AMN Healthcare Services Inc (AMN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare fourth-quarter 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions). And as a reminder, the conference is being recorded.

I'd now like to turn the conference over to our host, Ms. Amy Chang, Vice President of Investor Relations for AMN Healthcare. Please go ahead.

Thanks, Laurie. Good afternoon, everyone. Welcome to AMN Healthcare's fourth-quarter 2010 earnings call. A replay of this webcast will be available at amnhealthcare.com\investors, and will be available until March 29, 2011. 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 S3 filed on December 21, 2010; Annual Report on Form 10-K for the year ended December 31, 2009; and other period 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 Developments subsequent to this call may cause these statements to become outdated.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.

Thank you, Amy. Good afternoon, everyone, and welcome to AMN Healthcare's 2010 fourth-quarter earnings conference call. I'm sure, like everyone on this call, the AMN team is keenly focused on the current and future opportunities in our business. But, as much as we would like to jump right into the new year with you, it is important to first reflect back on 2010, as our actions and performance last year have a lot to do with why we are starting 2011 in such a stronger position.

After weathering through 2009 and the most severe contraction in the history of healthcare staffing, 2010 represented a year of stabilization and transition back to growth. During such turbulent times, companies can choose to either take a hunker down approach or use the opportunity to consolidate and make important strides in their long-term strategies. Just as we have done in prior contractions, we chose the latter approach to position AMN to build for the future.

There were two key events that occurred for the Company during 2010. First, the market began to stabilize and improve. Overall, for AMN, we bottomed out in the fourth quarter of 2009 and stabilized going into the first quarter of last year. Then we experienced modest sequential growth in Q2, Q3, and now, Q4. The travel nurse business experienced the strongest sequential growth during 2010 and the other staffing division stabilized, and have also begun to show positive indicators.

The second key event was our acquisition of Medfinders, which closed last September. This transaction not only delivered some immediate tangible benefits, but it also has a significant impact on our ability to deliver more sophisticated workforce solutions. These address the changing needs and buying behaviors of healthcare organizations.

In our call today, I will be giving an update on our top three priorities. The first is the integration of the Medfinders acquisition to achieve the targeted EBITDA synergies. The second is to grow market share through the expansion of our managed services programs and cross-selling of our services. And third, and probably always at the top of our list, is the everyday execution in our core businesses to ensure solid performance and to deliver on our promises to our clients.

The integration of the Medfinders organization is progressing very well. As we reported in our last call, the integration of the overlapping travel nursing businesses was completed in November. Since then, we have also completed the integration of certain corporate functions including marketing, HR, IT, risk management, and legal. The finance function will complete its integration by the end of March. We will also complete the full integration of the Medfinders allied brands onto our platform in April.

And then, finally, we are continuing to streamline clients and clinical operational functions into our shared services model. With this steady effort from our team, we are on track to achieve the targeted $8 million in annualized EBITDA cost synergies by the fourth quarter.

The second key focus for the team has been to increase the direct fill rates in our existing managed services program, through the sharing of our expanded local and national candidate supply. Whereas AMN previously used subcontractors to fill our local per diem orders, we are now able to partially fill that demand directly through our own newly-acquired nurse finder's local office network. Likewise, the travel nurse orders brought over by the Medfinders MSP contracts are now being primarily filled directly by leveraging AMN's large pool of travel professionals.

Just as an example to this, in the top four MSP contracts that were brought in by the Medfinders acquisition, we have already increased our travelers on assignment directly filled by AMN by nearly 200. Based on this success, we are running ahead of our original projection to add $2 million of additional annualized EBITDA by the fourth quarter of 2011.

The improvement in direct fill rates is one example of the near-term benefits we are experiencing from our MSP offering. Another is the positive recognition from existing and new clients of the additional value and differentiation created from the combined companies. Since announcing the acquisition, we have been awarded 20 new MSP contracts of varying sizes, specialties and settings. These have an estimated annual growth spend under management, of over $45 million. At these same clients, our pre-MSP revenue was running at about $7 million per year, so the majority of the $45 million is upside opportunity for the Company.

All of what I have just mentioned is being accomplished on top of our third area of attention, which is our everyday execution and client focus. Our efforts to integrate the two companies to achieve the expected synergies are certainly critical. However, it is equally important that we continue to have solid execution in our core businesses in order to meet or exceed our clients' needs and expectations.

Here are some of the highlights and market trends in each of the business segments.

Overall consolidated revenues for the fourth quarter were $220 million; organic, same-store consolidated revenues were up 1% sequentially and 9% year-over-year. This represents the third consecutive quarter of sequential growth in consolidated revenues and the fourth consecutive quarter of sequential growth in our largest business segment of Nurse and Allied staffing. This is also the first quarter of year-over-year consolidated growth experienced in two years.

Fourth-quarter Nurse and Allied revenues were $127 million, up 37% sequentially and 72% year-over-year. This includes $24 million in revenues associated with the local per diem business from the Medfinders acquisition. On an organic same-store basis, the Nurse and Allied business generated growth of 9% compared to the prior quarter and 17% compared with the prior year. The growth was driven by volume increases at both MSP and traditional clients, with pricing remaining stable.

