ASGN Inc (ASGN) 2011 Q3 法說會逐字稿

Good afternoon. My name is Misty, and I will be your conference operator today. At this time I would like to welcome everyone to the On Assignment third quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Jim Brill, Chief Financial Officer. Please proceed, sir.

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

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

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

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2011 third quarter conference call. With Jim and me today is Emmett McGrath, President of our Life Sciences and Allied Healthcare groups.

During our call today I will give our view of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by Emmett and myself. Then Jim will review in more detail our financial performance and discuss our fourth quarter guidance. We will then open the call up for questions.

All the markets we serve were productive during and exiting the quarter. We continue to see the strongest growth in the IT and Life Sciences end markets. Demand in nurse travel strengthened throughout the quarter and sequential revenue growth accelerated to 42% with the inclusion of labor disruption revenue.

In our Physician Staffing Division we saw a year-over-year quarterly growth in revenue for the first time in nine quarters. While demand has improved in the physician staffing marketplace, VISTA is still operating below our expectations. As those of you who have followed our Company over the years know, VISTA grew in excess of 20% compounded annually in 2007 and 2008. It shrunk 2% in 2009. It shrunk 16% in 2010 and is projected to shrink 5% in 2011.

Clearly the physician staffing market has been very challenging over the last three years. However, we believe that our current performance is not reflective of VISTA's historical performance or its future performance. Over the last six months we have hired over 30 new VISTA employees and believe that we can positively impact the current performance of the Physician Staffing division. In addition, we firmly believe that our physician and nursing groups can provide some of the greatest growth opportunities in 2012 and beyond.

Regarding industry dynamics, all secular trends continue to indicate a greater demand for temporary labor than full-time labor and the extended and moderated nature of this current recovery suggests that professional staffing will continue to benefit from employers' preferences for flexibility juxtaposed against an increasingly scarcity of skilled labor. We continue to see a classic cyclical recovery in professional staffing and clear signs have developed that show skilled labor is becoming more scarce.

As for our five-year strategic plan, we continue to execute well against our plan to get to $1 billion in revenue. The plan requires us to grow approximately 10% compounded annually with approximately $50 million a year in acquired revenues. Based on our third quarter results and the midpoint of our fourth quarter revenue guidance, we will end 2011 with $594 million of consolidated revenue.

This compares with our strategic plan target of $532 million for this year. Our strategic plan target for 2012 is $635 million in revenue which includes acquiring another $50 million in revenue and organic growth of 10%. We continue to track nicely ahead of our $1 billion revenue and $100 million EBITDA goals. Our operating performance in the third quarter of 2011 and our guidance in the fourth quarter of this year demonstrate that the actions we have taken over the last few years have us well positioned.

As for actions we took to sustain our future positive revenue growth rates, we substantially added to the number of recruiters and sales personnel that we employ. In the third quarter of 2011, we averaged 816 recruiters and sales personnel. This compares to 678 in the third quarter of 2010.

Regarding our share repurchase plan, during the third quarter and through today we acquired approximately 325,000 shares of our stock. Currently $15.8 million remains available under the $20 million share repurchase authorization.

Now in the third quarter, revenues in the third quarter were $162.4 million, an increase of 39.8% over the third quarter of 2010 and 13% sequentially. Consolidated gross margin of 33.6%, contracted 181 basis points year-over-year and 38 basis points sequentially. Net income was $7.8 million or $0.21 per diluted share.

Revenue generated outside of the United States was $17.6 million or 10.9% of consolidated revenue in the third quarter versus $8.5 million or 7.3% in the third quarter of 2010. Adjusted EBITDA was $18.2 million or 11.2% of revenue for the quarter, up from $11.7 million or 10.1% of revenue in the third quarter of 2010.

While we reported a contraction in gross margin compared to last year's third quarter, this relates predominately to a number of factors that positively impacted our results last year. First, although both quarters included a meaningful amount of labor disruption revenue in our Nurse Travel division, in the third quarter of 2010 a strike at our client hospital was called off such that we received contractual revenues but incurred few expenses related to staffing.

As a result, our labor disruption revenues in last year's quarter generated a roughly 73% gross margin and contributed 95 basis points to consolidated gross margin. In this year's third quarter labor disruption revenues carried a gross margin similar to our overall Nurse Travel division, i.e. about 24%.

Second, like most other staffing companies we benefited in 2010 from the HIRE Act which provided for a payroll tax exemption for unemployed employees who are hired during the year which expired at the end of the beginning of 2011. The benefits we received last year under the Act contributed about 33 basis points to our consolidated gross margin in Q3 2010.

Finally, conversion and direct hire revenues were 3% of total revenue in Q3 2011 versus 4.1% in Q3 2010. This created roughly 73 basis point differential in consolidated gross margin. All of these unique items were previously identified prior to this call.

Exiting the quarter, demand for our services was solid in all divisions. Our weekly assignment revenue which excludes conversion, billable expenses and direct placement revenues, averaged $12.2 million for the last two weeks. This was up 44% from the same period in 2010 and up 13% from the same period last quarter.

