and equivalents totaled $2 million and our long-term debt outstanding was $217 million, with no borrowings under our $40 million revolver.

Going into the fourth quarter, we continue to see overall steady, modest sequential growth in our business offset by some seasonal pressure. The nursing and allied business continues to experience momentum, with revenues expected to be up sequentially approximately 5% on a pro forma basis.

An important milestone to note is that our organic travel nurse volumes are expected to be up about 20% over prior year. The physician businesses are expected to experience their typical seasonal trends with mid-single digit sequential decline. The home healthcare business is expected to experience a slight decline sequentially as well, primarily due to the disruptive effects of the office closure in Colorado.

Overall, we expect consolidated revenues in the fourth quarter to be between $215 million and $220 million, which is essentially flat on a pro forma basis compared with the third quarter. As we mentioned in the earnings press release issued earlier today, we expect gross margins to increase nominally due to the inclusion of Medfinders for a full quarter. For the same reason, we expect SG&A as a percentage of revenue to increase similarly.

And with that, we would now like to open up the call for questions.

(Operator Instructions) And our first question from the line of Jeff Silber with BMO Capital. Please go ahead.

Thanks so much. Just wanted to go through some numbers really quickly, Bary, if you don't mind. In looking at your reconciliation of EPS to take out the one-time charges, can you just remind us where those one-time charges are on the income statement? [I'll be] -- I see the impairment's been stripped out. But the other three?

Absolutely. The -- you've got $6.3 million that's in the SG&A associated with the acquisition-related cost. So that would be -- is just in your SG&A and is also reflected in unallocated overhead in the segment reporting.

That's the $0.13?

Yes.

Okay.

The $0.09 is in the financing cost which is in interest expense. As a result of the amendment and extension, a significant portion of the costs associated with that are charged off directly and they flow through interest expense.

Okay.

And so that's the $5.2 million.

Yes.

And then the --

The preferred dividend.

Well, the preferred dividend, the reconciliation of EPS, yes, there is -- that is not on the income statement. GAAP requires that if you have a preferred security that has a dividend associated with it but that dividend has not been declared, we can't report it in the financials, but for EPS purposes you have to consider it, and, therefore, that is backed out for the one month that that was outstanding.

Obviously, as we look forward going into the last quarter, we are anticipating a shareholder vote. And if shareholders approve the convertibility of the preferred securities, that dividend goes away in its entirety.

And when is that shareholder vote scheduled for?

Scheduled for the latter part of December.

Okay. Great. And in terms of the other types of charges, should we expect anything else in the fourth quarter?

The only thing that we would expect in the fourth quarter is we expect to see some additional costs of the integration, which we will -- we'll call out as we move forward. We would expect those to continue into the fourth quarter, into the first quarter, then definitely start to drop off after that.

And any kind of qualifying in terms of how much that might be?

We haven't really given an indication of that. But compared to the -- the 6.3 that we've recorded this quarter has a lot more in it than what you would expect going forward because that obviously includes a lot of stuff building up to the transaction. So quite a bit less than that. And that would be indicative, probably, of the next two quarters and then again dropping off pretty rapidly.

Okay. Great. Just a couple more quick ones. Since home healthcare is so new, at least for us covering your company, are the type of margins you saw in the third quarter something we should expect going forward?

I mean, that's -- yes, that what we've seen in the past with the business it is pretty light in the Medicare side, which is typically in home health a higher margin business than what we've been in because Medicare is fairly low in our business. So you'd expect it to be the same. Or as we start to do Medicare, you should start seeing that margin increase.

Okay. Great. And in terms of, again, just talking about the current quarter, what should we be expecting for interest rate -- for interest expense?

Well, if you back out the $5.2 million out of -- I've got to try to think because that's only got one month. You're probably looking at about 5.5 a quarter.

$5.5 million a quarter. And I know you gave us the tax rate for the year. But can we back into roughly what kind of tax rate we should be using for the fourth quarter?

Again excluding -- we look at it excluding the integration cost. So the number I gave you of 66%, that would be what you would typically see in the fourth quarter then.

Okay. Great. And how about share count?

Share count, again, it's all premised on the approval of the shareholders to do the conversion. But if that is done, then you would expect the share count to be around 45, 45.5.