Travel nurse order levels continued to increase throughout 2010 and going into the first quarter, both sequentially and year-over-year. Demand is rising at both MSP clients as well as at our traditional clients. And the overall number of facilities with travel nurse orders continues to move upward, both sequentially and year-over-year.

The growth in orders is also occurring in multiple geographies, with our top five states spanning the West, Northeast, the Southeast, and the South. Our MSP orders have been trending at approximately 20% to 25% of our overall travel nursing demand.

Fourth-quarter performance in the local per diem business on a pro forma basis was up 14% sequentially, due largely to seasonal demand from flu clinics. The local per diem business tends to fluctuate more due to the short-term nature of the business. Fourth-quarter Allied revenue was up slightly on an organic same-store basis. However, this was tempered by some disruption from the Allied integration. As we mentioned earlier, the Allied business is undergoing the greatest amount of integration activities, and the team there is doing an excellent job working through the transition.

Our Locum Tenens segment delivered fourth-quarter revenues of $69 million, which included $7 million from the Medfinders Locum's business. As anticipated, the Locum's business declined on an organic same-store basis by 8% compared with the prior quarter. This was due primarily to lower volumes from typical seasonality. The business was flat on a year-over-year organic same-store basis.

However, the forward-looking trends in the business appear to be improving. Overall, days sold in the fourth quarter were up sequentially and year-over-year, with the largest increase experienced in primary care. For the first quarter, we are expecting Locum's revenues to be up slightly on a sequential basis.

Across competitors, short-term trends continue to be mixed. However, there is a pretty consistent agreement that the long-term demand and supply dynamics of the physician staffing business continue to be strong.

In Physician Permanent Placement, fourth-quarter revenues were $9.3 million, which, on an organic same-store basis, represented a decrease of 1% over the prior quarter and a 3% increase year-over-year. A fourth-quarter seasonal decline is typical for this business, but we do believe our new search activity was weaker than it should have been, due to having too few marketers to cover sales territories.

The marketing team that we do have in place is extremely strong, and they were able to achieve high productivity levels. We just need more trained marketers in the field meeting with current and potential clients. So therefore, we are aggressively hiring and training new marketers.

In the fourth quarter, the Company added $14 million in revenues from Home Healthcare Services. This represented a 1% sequential decline on a pro forma basis, which was in line with the industry. The decline was driven primarily by a decrease in Medicaid revenues. Medicaid represents 37% of the division's revenue in the fourth quarter. And we are expecting the segment revenues to be down slightly again in the first quarter, with continued Medicaid pressures.

While much of what we are speaking of today is about what will affect our business in the next few quarters, we are also very focused on evolving our service lines to meet the changing needs of our clients over the next several years. Healthcare organizations are beginning to transform their delivery models to address the challenge of providing increased access to health services while maintaining quality and reducing costs.

As a part of this, they are gravitating to strong partners who can offer more sophisticated solutions that can deliver value and efficiencies. This can come in a variety of forms, such as managing their total supplemental staffing in a more streamlined way; reducing their overall labor spend; and improving their costs and quality of new clinician talent. This can also include working more efficiently with Home Healthcare Services to provide transitionary care and management that reduces unnecessary and unprofitable readmissions.

Through our combination, we believe we have been able to make strides in our long-term strategy to ensure we are evolving alongside our clients. Our ability to use 2010 as a building block and our solid start in 2011 is a direct reflection of our committed and talented team. The team has done a tremendous job in our efforts to grow market share and emerge from the downturn ahead of the pack. Their efforts and the strong values that they exhibit were also the key ingredient to a smooth integration of the two companies. It is through our values-driven culture and our relentless focus on our clients that enabled AMN Healthcare to evolve into the largest provider of healthcare staffing and workforce solutions.

A third important ingredient to our ability to evolve is our financial discipline. This is a perfect segueway to introduce Brian Scott. Any investor, banker, or analyst who has interacted with AMN over the past few years probably already knows Brian. He was our Senior Vice President of Finance and Business Development, and he knows our business extremely well. During his seven years with AMN, Bryan oversaw the Company's corporate financial planning, capital funding, business development, and SEC reporting activities. He also served as the President of AMN's Pharmacy Staffing Division for some time. He took the reins as our Chief Financial Officer in January, and he is ideally suited for this role.

So, Brian, it is my pleasure, for the first time, to turn this earnings call over to you.

Thank you, Susan. Good afternoon, everyone.

As Susan mentioned, fourth-quarter revenue was $220 million. Our gross margin for the quarter was 28.1%, slightly down from last year but up 70 basis points from last quarter. The 30 basis point decline from the prior year came from compression in the pay-to-bill spread in our Locum Tenens business, and higher housing costs in our Nurse and Allied segment, partially offset by the addition of the higher margin Medfinders business. The addition of Medfinders for a full quarter was the primary driver of the sequential margin improvement.