Before turning the call over to Emmett, I would like to give you a brief review of the operations. I am pleased to report that On Assignment's IT and Engineering segment, Oxford Global Resources, once again had another excellent quarter. Our results met or exceeded our expectations with continued improvement for each month of the quarter.

Revenues for the third quarter of 2011 were $70.1 million, a 7.3% sequential increase over the second quarter of 2011 and a 47.7% increase over the third quarter of 2010. This follows previous year-over-year quarterly increases of 58.4%, 67.9%, 52.5% and 48.9%. In addition, for the sixth quarter in a row with the exception of telecom, we experienced quarterly sequential growth in each of our specialty areas.

Our quarterly revenue of $70.1 million not only exceeded our pre-recession levels but it is an all-time high for this segment. The 47.7% increase in year-over-year quarterly revenue was due primarily to a significant increase in demand for consultant labor across all of our divisions and disciplines. Our billable consultants on assignment increased from an average of 817 for the third quarter of 2010 to an average of 1,135 in the third quarter of 2011, an increase of 38.9%.

The average of 1,135 consultants was an increase of 6.2% over the average of 1,069 in the second quarter of 2011. As you would expect, our 1,135 consultants on assignment is another all-time record.

The revenue increase in the quarter was also a result of increasing bill rates which were approximately 6% higher in the third quarter of 2011 compared to the third quarter of 2010. The average bill rate for the third quarter of 2011 was $114.87 per hour compared to $108.43 in the same period of 2010 and $113.57 in the second quarter of 2011. Our gross margin for the third quarter of 2011 remained strong at 35.8% compared to 36.8% for the same period last year.

Also discussed on previous calls we launched our Healthcare IT business in late 2009 and it continues to be our fastest growing area as we continue to add staff and accelerate our penetration in this market. Total revenue in Healthcare IT was $5.8 million for the third quarter of 2011 compared to $4.4 million for the second quarter of 2011 and $1.3 million for the third quarter of 2010.

We ended the third quarter with 88 consultants on assignment compared to 47 at the end of 2010. Our current annualized run rate in this new business has increased to approximately $23 million. Total fees for our Permanent Placement Unit, Centerpoint, were $628,000 in the third quarter compared to $335,000 in the third quarter of 2010 and $540,000 in the second quarter of 2011. Total perm fees through Centerpoint represented less than 1% of Oxford's total revenues in the third quarter of 2011.

During the third quarter we were successful in continuing our strategy to diversify our business across all clients and industries, billing over 900 different client companies. No single client accounted for more than 3% of our revenue and revenues from our top ten clients represented only 13% of our total revenue for the quarter.

Demand for our IT consultants remains strong in financial services, retail trade and educational services. We saw an increase in our IT business with utilities and food manufacturers and a small decline from pharmaceuticals and transportation manufacturers in Q3.

On the Engineering side, instrument, semiconductor and machinery manufacturers continue to show strength. From an operational standpoint our internal staffing consultants drive our business and are a significant investment necessary for current and future growth. The average number of staffing consultants reached a high of 447 in June of 2008. That number declined through the second half of 2008 and all of 2009. Since then we have intentionally increased our staff from a low of 275 staffing consultants in December of 2009 to 404 at the end of 2010 and 458 at the end of this most recent quarter.

As with previous quarters and even with the addition of this new staff, the efficiency of our team continues to increase. During the third quarter of 2011 we reached a level of consultants on assignment that was 40% higher than our pre-recession high with a staff count that is about 6% lower than our staffing high that same year. Our aggregate total for new assignments per day also continued to exceed pre-recession results. In fact, September set an all-time record for new assignments per day.

This allowed us to continue our positive momentum into the fourth quarter. Due to this and our continued strong sequential performance over the last six quarters, we continue to selectively add staffing consultants to our Oxford International, Oxford and Associates, Oxford Healthcare IT and Centerpoint divisions. We monitor our operational activity daily and we continue to align the size of our sales staff with current and future economic conditions.

In terms of current quarter activity, we continue to see demand for our services which is consistent with our Oxford Index, our forward-looking quarterly survey, which indicates that clients anticipate increasing their temporary hiring in the fourth quarter of 2011. As we look past the fourth quarter staffing industry analysts are predicting that the US IT staffing market in 2012 will surpass 2000 peak of $21.5 billion and revenues set at the height of the dotcom business. That certainly bodes very well for this segment of our business.

Turning to Nurse Travel, the Nurse Travel division turned in its strongest performance in many years. This is the third consecutive quarter in which we have exceeded our short-term growth targets. We continue to focus on providing premium services to our traditional customers while seeking out new growth opportunities. In addition to strengthening our core business, we helped six of our clients maintain their business during labor disruptions and two other clients make a seamless transition to electronic medical records.

For the quarter revenue of $15.4 million was a sequential increase of 41.9% and a year-over-year increase of 58.2%. Our results in the third quarter included $3.9 million in revenue derived from labor disruption. Adjusted for the labor disruption revenues in this quarter, last quarter and the third quarter of 2010, the third quarter revenue was a sequential increase of 15.4% and a year-over-year increase of 54.1%.