Okay. Great. All right. I'll jump back in the queue. Thanks so much.

And our next question is from the line of A.J. Rice with Susquehanna. Please go ahead.

Hello, everybody. Just a couple questions if I could ask. When you take into account the impairment, does that on an ongoing basis reduce your D&A expense going forward? And by how much if it does?

A portion -- this is Bary again. A portion of it was and identified intangible that it would be amortized over time. But the lion -- the lion's share of it is goodwill and permanent, therefore, it wouldn't be amortized.

But in terms of forecasting forward, should we -- does the D&A get reduced by any meaningful amount or not really?

No, it, again, excluding the Medfinders acquisition, it wouldn't be impacted really at all. It just eliminates --

Okay.

It eliminates the goodwill which is not identified -- I mean not amortized --

Right. Right.

-- over time anyway.

Okay. And I noticed you said you don't have anything drawn on your revolver. Just remind me how much is available under that.

We've got a $40 million revolver and we have none drawn on it.

Right. Okay. And the notes payable, you got -- you got that $11.5 million in current, so you would -- you going to use the revolver to pay that off, I'm assuming is what you're thinking?

Cash from operations.

Okay.

Our expectation is to use cash from operations.

Well, you were $15 million negative in your cash flow from operations this quarter. You said -- is that -- did I hear you right to say that there was $11.5 million of unusual items in there?

You had $11.5 million associated with I'll say the transaction for fees and all. And then you had -- as discrete items. And then we also had one other, I'll say discrete item, which is we -- we made a pretty aggressive effort during the quarter just to clean up credit balances in our AR. Just because they -- you continue to have to manage them and we don't need to be dealing time on that, but you have to get them back to the customer or escheat them by law. So we cleaned that up. That carried about $2 million.

That was $2 million in collection expense or something like that?

$2 million just -- you have to just give it either to the state or back to the customer.

I see. Okay. So then if you normalize for that as sort of the run rate right now, what was that? That's about $1.5 million, $2 million of negative cash flow from ops and then you got your million dollars or so of CapEx? Is that going to turn around pretty quickly or do you have, in the fourth quarter, you've got some more one-time stuff probably coming out?

Well, we do have -- again, we have some of the integration costs coming in in the fourth quarter. But we do expect operating cash flow to turn. You have a -- in the quarter with the acquisition and the bringing together of the two companies there are a lot of costs flowing through, and that certainly had a significant impact. You can't call them out, per se, because they're not discrete. But we do expect operating cash flow to start to present itself just as we reflect it from our EBITDA, we would expect to start seeing that grow.

Okay. So by the, certainly by the first quarter, you think you'll be back to cash flow positive on a cash flow from operations basis?

Again, we -- I would expect that to turn fairly rapidly, [unless] the business grows dramatically, in which case you'll start seeing your AR grow. But we don't -- I don't see that happening with a significant inflection point. So we would expect that operating cash flow to start growing.

Right. Okay. On Medfinders, just sort of walking through the numbers you gave us in the quarter, and I know you -- the way you described the gross profit was a step up of 50 basis points that it contributed in the margin. Is it -- we're doing a back of the envelope here. Is it right to assume that for that one month it was sort of about $0.5 million contributor to EBITDA and about $1.3 million loss, if you look at the incremental interest in D&A associated with it on the pretax line?

Yes, and relative to the, I'll say dilution in this quarter, I think you're -- I got to think about the absolute numbers on that. But directionally --

(Inaudible)

-- you're playing out about right.

All right. And so I guess I just want to confirm, when we did the -- when the deal was closed, it was $0.08 accretive was the hope for next year or the anticipation for next year. Is that still the goal? And I guess any direction on when we might see that? Is it going to be more still carrying a little bit of a loss in the early part of the year and then a bigger contribution in the back half of the year?

Well, we should start seeing the synergies starting to take effect this fourth quarter and growing, which would then, that's what's going to drive the accretion, that -- I mean, the synergies with -- on a revenue side and on an expense side going into the fourth quarter. So we're still comfortable with the accretion that we have and we've set out that is still playing out.

Okay. So it might be like breakeven even in the first quarter it sounds like.