SG&A in the quarter totaled $54.8 million, which included $2 million of costs associated with the integration of Medfinders and a $1.2 million bad debt charge related to a client in our Locum Tenens segment. Excluding these charges and the $6.3 million of transaction and integration-related expenses incurred in the third quarter, SG&A as a percentage of revenue increased sequentially by 40 basis points to 23.4%.

The majority of the increased SG&A margin is the result of including Medfinders for a full quarter, as Medfinders has a somewhat higher SG&A margin to support the local staffing infrastructure. In addition, we have added some headcount to support our continued growth in MSP accounts.

Overall, we did not anticipate significant cost synergies in this quarter, but as Susan mentioned, our integration efforts are well underway, and we are on track to achieve our expected $8 million of annualized SG&A savings by the fourth quarter of 2011. Much of these savings will take hold during the next two quarters.

Our Nurse and Allied segment revenue increased sequentially by 37%, with Medfinders adding approximately $41 million in revenue to the quarter. Nurse And Allied gross margin increased by 40 basis points to 26.1%, due to the inclusion of a full quarter of the higher gross margin Medfinders' local and Allied businesses, partially offset by the higher traveler housing costs in the quarter. Fourth-quarter Nurse and Allied segment operating income was $10.7 million or 8.4% of revenue as compared to $8.6 million or 9.2% of revenue in the prior quarter, with the higher operating costs for Medfinders driving the decline in the operating margin.

Our Locum Tenens segment revenue was essentially flat with the prior quarter. Excluding the impact of the acquisition, revenue decreased 8%, reflecting a 9% decrease in days filled, offset by a small increase in our pricing. The gross margin of 25.4% was bolstered by the addition of Medfinders Locum's business. The organic Locum's business experienced continued pressure on the pay-bill spread in certain specialties.

Locum's operating income of $4.8 million or 6.9% of related revenues compares to $5.4 million or 7.7% in the prior quarter. This decline is the result of the $1.2 million bad debt charge in the fourth quarter that I mentioned earlier. Within our Physician Permanent Placement segment, revenue grew sequentially by 7%, due to the addition of the Medfinders Physician Perm Placement. Physician Permanent Placement operating income for the fourth quarter was $2.3 million, or 24.8% of revenue.

Our new Home Healthcare segment generated revenue of $14.3 million and operating income of $1.1 million for the quarter. Gross margin on this business was 37% for the quarter, consistent with the prior quarter.

On allocated overhead, excluding stock compensation, in the fourth quarter was $9.8 million, down from $12.6 million in the preceding quarter and higher than the prior year expense of $5.4 million. The fourth quarter includes about $2 million in costs associated with the Medfinders integration, including severance, lease termination fees, legal and other similar costs. The prior-quarter included about $6.3 million of such costs as well as transaction-related expenses. Excluding these items, the remaining increase in unallocated overhead was due mainly to having a full quarter of Medfinders corporate costs.

During the fourth quarter, we finalized the goodwill and intangibles impairment assessment that was initiated in the previous quarter, and recorded a charge of $1.1 million. We also performed our normal annual goodwill and intangible impairment analysis in the fourth quarter, which included the Medfinders values and determined that there was no impairment.

On a GAAP basis, we reported a fourth-quarter pretax loss of $4.5 million. The fourth-quarter tax rate reflects a true-up of the full-year tax rate to 17%, which was impacted by certain permanent differences, including nondeductible portions of the transaction costs and goodwill impairment charges incurred during the year. Excluding the goodwill impairment charges and the acquisition-related costs, our effective tax rate on a full-year basis was 64%. This rate is different than the statutory rate, in large part due to permanent differences having a disproportionate impact as a result of our relatively low 2010 pretax income.

For the fourth quarter, we reported a net loss per share of $0.03. Adding back integration charges and impairment charges incurred in the quarter, our adjusted loss per share was $0.01. Fourth-quarter operating cash flow was $4.8 million, and full-year operating cash flow of $8.1 million was net of an $11.5 million of acquisition and financing-related cash costs that were not capitalized as part of the transaction.

Days sales outstanding were 53 days as compared to 54 last quarter. We do anticipate that DSO may increase back into the mid-50s range. Capital expenditures for the fourth quarter were $1.8 million.

As of December 31, our cash and equivalents totaled $2 million and our total term debt outstanding was $215 million, with no borrowings under our $40 million revolver. Our plan is to use the majority of our cash flows to pay down debt, and our goal is to reduce our debt to EBITDA ratio by half within the next two years.

Going into the first quarter of 2011, the Nursing and Allied Staffing segments continue to experience positive momentum. This growth, particularly in the travel nurse business, is being driven by continued penetration of existing and new MSP accounts, and a steady improvement in the traditional client demand. Fourth-quarter local per diem revenue is expected to experience a sequential single-digit decline, due to the fourth quarter having higher seasonal revenues from the flu clinic business.

Allied Staffing revenue is expected to be down sequentially, due mainly to the anticipated disruption from the integration activities. The Locum Tenens division is showing signs of modest improvement in demand, which is expected to translate into a slight sequential increase in revenue.