The adjusted gross margin of 23.5% represented a 19 basis point sequential decrease but a five basis point increase year-over-year. In the third quarter the growth in revenue and earnings was driven by improvement in market demand and solid operational execution. Increased demand created an improvement in all operating metrics. The number of travelers on assignment has increased by 12% sequentially and by 47% year-over-year.

The average bill rate increased by 4% sequentially and 5% year-over-year. The average hours worked per week has increased 139 basis points sequentially and 151 basis points year-over-year. The investments we have made in our employees and the work completed to improve internal processes is clearly paying off.

As a result, productivity expressed as gross profit per staff consultant increased by 6.5% sequentially and 45.7% year-over-year. We continue to refine financial controls to drive gross margin improvement. Although there is an increase in absolute dollars for our SG&A expenses, it declined as a percentage of revenue, providing leverage to the bottom line.

Looking ahead, we remain optimistic in our outlook for the fourth quarter of 2011. The volume of open orders received to date is very promising and an early indication of strong demand for skilled nurses. As a reminder, it is typical to see a slight sequential revenue decline in the fourth quarter due to normal seasonal changes in demand particularly in the month of December.

We are confident in the short and long-term future of this division and our confidence is reflected in our increasing headcount particularly in recruiting and sales while maintaining tight control of our SG&A. Providing our customers with the highest level of service is the key to our success and we believe we have the right people and the right strategy to do this.

Here is a recap of some important additional metrics for the quarter. Bill pay margin increased sequentially and year-over-year when removing labor disruption revenue. Average hours worked per nurse increased year-over-year to 40.7 from 40.1, and increased sequentially from 40.1 hours as well. The revenue from the top ten clients without labor disruption revenue accounted for 36% of business compared with 37.7% in Q2 2011, and 33% in Q3 2010.

We billed 227 clients this quarter, 229 last quarter and 166 in Q3 of 2010. Our results include no perm-placement revenue or conversion fees.

Now let's turn our attention to the Physician Staffing division, VISTA Staffing Solutions. Our most important focus with this division right now is ensuring a smooth transition as President and Founder, Mark Brouse, moves into a part-time roll starting November 1, assisting me with mergers and acquisitions in the physician space. We are excited to have Mark's expertise at the corporate level.

Also, as announced in August of this year, Christian Rutherford has become President of our Physician Staffing Group. Please see our August 1 press release for more details on Christian's strengths and his past endeavors and what he brings to our organization.

While this quarter's results were the best year-to-date, the results did not meet our expectations for the quarter. We continue to see positive trends develop in the Physician Staffing market tempered with forward uncertainty. Revenues were $23.4 million for Q3. That represents a 37.5% increase sequentially and a 24.5% increase year-over-year.

Included in this revenue total are two months of revenue for Healthcare Partners, the acquisition which we closed at the beginning of August. The VISTA legacy business grew 10.9% from Q2 to Q3 and marginally over Q3 of last year. Gross profit dollars for the quarter increased by 20.2% sequentially to $6.7 million up from $5.6 million. Gross margin increased 257 basis points sequentially from 33.1% to 35.7% and gross margin was up 589 basis points over Q3 last year from 29.8% to 35.7%.

Our other gross margin improvement was attributable to a $525,000 positive actuarial adjustment to our medical malpractice reserve. In the third quarter we had a 19% sequential and a 25% year-over-year increase in sold days which equate to an opportunity for future fill days and the resulting revenue. Conversion revenues, fees paid when a locum tenens doctor takes a permanent position, were flat sequentially and down almost 24% year-over-year. This actually bodes well for the division because it means fewer doctors are leaving the locum tenens inventory.

VISTA's legacy locum tenens bill rate was up 1.7% sequentially and flat year-over-year. Productivity indicators such as gross profit per sales consultant and gross profit per contract professional were up 16% to 18% sequentially and 26% to 27% year-over-year. The number of FTE physicians on assignment during the quarter was up almost 4% sequentially but down 4% year-over-year. Healthcare Partners generated $4.5 million of revenue for the quarter which was better than our expectations and is included in our results for the quarter.

As Christian Rutherford takes the helm his immediate priorities are to accelerate the growth of the division's revenues and ensure the successful integration of our existing business with Healthcare Partners. Our extensive training programs are being implemented at HCP and back office systems are being integrated. Our combined Atlanta team will be more than 50 strong. So far the integration is going well, plans are on track and milestones are being met.

We have a positive outlook for 2012 but believe fourth quarter performance will be impacted by normal seasonal patterns. In the September 2011 Pulse Report, staffing industry analysts said participants noted widespread improvement in revenue for the months of June and July and then reported flat revenue growth for the month of August. Also noted, but similarly unexplained in the Pulse Report, is a trend towards more difficult sales versus recruiting in the locum tenens sector.