When you say breakeven --

In the EPS line. I mean, is that -- I mean, I'm trying to figure out how much of a skew there is to the $0.08 accretion next year, whether you -- it was -- in round numbers are we talking about it losing money in the first or second quarter and then making a lot of money in the fourth quarter, the third and fourth quarter? Or are we thinking by the time you get to the first quarter, given the cost you're taking out now, that it might actually be breakeven to slightly accretive on the bottom line in the first quarter next year?

Q1, Q2.

Okay. All right. Thanks a lot.

Thanks, A.J.

(Operator Instructions) Our next question is from the line of Mark Marcon with RW Baird. Please go ahead.

Afternoon. I have a few follow-ons to the prior line. Can -- just on Jeff's question with regards to the share count, Bary, that number that you gave us, is that for -- is that the full -- is that where we'll end up after everything's done? Or is that a weighted average for the fourth quarter?

Well, the -- right now we're running on a fully diluted, if you will, at around 34 and change. That includes an averaging of the common shares issued in the transaction. For the fourth quarter those will be in there for the full quarter. And then if you assume the conversion feature [is] approved, I'm going to jump here and say that then you would treat that as going back to the beginning of the quarter. So that would reflect essentially the full-in shares for the quarter.

Okay. Great. And then with regards to the CapEx and the additional integration expenses, can you talk a little bit more about that just as we think through the free cash flow characteristics over the next six months?

Yes. I mean, I think on an annual basis we're expecting in the $5 to $6 million range.

For CapEx?

Yes, on an annual basis.

And how about for the additional integration charges that are coming up?

The additional integration, like I said, we haven't called them out specifically. But you're going to see probably a couple million in Q4, and it'll start to go down and then drop fairly dramatically in Q2 into Q3 and then it's gone.

Okay. Great. And then can -- if we take a look at Medfinders [ex] home health, is it just roughly around breakeven?

It's hard to separated because as you have the allocation of costs because they're fairly centralized from a number of the functions for that, and we haven't called out the corporate costs, per se, associated with it -- so I'm trying to sit back and -- I'm -- I don't --

I'm just thinking just what you gave us in terms of you gave us what the operating profit would be from home health, which was roughly $0.5 million. And it looks to us like your profit or your EBITDA from total Medfinders is $643,000. So basically $143,000 in EBITDA off of $21.4 million in revenue? Well, or $16 million in revenue on the other divisions?

I'm trying to think of the unallocated corporate overhead. If you don't have any unallocated -- any of the unallocated corporate head -- overhead attributed to it, that will have an impact on it, yes.

Yes.

I mean, that's absolutely it.

Okay. And then when we think about the SG&A that you were running for the month, is that a -- is that a -- is the $8 million in projected savings, would that go up against that $6 million a month SG&A run rate?

Yes. I mean, we're anticipating some growth going into next year as the business itself grows overall. But that's -- the $8 million would go against those costs, absolutely.

So, I mean, $8 million against roughly 72?

Sounds about right.

Okay. Great. I just wanted to -- I didn't know if any of those savings were in there at all or not or whether the $8 million was referred to against that number or where it was -- where it used to be. That -- so I was just trying to confirm that.

No, the $8 million, we have not, as I mentioned, we haven't realized really any savings in the period you've got so far.

Okay.

I mean, it's one month. You're actually -- there's a lot going on in that one month.

Yes.

And on a go-forward basis, again, we would expect from the current SG&A levels, I would expect those to go up in the year somewhat just through the growth of the business.

Sure.

But you're going to then apply -- you're going to get the $8 million of savings. And we've actually largely identified every one of those dollars already. It's just now the integration of the two businesses. And as Susan mentioned, for instance, we've already integrated the nurse business largely this week, wasn't it?

Yes, we largely completed that process this week. And besides the back office corporate functions, which is the bulk of the cost. I mean, there are some obvious immediate areas such as insurance where you can get more purchasing power and elimination of brokers, but there's also back office corporate functions. And then there's the consolidation within our nurse and allied divisions which so far have gone extremely well on the nursing side, largely complete this week.

And, as I mentioned, Allied will be complete by the end of the first quarter. And there's further cost reductions. And that's why a lot of the cost reductions start to -- they kick in in the fourth quarter, but they really start to kick in more so in the end of the first quarter, second quarter of next year.