Physician Permanent Placement revenues is expected to be relatively flat. Our Home Healthcare division is expected to decline slightly, as historical reliance on Medicaid business is being impacted by states' budgetary challenges, and while we transition our business to a higher mix of private pay and Medicare.

On a consolidated basis, first-quarter revenues are expected to be between $223 million and $227 million, with gross margin anticipated to remain steady with the prior quarter. Excluding integration-related costs, SG&A dollars are expected to remain roughly flat in the next quarter.

I'd like to provide some other financial estimates for 2011. We anticipate 2011 depreciation expense of approximately $10 million and amortization expense of approximately $7.5 million. Interest expense for the full year is expected to be around $22 million, which includes $3 million of amortized deferred financing costs and original issue discount. Our tax rate should be in the mid-50s, with the cash tax rate closer to 20%, taking into account the utilization of tax benefits primarily from the Medfinders acquisition. Share count should be in the 46 million range.

Finally, capital expenditures should be between $6 million and $8 million, which is higher than the prior year, due in large part to the addition of Medfinders and several projects supporting the integration.

And with that, we'd like to open the call up for questions. As we have had over the past couple of calls, we also have with us Ralph Henderson, President of Travel Nurse and Allied Staffing; and Bob Livonius, President of Workforce Solutions, available to answer questions.

Operator?

(Operator Instructions). Tobey Sommer, SunTrust Robinson Humphrey.

Thanks for the details in the press release and so far on the call. I wanted to just see if you could parse out what you think the organic rate of growth is outside the MSP clients? Were you able to get those new cross-selling opportunities that you seem to be capturing? Thanks.

Sure. If you're asking about the fourth quarter, I think of it in two ways, Tobey. One is, what was the organic growth that we were on track to achieve, even without the benefit of the Medfinders MSPs that were brought to the table?

And we would have had organic growth without that. But on top of that, we had the revenue synergies that came from our ability to directly fill more of the travel demand that Medfinders brought to the table with their MSP -- as I mentioned, the four largest ones, where we added an incremental 200 travelers at those accounts.

Brian, you want to maybe comment on how those numbers would have been different?

Yes, the difference between trying to include or not include those cross-selling revenue is probably 1% to 3%, depending on whether you're comparing to sequential or year-over-year. So it's not a huge impact in comparison to the pretty significant growth that we saw.

It starts to be a bigger impact, as you would expect, in the first quarter, because we were still ramping up quite a bit in the fourth quarter.

Is -- that answer your question, Tobey?

Yes, I think so. I think so. And then I was curious on the gross margin side for your guidance, I think it reads like it's going to be flat sequentially. That seems to be a pretty strong level of profitability just from a seasonal perspective, and I was wondering if you could give a little bit more color on the composition of how you get flat sequentially in what's usually down first quarter?

Typically, our first quarter is not down as much as maybe some of the other competitors. We do take a slightly different approach on some of our payroll taxes, where we kind of standard-cost them throughout the year, so we don't see that dip that you might hear from others.

So, outside of that, we really think the fourth quarter -- obviously, the first quarter, where we had a full quarter of Medfinders included, and I think that's a pretty good baseline of our expected performance for 2011.

So the various payroll taxes and the increases you've seen not really a material impact so far this year?

No, from a year-to-year basis, we don't see a real big impact on -- just in terms of the rates that are going to be utilized for 2011.

And then, Susan, I just wanted to get one more question and I'll get back in the queue. Your general sense for pricing -- and I'm referring primarily to the travel nurse business in terms of the composition of your growth this year -- do you think you start to see some pricing work its way forward?

And then I was wondering if you could comment on anesthesiology and how that is shaping up on the Locum side. Thanks.

Okay. You know, since Ralph is here, I'll have him talk about the travel nurse pricing and then I'll come back to anesthesiology.

So our view right now on short-term trends overall -- I mean, percentage of non-MSP business is growing, and it would grow in the first quarter a little bit faster than the MSP business, so you'll see a little bit of a bump from that. And most of those specialties are actually kind of unique specialties that do have higher bill rates.

So we feel pretty good about first-quarter pricing trends remaining at or above where we're at today. And just depends on how that mix comes in. The more non-MSP business, the better it will look.

Great. And then coming back to physician anesthesiology, as you probably tracked, anesthesiology was one of our pain points in 2010. In fact, if you look back over the full year in 2010, almost half of our decline in Locum's was related to the year-over-year drop in anesthesiology.

The good news is we've seen that stabilize. And in fact, as we're looking at the first quarter, we're actually seeing a sequential increase. So I don't know if anyone is claiming we're completely out of the woods there yet, but it's definitely become more stable and directionally moving up, versus, say, radiology, which was the other half of our decline in 2010, which we also feel has stabilized more recently, but I just don't think the future is quite as clear.

Thank you very much.

A.J. Rice, Susquehanna Financial.

I had a few questions, if I could ask. First of all, the comments about a little pickup in traditional client demand. I guess I'm trying to flesh that out a little more. Is it more on the traveler side, the per diem side? Is it more share gains that you're getting vis-a-vis others? Or is there some aspect of the underlying tone of the market, whether it's hospitals being a little more optimistic about volumes -- or just any color that you can provide on that.