Staffing industry analysts have been testing a hypothesis that as the economy improves and unemployment drops it will be easier to find staffing buyers and more difficult to find candidates. Currently finding buyers is the driving force in the locum tenens sector based on the past two years of experience. While most other segments covered in this report showed that it continues to get easier to find buyers, the report shows it is almost twice as hard to find a buyer as it is to find recruits in the locum tenens sector. There are no clear reasons identified for this trend.

Perhaps we can gain insight into the mixed message locum tenens market by examining the top concerns of healthcare financial leaders. In an October 17 preliminary report on this 2011 industry survey, Healthcare Leader's Media reported that cost cutting will intensify, Medicare payments will be mixed and growth will become an imperative. While cutting costs could signal a reduction in the use of contingent staffing, the increased need for growth should drive the use of temporary staff hire as healthcare providers expand.

So while short-term uncertainty persists in the Physician Staffing market we remember that the long-term drivers of demand here such as the aging population and the growing shortage of physicians globally will ultimately drive increases in the market size. Interim staffing is one of the safest and most strategic ways to meet demand and our strategy is to work closely with customers as they figure this all out.

I would like to now turn the call over to Emmett McGrath, President of our Life Sciences and Allied Healthcare Group. Emmett?

Thank you, Peter and good afternoon to everyone on the call. The operating environment for the Life Sciences segment continued to improve in the third quarter. Revenues for this segment grew on an absolute dollar basis over the second quarter to $41.8 million which represents 5.5% growth sequentially and a 39.1% increase year-over-year.

Revenues from acquisitions were $9 million. Excluding acquisitions, revenues increased 7.5% sequentially and grew 23.2% year-over-year. On a divisional basis, US operations generated $30.2 million in revenues, up 6.3% sequentially and 17% year-over-year. Excluding acquisitions, US operations increased 6.1% sequentially and 20.6% over the prior year. Foreign revenues were $11.7 million for the quarter, increasing 3.7% sequentially and 172.5% year-over-year. Excluding acquisitions, foreign revenues increased 16.3% sequentially and 41.2% year-over-year.

Gross margin for the Life Sciences segment was 33.9%, decreasing 43 basis points sequentially and 337 basis points year-over-year. We attribute the sequential decrease in gross margin to higher social costs in the European countries in which Velesta, operated and a greater number of holidays and increased Worker's Compensation in the United States. The year-over-year decrease in gross margin is primarily due to the Sharpstream acquisition which occurred in mid-July of 2010. Sharpstream retained search revenues represented a greater percent of total Life Sciences segment revenue for Q3 2010 compared to Q3 2011.

On a divisional basis, US gross margins of 31.6% decreased 99 basis points sequentially and decreasing 367 basis points year-over-year. Foreign gross margin was 39.9%, increasing 113 basis points sequentially but decreasing significantly year-over-year. As stated earlier, due to the reduction in Sharpstream's foreign search fees as a percent of revenue.

Moving on to the fourth quarter of 2011, demand for contract contingent and retained search services throughout the US and Europe remain steady and the business climate is stable. Early in the fourth quarter we are encouraged with the level of contract and permit orders, the number of weekly contract assignments and permanent placement activity. However, normal fourth quarter seasonal factors may constrain sequential revenue growth on an absolute dollar basis.

Given current trends, and the pipeline of opportunities, we expect revenue production per billable day to be up sequentially. The wildcard that could hamper those are a greater number of plant closure days during the holiday season, extended and encouraged time off, poor weather and postponing hiring decisions until the New Year, all of which we realized in the fourth quarter of 2010.

To offset these challenges, our sales and recruiting staff are focused on new business development, increased sales and marketing efforts in greater depth with existing clients and expanding our database of candidates and client contacts.

Now I would like to turn to Allied Healthcare. Revenues for the Allied Healthcare division were $11.7 million which represents approximately a 7.5% sequential increase and a 15.5% increase year-over-year. We attribute the sequential and year-over-year revenue increase to the improved operating environment and operational execution.

Allied Healthcare gross margin for the quarter was 31.7% which represents a 73 basis point sequential decrease and a 245 basis point decrease year-over-year. The sequential decrease in gross margin is primarily attributable to an increase in contract related expenses and a decrease in permanent placement fees for the quarter. The year-over-year decrease in gross margin is primarily attributable to an increase in contractor related expenses.

Turning to the fourth quarter of 2011, the healthcare markets in which we operate continue to show signs of improvement. Early in the fourth quarter we are encouraged with the level of contracts and permanent orders, the number of weekly contract assignments and permanent placement activity. The main challenges we face in the quarter are seasonal and economic factors beyond our control and for similar reasons cited earlier.

Based on our current run rate and pipeline of orders, we expect revenues to be slightly down on an absolute dollar basis over the third quarter. As we have done in other divisions, we have continued to respond to the current economic climate by focusing on new business development, gross margin preservation, cost containment, process improvement and greater attention to individual performance metrics.

In addition, we will continue to implement targeted sales and marketing campaigns to capture both seasonal and core staffing needs and to strengthen our competitive position in the markets that we serve.

I will now turn the call over to Jim.