The revenue synergies which are on top of the $8 million is where we're already seeing momentum. As I mentioned, we've already seen our direct fill rates as the MSPs begin to go up in just the first two months, in fact, double and almost triple in some accounts. And so we're feeling very confident about our ability to achieve not only the cost synergies which are very well documented and planned and we've got people and processes in place to achieve those, but really the revenue synergies that give us longer term opportunity to drive profitability and grow the business.

And when we think about the revenue run rate that it's currently -- the business is currently at and then you think about those revenue synergies that you've already seen, how much do you think that that would end up adding?

We haven't given that number for 2011 and 2012 kind of going forward. But I think we have to --

Just a rough feel from what you've already experienced.

Pardon?

Just a rough feel from the synergies that you've already --

Well, I wouldn't -- we're talking about two months. So I think we've just got sort of a tip of the iceberg in terms of what we've experienced. But going into next year, you're talking about by the fourth quarter adding a couple million dollars in bottom line EBITDA. So top line, you're talking somewhere north of $20 million in additional revenue. Our target is actually higher than that, but that would be sort of a baseline.

Bob, would you like to --

Yes.

-- add into that?

By the way, I think we feel pretty strongly not only about the -- what we've seen just after the first couple months, but the pipeline of new accounts and wins. For example, we've already closed some -- just since the combination of the two companies together, each of us had a pipeline and we were able to put them together and identify some immediate opportunities, not only to close some business, but we actually had a couple situations, one in particular, where the client, because of this acquisition, felt that this was the choice they should make and they have already -- we've already had a win in that respect as well.

So not only into what we think will be some uplift in this next quarter, but really in the next year, throughout the full year, we think that there will be a significant increase in our number of wins and number of clients where we can take advantage of both the travel side, expanded travel capabilities as well, as now providing per diem. And, frankly, we don't care what it is that the client wants. If they want per diem, if they want travel, we're now in a position really to provide that, either one to them. And that's really been a real boost to our ability to talk to our clients and to start to begin realizing those benefits.

That's great. One more question and then I'll jump back in the queue. Just following on that, who are you winning the contracts from? Is it some of the other nationals or is it regionals? How should we think about that?

Well, your -- the client itself -- the client themselves are oftentimes regional players. In some cases they have multiple facilities. They are typically clients who have not implemented this kind of a program in the past. While there are situations where we've actually taken it away from other vendors who are already out there, those are -- those represent probably less than a quarter of the times, about three-quarters or more of the time we're explaining to the client why this is a good thing to do and with the support of really good product and service offering, we're able to convince them to move to an exclusive relationship where we then use our subcontractor network to fill all their orders. And that's been our secret sauce for quite some time now over the last six or seven years at Medfinders. And combined with AMN, we really have a much more powerful story.

And what Bob's talking about there is the pipeline of new contracts. Some might be existing clients where we have some business, but moving them from a kind of traditional competitive account situation where we might have just sort of normal or even low market share to a MSP where we have a much higher fill rate and can dramatically increase our market share overall. That's not included in the direct fill rates [and] the $20 million plus that I was referring to earlier.

Those are contracts that we already have in house and we were sending the -- some of their needs out to subcontractors because we, AMN, didn't have per diem capabilities or Medfinders didn't have a big enough travel nurse capability, so they were having to -- we were collectively having to send a fair amount of business out to subs. Now we can keep that in house, increase our direct fill rates, and drive revenue just within the clients we already have.

On top of that, we have new clients, some great ones that have been signed just in the last two months, as well as a very robust pipeline of clients for the future.

Super. Thanks. I'm going to jump back in the queue.

(Operator Instructions) And we're going to open the line back up now for Mark Marcon with RW Baird. Please go ahead.

Guess I'm the only one in the queue. So can you talk a little bit about how we should think about locum tenens and physician perm going forward? It sounds like things are really positive on the nursing side.

Yes.

How should we think about locum just in terms of demand trends and --

Right.

-- pricing trends?

Yes. Great question. As I mentioned earlier in the call, we've done well through the year and our team has done very well I think in a continuing constrained market. And we've shown some good growth, 8% sequential growth in the second quarter, 3% in the third. And as much as the team had aspirations of doing better in the third quarter, it turns out that we did better than the market. So we're very proud of them and pleased with that.