Again, I'm probably going to have Ralph and Bob jump in here, but it is probably more on the travel side than it is on the per diem side. As I mentioned, per diem, because of the short-term nature of the business, you're literally booking day by day, shift by shift. It tends to be a more sensitive and volatile. The market in the fourth quarter was great for us, up 14%. But the underlying demand in the per diem market isn't quite as stable across the country. There are regions such as the West which are doing very well, and there are others that are a little more up and down.

So, Bob, why don't you comment on per diem and then we'll have Ralph jump in on travel.

I think you're right -- West, we seem to see a lot more demand right now, and I think that's partly a function of some new MSPs that we've implemented but also just in general. Add-in MSP, whether it's a new account or it's a more traditional account, the demands have been a little bit stronger in the West. The Midwest has stayed about stable. In the East, we've started to see some -- and in the south, we've started to see some increased demand there as well. So we're not picking up the pace, I think, as fast as we're seeing in travel, but we're more optimistic than pessimistic.

So, on the travel side, first on TOA, we've definitely seen double-digit growth since the beginning of the year in the traditional staffing business, the non-MSP business. So it's even exceeding the growth rates, which are fantastic in our MSP business from the new account startups and things like that. So that's kind of in the traveler's side.

On the demand side of the business, very similar trend strengths, both in MSP and our non-MSP business.

Would you characterize it as you're just getting share, you think? Or because players have dropped out? Or do you think there's underlying strength in the market as a whole?

Yes, I think it's both. I mean, our fill rates have gone up, particularly at MSP, where we have the order longer in our hands before it gets distributed to other vendors in the marketplace. So we probably have captured quite a bit of share there. But we've also seen just true growth overall in the marketplace. So it's kind of execution and market, both.

Okay. Maybe just also a big picture on the Home Health. Obviously -- and we all would understand Medicaid pressure, that dynamic is going on; but there's also, like you said, the discussion about trying to reorient toward more reliance on Medicare and private pay.

I guess, at the end of the day, the revenue base you now have in Home Health versus where you'll be toward the end of the year, is it right to think about that as sort of flattish over the course of the next year, as those two things offset each other? And what is the -- how does the profitability of that business change as you make that transition?

In terms of the mix, you've got it right that we would see the Medicare portion actually increasing as a percentage of our overall revenue, Medicaid dropping now. Another positive, while they may offset each other somewhat on the top line, the Medicare business is more profitable with higher gross margins. So you would drop more to the bottom line.

Yes, as we migrate more to the Medicare model, we've seen that we've increased our profitability, and that's an expectation that we would continue to have throughout the year. We have been fortunate to be able to launch some new business in Hawaii that is as a result of a new CON there, and that's all incremental business. So our expectation is that, for the full year, we would not -- certainly not see it -- expect it to be flat.

You know, there are things, A.J., that we have to do to continue to reduce costs -- and not just us; any home health provider has to be cognizant of the pressure on reimbursements both in Medicare and Medicaid. And so, again, I think most providers in this space -- we're continuing to do things to become more efficient -- centralizing functions, things that hadn't been done before, that now we feel we have the infrastructure and the resources to handle.

It's also business that while it's really executed at a local level, there are things you can do to create consistency, such as in the Oasis treatment -- I'm sorry Oasis assessments, which really drive your ability to bill correctly. So we think there's things we can do to help offset the reimbursement pressures.

Okay. I guess I was just trying to understand, and it doesn't sound like it's the case, but do you have a couple of quarters where your profitability is under a little pressure as you make the transition, and then you sort of rebound late this year or early next year? Or is it more smooth because it's more profitable business naturally? And it sounds like you're saying more of the latter -- you think you will at least do as well, if not a little better, it sounds like.

Yes, I think the latter is probably the right way to think about it.

Okay. I had a couple more here. On the bad debt and Medfinders, the $1.2 million and the $2 million restructuring, first quarter, is there any continuing restructuring that we should expect to be in the numbers for Medfinders? And then can you just give us a little bit more on what happened on the $1.2 million of bad debt? Is that something that we should think about potentially recurring elsewhere? Or is that sort of really truly a one-off thing?

Sure. On the first one it's -- yes, from the integration expense standpoint, we incurred -- we've said we'd have higher amount of costs in the fourth quarter and then it would decline. So the $2 million in the fourth quarter, that will definitely be the peak in terms of our costs. In the first quarter, I think it will be something about half that number, and then it will decline pretty quickly thereafter.

Okay.

And on the bad debt, it really was isolated to one particular client in the radiology space in Locum Tenens. And so I don't feel like that's an issue over all with in that space or across any of our other divisions. And I wouldn't expect to see anything like that on a go-forward basis.

It's obviously hard to predict always with accounts, but we have a very good set of controls in place to mitigate these things. And we're not really seeing any other clients with any issue similar to what we had with this one.