Thanks, Emmett. As Peter mentioned, consolidated revenues for the quarter were $162.4 million, up 39.8% from the third quarter of 2010. There were 64 billing days in this quarter, 64 in the second quarter and approximately 64 in the third quarter of 2010. However, for Nurse Travel there were 92 billing days this quarter, 91 last quarter and 92 in the third quarter of 2010.

Foreign currency had a $900,000 positive impact on revenue relative to last year's third quarter and a $300,000 negative impact on revenue relative to the second quarter of this year.

Now let me address some of the variances and their related explanations to the extent Peter or Emmett has not. In the IT Engineering business Peter discussed the increase in bill rates. The bill pay margin contracted slightly from both the third quarter of last year and from last quarter. In Life Sciences the bill rate was up 7% from the third quarter last year in part due to the Velesta acquisition and the bill pay margin increased. Relative to last quarter the bill rate was down slightly and the bill pay margin increased as well.

In Allied Healthcare the bill rate relative to the third quarter last year was up 2% and the bill pay margin increased. Relative to last quarter Allied Healthcare's bill rate was down slightly but the bill pay margin increased. Peter mentioned the bill rates and the bill pay margin for Nurse Travel. In Physician Staffing the bill rate decreased by 2% from last quarter and by 4% from last year and the bill pay margin contracted in both periods.

Consolidated gross margin in the quarter was 33.6%, down from 35.4% in the third quarter last year. As Peter mentioned earlier, gross margin last year was positively impacted by the labor disruption assignment in our Nurse Travel division and by the benefits we received under the HIRE Act.

Our year-over-year comparison was also impacted by the lower percentage contribution to this year's revenues from conversion and direct hire. Had the direct hire and conversion revenues stayed at the same percentage as they are this quarter, had the labor disruption gross margin been at a normal gross margin of approximately 24% and had there been no HIRE credits in our third quarter of 2010, our third quarter 2010 gross margin would have been approximately 33.4%.

Total SG&A expense for the third quarter was $40.8 million, or 25.1% of total revenues, up from $38 million or 26.4% of total revenues last quarter and $33.7 million or 29% of revenue in the third quarter of 2010. The increase from last quarter was in part related to the increase in revenue generating headcount and an increase in commissions related to increased revenue, the addition of operating expenses related to Healthcare Partners and an increase in stock based compensation.

In the second quarter of this year there was also a gain of approximately $1.3 million due to the settlement of an earn-out related to our acquisition of Cambridge and a foreign currency transaction loss of approximately $400,000. Included in SG&A in the quarter was $660,000 of amortization, $1.7 million of depreciation. Our interest expense was $730,000. Our tax rate was 38.9% and we had net income of $7.8 million or $0.21 per diluted share.

We believe it is meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters. As outlined in today's press release, EBITDA for the quarter was $16.1 million. Excluding equity based compensation expense of approximately $1.8 million and acquisition related expenses of $265,000, adjusted EBITDA was $18.2 million or 11.2% of revenue.

We ended the quarter with cash and cash equivalents of $13.2 million and our bank debt stands at $88 million. We generated $2.1 million of cash flow from operations. CapEx was approximately $1.4 million, down from about $2 million last quarter and equal to the third quarter of 2010. Net accounts receivable was $96.4 million at the end of the third quarter and day sales outstanding were 54 days versus 51 last quarter and 47 in the third quarter of last year. The increase from last quarter was due to labor disruption revenues billed in the last week of the quarter and the impact of not having Healthcare Partners revenue for a full quarter. The increase from last year was in addition to these factors due to an increase in international revenue.

Now, turning to productivity which we define as quarterly gross profit generated per staffing consultant. For the third quarter we averaged 816 staffing consultants and gross profit per staffing consultant of $67,000, up from $63,000 in the second quarter and up from $61,000 in the third quarter of 2010. Life Sciences segment generated $86,000 in gross profit per staffing consultant, up from $83,000 last quarter. The Healthcare segment generated $54,000 without labor disruption revenue in gross profit per staffing consultant for the quarter, up $52,000 last quarter.

The Physician Staffing segment generated $89,000 in gross profit per staffing consultant for the quarter, up from $76,000 last quarter and the IT and Engineering segment generated $56,300 in gross profit per staffing consultant for the quarter, up from $55,900 last quarter.

Looking at the fourth quarter revenue expectations, it continues to be difficult to estimate what will happen to revenues because of the worldwide economy. However, considering normal seasonal trends without any extraordinary plant closures or severe weather, we currently estimate consolidated revenues of $157 million to $159 million for the quarter ending December 31, 2011.

We are estimating consolidated gross margin of approximately 33.2%, SG&A of approximately $41.5 million including $200,000 of acquisition costs, equity based compensation expenses of approximately $1.8 million, approximately $700,000 in amortization of intangible assets and depreciation of approximately $1.6 million.

We estimate net income of $5.8 million to $6.3 million, earnings per diluted share of $0.15 to $0.16 and an effective tax rate of about 41.5%. Adjusted EBITDA is estimated to range from $15 million to $15.8 million.

Now I will turn the call back to Peter for some closing comments before we open up the call for questions. Peter?