With that said, there still is softness in some areas. Radiology, in particular, continues to contract and be challenged in most areas. Anesthesia also continues to have its challenges. Primary care's relatively strong. In fact, our primary care and surgery teams have recently been doing extremely well and we've seen up-ticks in our days sold, which is business that we are signing up today for future placement. And so it's a good indictor of the future.

But I'd characterize us as still being somewhat cautious. We think the market is improving, but we've not seen enough stability out across the entire market to feel comfortable with that. So fourth quarter appears to be producing what is a typical seasonal trend projecting to be down. I mentioned kind of mid-single digits. That's very typical for the fourth quarter. We've got some, again, strong points in there in primary care, which is great because it's our largest business. But we still have some others that we think need to be nurtured along.

From a pricing standpoint, pricing has been pretty stable across most specialties with the exception of radiology, which continues to feel pricing pressure. And then on call and overtime is down. And that hurts us in our gross margin very directly because those typically are higher gross profit dollar hours that are worked and contribute to our gross margin. So that's a little bit of the pressure that we're feeling on the gross margin side.

And how would you -- Susan, how would you think about that for next year? I mean, given what you're currently seeing and what you're hearing from potential clients, should we think about that as being kind of flattish for next year until we start seeing some real signs of strength?

No. I think the industry is projecting some growth next year. We believe that we will be growing into next year. We're not prepared to actually give guidance on that yet. But directionally, we would expect to be up. And the indicators we have around days available and days sold and the trends are up, I guess you just sense some caution in my voice because of the challenges we have in some of the specialty areas like radiology.

And again, I -- as much as we love to be beating our competitors, if they're doing well, it's a sign that the overall market is a little more robust and healthy. So I'd like to see everybody doing a little bit better in the industry.

And then the same sort of questions on the physician perm. How should we think about that? Same sort of dynamics? Or do you have less exposure to radiology and anesthesiology there?

Yes, we do. Family practice tends to be our largest business there. It's about a fifth of the overall business. But we've seen some increases in some of the high specialty areas. Like neurology, it's small, but it's grown quite a bit over the last year. We've seen some regional differences there. The west and the southwest were up pretty nicely sequentially. But we've seen other weaker areas such as the upper Midwest.

So I'd characterize current placement as relatively stable in some areas, in other areas we're still not quite out of the woods, probably more economically driven. I do think that as the -- we see improvements in the economy and more so the outlook on the economy, things like tax rates and housing prices, feed into a physician's willingness to pick up and move to another job and there's been a very tentative behavior in the marketplace. So we think that we'll start to see that loosen up.

There actually, throughout the year, hasn't been a lack of demand in [searches]. Searches have been up year-to-date. We felt some weakness very recently in September. But the rest of the year searches were up very nicely and we were more challenged with placements, both the supply and the ability for us to have enough trained recruiters.

And that's the other thing that I mentioned in our comments, that the market seems to be okay, a little bit of weakness recently on searches. But it's also challenging when you're in an uncertain market environment to recruit and retain really strong, productive, talented recruiters and marketers, because if they're not clear about where the industry is going, they may want to try something different. And not just us, I know others in perm placement have been challenged with that over the last year.

We're working hard to recruit and build up that sales team, and our talent acquisition group has done a great job of working hard and made a lot of recruits over the last couple of quarters. But it's still a work-in-progress.

How much excess capacity would you say you have across the system?

It depends on each group or each division. Some, such as local staffing, I think manage their teams extremely tightly. We have some offices where we literally have one, maybe two people. There isn't a lot of excess capacity here. Where we have others such as in perm placement where we may have a region where we have recruiters that are at 60% of capacity. And I won't go into every division. But it really is different from business to business.

But overall, I would say we have the most capacity in our locums and our nurse staffing teams. And that's even with the great performance that they've been producing. There's still room to continue to build volume, because as much as say recruiter productivity and revenue per recruiter in our nursing business has grown very nicely, it's still not back to where it was even three or four years ago.

Great. Thanks for the color.

Okay. Thanks so much, Mark.

And I'll now turn it back to our speakers for any closing remarks.

Okay. Well, thank you, everyone, for joining us today. We appreciate your continued support of AMN. And we're looking forward to updating you on our progress next quarter.

Ladies and gentlemen, that will conclude our conference call. We do thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.