Okay. And then just my last question -- on cash flow from ops in the fourth quarter, it was, what -- I think you said $4.8 million. I don't have the press release fully in front of me, but is there puts and takes on that, that are sort of adjustments that we should think about for, like, a run rate, a quarterly or an annualized run rate, as you look at 2011 and what your expectations will be for that?

Sure. In the fourth quarter, probably the only thing that -- incremental would be just the integration expenses that we incurred, that would be outside our normal operating. If you're looking at 2011, we're not giving complete guidance on that, but I guess if you consider 2010, our operating cash flow for the year was about $8 million. But that included almost $11 million or almost $12 million of costs that were associated with the transaction, things that were not capitalized. So if you put that as kind of a baseline -- and that included about $10 million of growth in working capital.

So for 2011, we would expect our operating cash flow to grow by more than 50% from that adjusted 2010 number. And we would -- we'll benefit to some degree by the tax benefits that we acquired through the acquisition of Medfinders.

Okay. And the working capital need -- when you say plus 50%, you're including the working capital?

Correct. Absolutely. But we would expect, obviously, to continue to have growth and working capital, as we see growth in the revenue.

Right, right. Okay. That's great. Thanks a lot.

Jeff Silber, BMO Capital Markets.

Just a couple of quick numbers questions. Just wanted to actually -- you just stated something I wanted to make sure I had it clear about your expectations for operating cash flow this year. It was up 50% from what number -- I'm sorry?

From the -- if I take 2010 and if you kind of strip out the transaction-related expenses, we're closer to about $20 million in 2010. It would grow by more than 50% from that number.

Okay, got it. All right. And then just one more numbers question. Just looking at the Nurse and Allied business, if I look at revenue per average traveler per day, it was down significantly year-over-year; that's because of the MSP impact on the Medfinders acquisition?

Actually, the majority of it is from the inclusion of the local per diem staffing business. They have lower average bill rates because they're putting a different mix of clinicians to work, as well as just the fact that there's initially travel included in that bill rates. So really, if you were to kind of go business line by business line, not a lot of variation in the travel nurse revenue per day, allied or local. It's just that this is the first quarter where we have a full quarter of those blended together.

(multiple speakers) And per diem is roughly running what size, either as a percentage of total revenues or a percentage of [that position]?

It was about $24 million out of the quarter (multiple speakers) --

(multiple speakers) All right, great. I appreciate it.

(multiple speakers) -- for that segment. And remember, the reason it's lower is that they have a percentage of unskilled workers, and even within their nursing component, there may be more LPNs working. And so it's not a matter of the per diem RNs are at a lower rate; it's more that their mix of workers has more of those unskilled professionals.

Correct.

Okay, got it. That's helpful. And then one more numbers question. Just turning to the Locum Tenens business, if I take anesthesiology and radiology combined, that represents roughly what percent of that segment?

Oh, let's see, in the fourth quarter, they would have been about 25% in total -- of the total business.

All right, great. Now just a big picture question -- it's focused on the end markets and probably more for your Nurse and Allied business than some of the other divisions. I'm actually at a healthcare-related conference right now, and they're talking about a lot of the hiring going on, more at long-term-care facilities as opposed to your traditional hospitals. Is that where you're seeing your growth in that segment?

Well, let's talk about two pieces here. We'll talk about the MSP, because there is some action there and then we'll talk about Allied.

Yes, on the MSP side, we're actually excited about the fact that we have a really broad range of services that apply to the non-acute-care segment -- sub-acute, the rehab centers, even pharmaceutical companies and so forth. So we actually are seeing a higher demand in some of those non-acute facilities. We've had some new wins at nationwide companies who do rehab facilities, for example, which Ralph will talk about.

But the diversification of growth and the use of MSP is not limited at all. In fact, it's pretty widespread outside of the acute care facilities.

On the Allied side, our Allied business really does most of its business any more outside of the acute care settings, where we certainly cross-sell into our acute-care clients from the nursing side; but a majority of the business there is done in rehabs, long-term acute-care, skilled nursing facilities and all types of settings.

A real positive there that I'll mention is we are starting to also see some consolidation of spending there and migration to an MSP of model in the Allied segment as well. So this is a relatively fresh trend, something that hasn't been around -- we haven't seen much of it over the past few years. So I think that sector is also starting to take advantage of MSP, which should drive additional business for us there.

You're right, most of the job creation in healthcare over the past really kind of three or four years has been outside of the acute care setting. So we certainly have tried to migrate there and expand our business in those areas as much as we possibly can.

Okay, great. That's very helpful. Thanks very much.

Gary Taylor, Citigroup.

A couple of questions. One, I wanted to make sure I heard you correctly on the share count range for next year -- you said 46 million?

Correct.

And what does that -- what's the development of that? With the conversion to common, is that the number we should expect for the 1Q as well?

That is for the first quarter, yes. So really when we got the shareholder vote for the preferred shares to be -- preferred, they're now included in that diluted share count. So if you see the change from the fourth quarter, which it had just a part of the quarter, including those shares, the first quarter is really our first true representation of our go-forward diluted share count.

Right. And where is the preferred dividend on the income statement?