Thank you, Jim. We believe we are well positioned to take advantage of what we believe will be historic secular and cyclical growth for the staffing industry over the next three to five years. While the entire On Assignment team is very proud of our performance, we remain focused on regaining our peak levels of profitability. We would like to once again thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress to where we are today.

I would like to now open the call to participants for questions. Operator?

(Operator Instructions) Your first question comes from the line of Tim McHugh with William Blair & Company.

Yes, thanks guys. I first wanted to ask about the gross margin and specifically you gave a lot of good color about comparing to the year-ago period but in looking at the fourth quarter guidance at 33.2%, can you talk a little bit about the different segments and what would cause it to tick down sequentially?

It is a classic seasonal pattern, Tim. Typically you don't see as much perm in the fourth as you might see in the third or the second. In addition we have a little more holiday time, lack of billable time on the nurse's parts which we are still paying for the apartment, etc. Then the other thing that I would point out is that the HCP is a slightly lower gross margin than VISTA historical gross margin. But on gross margin our margins remain remarkably stable.

We do think over time there is room for expansion to the extent that we make some improvements on the HCP gross margin as well as our perm placement becomes a little bit larger percentage of total revenue. But the margin is very stable and it is as we pretty much predicted for the year and for the fourth quarter.

I might just also mention, as we said on the call there was about a $525,000 actuarial, positive actuarial adjustment in Physician Staffing which obviously we wouldn't be expecting in the fourth quarter.

Okay, great. Your comments basically said you continue to see strong results both in the quarter and as you exited the quarter. I guess maybe asking the opposite way is have you seen weakness in any particular areas or is there not really anything that you would even call out that has maybe been a little choppier?

You know, we said that the doc business it got starts and stops so the visibility is not as clear there but absent normal seasonality we aren't seeing anything develop that would lead us to believe that something is going on in our market different than on a normal seasonality. Budgets have been expended. People are holding off until the new year for additional projects or hire starts, things like that.

Jim, one numbers question. The share count, when in the quarter were those repurchases and I am assuming given the price it was later in the quarter. Should we see share count down in Q4?

I will just tell you for planning purposes probably you should expect the share count to be up by maybe 100,000 shares for the fourth quarter.

Can you give him a number?

It would be like, it was 37,770 so it may be 37,870 or something like that.

Okay, thank you.

Your next question comes from the line of Tobey Sommer with SunTrust.

Thanks. Jim, looking at some of the puts and takes of one-time either expenses or benefits, what were their net impact on profitability and EPS in the quarter?

In this quarter?

Yes.

There was really only one benefit, Tobey, which was the malpractice.

Right. $500,000 of malpractice.

That's just because our third-party administrator did an audit and determined that our loss history on incurred but not reported type claims was such that supported a lower amount than what we accrued.

I guess I was trying to get at the impact of strike revenue and anything like that. It might be difficult to do but it is more than a penny or is a penny about the right number?

Well, the strike number was $3.9 million and it was about a 24% gross margin.

So figure that is $1 million or $1.5 million at the gross margin line.

And it is not all incremental.

Pete, where do you sit as far as your five-year plan to reach $1 billion? I don't know the specifics but I'm guessing you didn't have setting record revenue in the third quarter of 2011 as one of the milestones. So are you running substantially ahead of plan? How does that look from your perspective?

We are, Tobey. What we said in our prepared remarks is that as you know the plan requires to grow 10% compounded annually with approximately $50 million a year of acquired revenues. Based on our third quarter results and the midpoint of our fourth quarter revenue guidance, we will end 2011 with $594 million of consolidated revenue.

This compares with our strategic plan target of $532 million for this year. So we are $62 million ahead of where we thought we needed to be by the end of this year. The strategic plan target for 2012 was to be for $635 million. So at the end of this year we will be about $39 million away even without doing any acquisitions from hitting our internal strategic plan target for 2012. So we are in very, very good shape with regard to the kind of targets we have to hit at the end of each fiscal year, 10% compounded annual growth and acquired revenues.

And Pete what is in this market environment what is your appetite to execute acquisitions? What does the availability of opportunities look like?

It is good. We continue to have consistent conversations. We are very disciplined. We made an offer on a company this week but unfortunately they didn't like the valuation that we offered so that is the end of that and we have got a number of other conversations that are going on. There is nothing imminent but as you know from covering us over the years we are constantly having conversations with attractive private companies in good times and in bad times and trying to find out whether there is a transaction that can occur that meets both parties' needs.

So we have pretty decent visibility in our markets and we see some assets that would be additive to what we want to do and would harmoniously coexist with our core offerings and they are all within our existing verticals.

Okay. I will ask one more question and then I will get back in the queue, I think if I got the number right in your prepared remarks you had about 816 internal production staff. Do you expect to continue to grow that number sequentially as you sit here today?

We do, unless we see a flattening of revenue.

Thank you very much.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Good afternoon. Let me just ask a follow-on to Tobey's last question. Is it getting more difficult to find those people? I mean, we are hearing a lot of the other companies adding recruiters as well. I am wondering if you are having a tough time finding recruiters? Thanks.