It actually does not get recorded on the income statement other than in the EPS number. So that would have been the case in the prior quarter. We had an increase in our loss per share of $0.01, and conversely, once we got the vote in the fourth quarter, there is a $0.01 benefit in the fourth quarter.

What is that dollar amount, I guess -- pretax, I guess, is an untaxed number, but what (multiple speakers) --

Yes, it's about $260,000.

Okay. So that goes away, but with the share count moving up -- I understand the revenue will be up slightly sequentially, but with the share count moving up, your expectation would be an EPS loss in the 1Q, right?

No. I mean, if you think about the -- think more of an adjusted basis, we had a $0.01 loss. And really if you consider that bad debt charge of $1.2 million, that's about a $0.02 impact to the quarter. So with our margin and SG&A being relatively consistent quarter-to-quarter, with a higher revenue, we would not expect to have a loss in the next quarter.

Even with the higher share count?

Correct.

Right. Okay. Thanks. And then, Susan, maybe a question for you. Can we just think out three years, four years, five years -- let's hypothesize an assumption where demand continues to come back for the business. I'm interested in your view of how gross margin sustains itself or not in a substantial recovery of the labor markets. Do you have to give up gross margin and return to historic levels if we see competition for nurse labor and demand increase substantially?

And then, secondly, I guess, my impression is that the MSP business is a lower margin business. So as you grow that, does that impact or kind of that normalized gross margin ends up under a full recovery scenario?

Sure. Sure, okay. Well, let's go at both of those.

First, regarding gross margin specifically for travel nursing and compensation packages, it somewhat depends on the growth rates themselves and how much pricing increase you're getting out of that growth. But history would show that as the business grows, and you're presumably getting some pricing uplift, you are able to increase your wages accordingly -- and basically, maintain a gross margin level.

In fact, as you might recall, back in the early 2000's, when we were getting more substantial pricing increases, we actually grew our gross margin. We wouldn't forecast that as we do our hypothesis and scenarios three to five years out, we're projecting more stable margins across the board.

Now, you might get some short-term fluctuations that you have to adjust to. Right now, for example, one of them for us is housing costs. Rents are going up because apartment vacancies are relatively low. So we certainly have to adjust our compensation and pay rates to adjust for that and maintain a relatively stable margin.

But if we assume going out three to five years, and we maintain our gross margins at a stable level pretty much across the board -- you'll have some puts and takes -- we still believe our goal is to get back to a 10% EBITDA margin. And I know you didn't ask that, but it all kind of adds up to that at the end of the day -- you know, where do we think we can get leverage and increase our bottom line? And we think it's through stable gross margins and leveraging our SG&A as the revenue grows.

And on MSP impact on gross margin, at a full recovery cycle, is that -- I mean, my thought is that that would be a lower margin business and would have some impact, but (multiple speakers) [is that true]?

This is Bob. Let me just comment on, first of all, the gross margin level but also just on the profit contribution level. I think there is a perception out there that MSP in our model has to be a lower gross margin, and we haven't had that necessarily be the case. Our traditional business, you'll recall today, is an environment where if you are not operating directly with a client, you're operating through some third party.

Actually, when we get an MSP, oftentimes we're operating at a higher rate than we would be if we were operating, say, through a Texas hospital associations or a third party BMS or even another MSP. So, we'd rather be the one with the higher rates, because otherwise you're subcontracting the business and you're actually taking even lower rates. So those that win the MSP contracts typically have higher gross margins, not lower.

And then in aggregate, the profitability of the MSP is actually something I want Ralph to talk about too. We did a study of branch offices with and without MSPs awhile back, and found that our profitability was much better with those with multiple MSPs or even one MSP. And the efficiencies come from lower selling costs and the costs to compete for every single order. And additionally, you get the benefits of continuously improving the process within an existing account, so you can begin to maximize payroll processing, collections, QA.

So, notably, the big benefit is you get the same healthcare workers to work there over and over and over again, so your recruiting costs go down substantially and your cost of retention is much lower. So, it actually is a more profitable model, we think, going forward. Ralph?

I'm going to go a little long on this one, because I think it's a real important part of our strategy. And I agree with Susan. Our ability to pass on rate increases in traditional staffing has -- we've been very strong in doing that in the past.

And I don't actually think there's going to be any change in how our MSP clients react to the market. They want to compete; they want to have the best talent. And we help them aggregate their spending and drive out some efficiencies for them, but it's not all just about the bill rates. The bill rates are traditionally lower, but that doesn't always translate into lower gross margins because of some of the reasons Bob talked about.

But on the travel side, one of the main ones is that in a traditional environment, there may be four or five companies that have an order; but in an MSP environment, only one company controls their order. So when an offer is made to a traveler in a traditional environment, they sometimes shop them around to the four or five competitors, try to drive their compensation package up. It doesn't happen in an MSP environment. So we have more leverage in negotiations, so we're better able to manage this spread between pay and bill.

Second, we also -- when we don't fill a job, in a traditional market, we don't make any money. We've put a lot of effort into something and nothing happens, and that's kind of a waste issue for us. In an MSP environment, we actually still get a feed off of our affiliate vendor, so that drops straight to margins.

And then the last part is because spending -- our volume tends to be aggregated around particular systems and facilities, we can negotiate deeper discounts with our housing partners and leverage our spending, lower vacancy rates there. So those are all the margin issues.

Obviously, on the profit side, there's some productivity per recruiter, with higher fill rates can be substantially higher because of that. Also the validity of orders is better. We don't have to work on orders that aren't valid. MSPs are budgeted, approved orders, so that's a big positive for us as well. And our expenses for sourcing candidates are lower, because candidates want to work directly with the MSPs. So, for instance, we won a very large client last year, right? The number of applicants we had the next -- the following several weeks, went up by several hundred. So, a lot, a lot of positives on the expense side.

There are some upfront costs -- you know, implementation costs, I'll just mention those. And they were higher. And then there's kind of a learning curve when our back office costs remain higher while we master that client's needs. Once that period is over, you do start to see some increased leverage on your back office as well.

And I guess the alternative is, I guess, probably ought to be discussed as well, which would be where we become an affiliate vendor to somebody else with a lower bill rate, and we have to pay a fee to them. We'd certainly be kind of disastrous to our profit model. So, that's all the reasons why we head in this direction. It was a well-thought-out, strategic choice. We targeted the acquisition we made. And certainly, hopefully, you guys find some comfort in my statements that we're not worried about the margins or profitability of the MSP business.

Great question, Gary.

Thank you for the color.

Tobey Sommer, SunTrust Robinson Humphrey.

Just a couple of follow-ups. One, I was wondering if you could comment on the supply of folks on the travel side, travel nursing side as well as the physician side. In the travel nurse, do you notice anything different in terms of the empty nester pool versus the resume-builder pool? And then I'm wondering what your business is seeing in terms of maybe retirements of physicians? Any signs that those are starting after the recession?

Well, first on the physician side, we are seeing an uplift. In fact, in the second half of 2010, we started to see an improvement in the number of new providers that we put to work, which is very important, because once you have a physician working with you, they tend to continue working with you for a period of time. And so that was a positive sign and probably speaks to why we're also seeing growth coming into the first of the year.

We also saw the number of what we call MedMal approved, which means we can get them to work -- that number rose as well. So we're feeling better about the supply of physicians, but we're always short. It's really -- it's about the demand, but it's more about the supply on the physician side of the business.

Nursing, we've been talking all about the need for demand over the last two years. And you hit an important point, because now we have to focus more and more on supply, which we think is good news, because with our large database of candidates that we have already preapproved and have been talking with over the last several years, we have the largest available network. And we have, for the first time, started to see our new unique applicants rising.

Ralph, you want to add a few more comments around that?

Sure. Our first priority is that loyal database of travelers. We have 75,000 in the database. We think it's one of the largest out there. And we're really working to come up with more efficient ways to get them on assignment as part of our priorities. So, things like text messaging and voice blasts help us tap into that database better.

Second, about Q3 of last year, we did start to see applicant trends starting to improve -- more nurses coming back into the market. That trend has accelerated over the last 13 weeks. So our supply has begun to come back. I think they're a little more confident both in job opportunities on their next assignment, which makes them feel like coming back to the travel markets and coming out of perm jobs.

That whether they're empty-nesters or not, I don't have a good sense for that. They are people who have typically traveled before, so -- and they could be in any of those buckets. But not first-timers yet; not quite yet.

And Tobey, remember the other benefit that we have in coming together with Medfinders is they have a very extensive local network of candidates that we can now share between the business units. So we have processes set up so that individuals who have a traveler that's not working with us, but is staying put in a local area, can get referred over for local opportunities.

And vice versa -- if there's a local candidate that might be interested in a travel assignment, they can refer those individuals over. And we've already seen that, that initiative improving.

Thank you.

Yes, I would (multiple speakers) [think of] a formalized cross-selling program that both companies had, and we refined it and made it even better. So we're actually exceeding expectations in terms of the number of placements we think we would have made at this time, both on the local level and traveler.

Thanks. And I'll ask one last question. You've, over the course of the last year, rounded out a suite of service offerings. And I was curious now that we're perhaps growing a little bit in many of your markets, do you have any plans to de novo any news service line or perhaps specialty that you would like to round it out even fuller? Thanks.

Nothing significant in the near-term. As you know us, we're always thinking about the future and what we might need to be doing three to five-plus years from now. So there is work certainly being done on what we should do down the road; but for the near-term, our focus is really maximizing the opportunity that we have in our hands today. And with the growing market and virtually almost all of our business lines, we feel that ought to be our first priority. And so that's probably where you're going to see us paying all of our attention right now.

Thank you very much.

Thanks, Tobey.

(Operator Instructions). We have no one queuing up, so please continue.

Well, thank you so much for joining us today. We are looking forward to updating you on our progress throughout the year.

Thank you. And does that conclude our conference call?

That does.

Very good. Ladies and gentlemen, this will conclude our conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference Service. And you may now disconnect.