Not really because you know Jeff a lot of our recruiters are green and we do extensive training. So we are actually seeing the caliber of people that we can attract continue to stay at a high level and then those that have industry experience when we show them what our compensation plan is and because of how high our margins are what they can generate this is a very attractive place to work. So we have not hit that wall yet.

That is great to hear. Peter, in your prepared remarks and some of the other folks you talked about the different trends in bill rate spread by division and I know it varies a bit but generally they have been increasing. Is that something that we should expect to continue in the near-term?

I think so. You know, the skills that we recruit to are getting more scarce so I believe the terms that we have seen in the past should continue in the future. By the way we are doing this with 9.1% unemployment so it tells you that the skills that we are recruiting to are pretty scarce.

Okay great. I will jump back in the queue. Thanks so much.

Your next question comes from the line of Mark Marcon with RW Baird.

Good afternoon and congratulations on the strong execution. I was wondering if you could talk a little bit more about the trends you are seeing on IT and Engineering? Obviously that was one of the standouts in the quarter. I am just wondering how much capacity do you still have in that division? How much more growth can you do without adding folks? I am sure you are still adding folks but you have added quite a few over the last 24 months if I recall correctly and just wondering how much more they can ramp up in terms of capacity?

Well you know this is our largest division. Mark, we are at 458 recruiters and sales people. A good portion of those people have been with us less than a year which means that they are really not productive. I would probably tell you that this is the division where we have some of the largest productivity gain opportunities because people are building their databases and they just haven't been in the seat long enough.

It typically takes eight to 12 months for these people really to ramp up and be able to recruit and sell $115 per hour people. So as long as the economy doesn't go south and excluding normal seasonal patterns or CapEx budgets running out we see pretty good opportunity ahead of us.

Great, and what percentage roughly speaking of the 458 are relatively new within the last year or so?

You know, I don't have a precise number. If you could call us back. I would tell you it is probably under 100 of the 458.

So somewhere around 20%?

Yes.

Great. Then can you talk a little, actually before I jump to the other divisions on the IT and Engineering, there weren't acquisitions that have positively impacted on a year-over-year basis have there?

Nothing. We would call it if there was. This is all organic.

Tremendous. Then can you talk a little bit more on the Life Sciences area? You are experiencing good growth there. How much capacity do you have in that area? What are you seeing in respect to big pharma? How should we think about that?

Well, Emmett is with us today on the call so I will let him address that.

Just to touch on, Mark, on staffing levels, I think I will just handle both divisions right now. Life Sciences and Allied Health, I think we are staffed there at an appropriate level. We will still make some opportunistic hires probably during the year but I think we are pretty staffed at appropriate levels and there still is capacity there across the board.

As far as big pharma and Life Sciences that is a real big part of our focus, specifically in our clinical research arm, but also in our lab support product lines, pharmaceutical is also a big part of that as is biotech and medical device. But getting back to clinical research we made an acquisition in February, the Velesta Company, and then we also have an organic clinical research business we started in 2005 in the US so we are looking to see those two organizations really grow in 2012.

Our strategy is really to create and build strategic partnerships with pharmaceutical companies both on a sponsor side. An example of a sponsor would be like a Pfizer and then on the CRO side, and the CRO is a clinical research organization that handles and manages an FDA regulated clinical trial study and we are looking at building strategic alliances with those and I am happy to say we have been very successful in that. So I feel pretty confident about big pharma going forward.

Emmett, can you add a little bit more detail there? Were you just saying Pfizer as an example? Because they just went through this consolidation with regard to their CRO's.

Yes, I will clarify. What I was giving, Mark, was an example of there are two customers. When we talk about pharmaceutical there are two customers. One is a sponsor type organization like a Pfizer. So the Pfizer's would be the R&D, innovation and all that. Some of those companies, like Pfizer, like you said, outsources their clinical study to a CRO. So our strategy is to develop both of those customer bases. As you know there is a huge spike right now of outsourcing more and more to CROs so obviously we are focused on that market.

Based on what you currently see, how are you thinking about growth in that division? You probably know more about it than just about anybody. When you look out given the dynamics that are occurring in the industry how are you thinking about the next 12 to 18 in that industry?

I would tell you we think within Life Sciences that clinical research will probably be the fastest grower of IS service offering perspective. Is that what you were getting at?

Yes, and then when you think about overall Life Sciences we are tracking towards somewhere around $156 million for this year. What sort of growth can we see on that as we look towards next year? Assuming that the macro environment stays the same.

Not to be coy but the only kind of longer-term growth perspective we have given, Mark, is that we think we can grow the business on a consolidated basis at 10% compounded annually.

And Life Sciences would probably be a little bit faster than say Healthcare Staffing or Physicians, right?

In the near-term, but I fully believe we have very, very high expectations for what is going to happen in Nurse Travel and in VISTA, our physicians group, over the next 12 to 18 months.

Great. Can you finally just talk about SG&A. I wanted to make sure I understood correctly. Jim, when you gave the numbers you mentioned SG&A of $41.5 million. Was that an inclusive number including stock based comp? Including D&A?

Yes.

Okay. Just wanted to make sure. Then what sort of leverage do you think we can get there because you have some projects that are going on with regards to some of the back office consolidations. How should we think about the SG&A leverage on a go-forward basis?

Well, it went down as a percentage of revenue and our adjusted EBITDA margin went up 100 basis points year-over-year and I think we quoted in our press release that the incremental adjusted EBITDA margin on the incremental revenue is 17%. So we believe that there is still room to gain productivity and operating margin expansion. Again, the only longer-term targeted goals that we have given you is kind of 10% revenue growth and 10% to 12% as the EBITDA margin.

Terrific. Thank you.

(Operator Instructions) Your next question comes from the line of Tim McHugh with William Blair & Company.

Hi, just one follow-up. The incremental margin you just talked about, it seems like the fourth quarter guidance year-over-year has kind of flat year-over-year margins and I know you have had some kinds of gives and takes here especially on the gross margin line that probably explain that. Can you remind I guess for the fourth quarter what we should think about and then I guess just I guess moving forward beyond that what sort of incremental margin might we think of?

I don't want to, at least on this call, I don't want to give that expectation because we haven't given a longer-term incremental margin but in the fourth quarter of 2010 we had the HIRE Act. Jim, do you have in front of you what the percentage of revenue was from --

It is perm, I don't know what the perm was. I think it was probably around 3%.

Third quarter of 2010 was the standout. It was 110 basis points higher perm contribution than any other quarter basically. So we have holiday pay, we have some topping off of some incentive bonuses and things like that. My expectation is we would be up incrementally year-over-year on our adjusted EBITDA margin. But we did have probably $500,000 benefit, if we had a $500,000 benefit in the third quarter from the HIRE Act and I assume we had a similar amount in the fourth quarter.

So there was HIRE Act in the fourth quarter of last year. I don't have the numbers in front of me related to that. I think Peter's directional $500,000 is probably close. The percentage from perm and conversion was 3.4% last year. I don't believe we are going to get to that this year.

I think we will probably be around 3% or 3.1%. You know it is interesting, Tim, as I listened to the Robert Half call the other day and they were talking about their conversion fees and they said they haven't recovered and are running at about 3%. Ours are running substantially below that. Our conversion fees have not recovered anywhere close to what historical levels are. As you know from what we reported today our conversion and perm fees together are 3%.

That is helpful. Thanks, guys.

(Operator Instructions) At this time you have a follow-up question from the line of Tobey Sommer with SunTrust.

Thanks, Pete. I had a question for you, which elements of your segments would give you kind of visibility the farthest out? I know some of them have either longer typical project lengths and others have orders that are maybe shorter project lengths but placed farther out in the future. Are those areas that provide the longest visibility demonstrating growth?

Yes, so if I understand your question which I think I do, Tobey, IT has the nearest visibility and has the longest term assignment but the division that has kind of the most outward visibility would be the Physician Staffing Group or clinical research because the orders that we qualify and accept today in the Physician space we won't get a dollar of revenue from for three months.

So our customers are thinking about expending dollars three months from today versus five days from today. So they are planning further out than some of the other flavors in staffing. We are seeing, you know it is hard to really use that as a barometer of the strength of the economy because healthcare has acted so differently than the broader economy over the last 18 months.

But we are not seeing a contraction. We are not also seeing just a dramatic uptake. You did see in our prepared remarks the number of days sold is up fairly significantly. Then it is a challenge for us to fill those orders with appropriately credentialed physicians. I guess what I would be telling you, what I am looking at is on the IT side. We are not seeing any early terminations and these are lengthy assignments.

The clinical research business, which these are very expensive people, is a real bright spot and we feel as if the physician business has stabilized. I wish I could be clearer than that.

No, that's perfect.

I would just resist you using the physician business as a forward indicator because I just think healthcare is so much different than what is going to happen in IT or accounting or commercial staffing. I don't think you can read into those non-healthcare segments with what is going on in healthcare.

I appreciate the color. Thanks.

Your next question comes from the line of Mark Marcon with RW Baird.

I think you have covered it but I missed it. The total strike impact was roughly $4.3 million?

$3.9 million in revenues.

Right.

Approximately a 24% gross margin.

Then of that $3.9 million, is there strike revenue that is falling into the fourth quarter?

Not to my knowledge.

No. As of today we have no strike revenue in the fourth quarter.

But within that strike revenue as well some of it is pass-through expenses for housing, travel and things like that where the margin is not as high.

I'm just trying to understand how we should think about it with regards to the sequential trends in terms of Nurse Travel. It is normally down a little bit sequentially on a seasonal basis just because of December and all that.

Take the $3.9 million out.

And then put the normal seasonal adjustment in?

Yes.

Perfect. That's what I was asking. Thank you.

At this time there are no further questions.

We appreciate your attention and we look forward to speaking with you on our fourth quarter conference call. Have a good afternoon.

This concludes today's On Assignment third quarter 2011 earnings conference call. You may now disconnect.