Cross Country Healthcare Inc (CCRN) 2004 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare earnings conference for the third quarter 2004. All participants will be in listen-only mode in public question and answer session. This conference is being recorded. At this time I would like to introduce your host for today's call, Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning, and thank you for listening to this conference call, which is also being webcast, and for your interest in the company. With me today are Joe Boshart, President and Chief Executive Officer, and Emil Hensel, Chief Financial Officer. On this call, we will review our third quarter and year-to-date 2004 results, for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our web site at www.crosscountry.com. Replay information for this call is also provided in the press release.

Before we begin, I'd first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature, that depend upon our referred to future events or conditions, or that include words such as, "expect", "anticipate", "intend", "plan", "believe", "estimates," and similar expressions, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statements section of our press release for the third quarter of 2004, as well as under the caption "Risk Factors" in our registration statement on Form S- 3 dated yesterday, November 3rd, 2004. Although we believe that these statements are based on reasonable assumption, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements. Now, I'll turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening, and for your continued interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the third quarter 2004 decreased by 10% year-over-year to $165 million. Net income decreased 25 % to 5.1 million or 16 cents per diluted share. Cash flow from operations during the third quarter were $10 million, a strong performance that allowed us to reduce our total debt by 13% from 16 million from the balance at second quarter-end.

While our nurse staffing business continues to go through a transition during which little upward progress is achieved, our clinical trials staffing business performed particularly well in the third quarter, compared to the prior year period, as have our educational seminars and search businesses, to a lesser extent. We're very pleased that these businesses show revenue momentum as well as generally improving margins.

While, our non-nurse staffing businesses have out-performed in the past year, we recently made a strategic decision regarding our healthcare consulting business, on which I would like to elaborate upon at this time. On October 5th, we announced the sale of two of our three health care consulting units and that we're pursuing a plan of sale for the third. Our investment philosophy on non-nurse staffing business is, that it should provide strategic synergy to our core activity and should deliver consistent profitability so that we don't apply disproportionate management attention to a relatively small component of our business mix.

As a result of significant volatility in our consulting business in 2003, we had been evaluating our commitment to these businesses when we were approached by a third party, Mitretech, who is interested in expanding its health care consulting presence. Mitretech viewed two of our three practices as a fit to their strategy, and offered to purchase them at prices we felt realized strong returns to our shareholders. The sale of these two practices resulted in an internal rate of return in excess of 25% that was generated by a pretax gain of $3.6 million. When we divest of our remaining practice we will exit the consulting market. This decision is in no way a reflection of the quality of the practices that made up Cross Country Consulting.

Quite the contrary, we were proud to be associated with such a prestigious and well-respected organization. It's simply that we believe our shareholders are better served by executive management focusing more fully on activities that would cause the majority of our current shareholders to invest in Cross Country. We want to extend our sincere thanks to our consulting team for their dedication to excellence and contribution to our performance these past five years.

Turning back to our core business, orders for contract travel nurses for our hospital clients remained well above a year ago's level and are currently at the highest level since 2002, as we enter the historically strong winter-seasonal staffing period.

While we're pleased with the strength in seasonal demand, we are still experiencing weakness in applicant activity. Thus, we do not have yet a clear sense that we will be able to translate increases in seasonal demand to a sequential improvement in volume in the fourth quarter, as we would expect based on historical trends in our business. To be conservative, we're, therefore, guiding to a slight sequential decline in the fourth quarter.

Despite current market conditions, we remain optimistic regarding the continued success of our efforts to achieve single-source vendor status in our larger accounts nationwide. Continued growth of these strong relationships with our clients has allowed us to realize sustained improvement in our conversion rates [inaudible] that we send in response to customer orders into contract bookings.

In sum, our staffing volumes have largely stabilized and we continue to believe that our operating environment is taking on the aspect of one noted more for its supply constraints than demand constraints. Historically, a supply-constrained market is a more favorable environment for us, and we expect to benefit from this market dynamic over time.

Meanwhile, we are prepared to continue blocking and tackling in order to continue growing market share in the current environment. Longer term, we believe the rising tide of a growing nursing shortage-- a shortage of nurses in this country, will result in a resumption of market growth. With that, I'd like to turn the call over to Emil.

Thank you, Joe, and good morning, everyone. First, I will go over the results for the third quarter and then review our revenue and earnings guidance that we provided in last night's press release. As Joe indicated, Cross Country Healthcare recorded third quarter revenue of $165.1 million, which was above the midpoint of the revenue guidance range that we provided in August. Our third quarter revenue was down 10% from the prior year quarter, and 1% sequentially, reflecting the continued supply constraints operating environment in our core travel nursing business that Joe referred to earlier.

Our gross profit margin was 23.3%, down 100 basis point from the prior year quarter and 70 basis points sequentially. The year-over-year decline in margin was attributable to a combination of a lower average bill-pay spread as well as higher insurance costs. The sequential decline was primarily due to a seasonal reduction in margin in our educational seminars business. The margin in our core nurse staffing business was essentially unchanged sequentially.

SG&A expenses in the third quarter were down 6% from the prior year and 3% sequentially, despite increased expenses associated with our efforts towards complying with Section 404 of the Sarbanes-Oxley Act. Interest expense was $1 million as compared to 1.6 million in the prior year quarter, reflecting the delevering of our balance sheet of made possible by our strong operating cash flow.

Net income was 5.1 million or 16 cents per diluted share, as compared to 6.8 million or 21 cents per diluted share, in the third quarter of 2003. Our fully diluted E.P.S. for the third quarter was at the upper end of the guidance range that we provided during our earning-- August earnings call.

Our balance sheet and cash flow generation remains strong. We ended the quarter with a debt to total capitalization ratio of 15% in the current ratio of 2.221. DSOs were 57 days in the third quarter, up sequentially by a fraction of a day, as compared to the second quarter. Cash flow from operations for the third quarter was a strong $10.3 million and on a full-year basis stands at $37 million.

Capital expenditures in the third quarter were 1.1 million. Peak cash flow, which we define as cash from operations as capital expenditures and earn-out payments, was $9.1 million for the quarter and 31.3 million for the year to date. We used our free cash flows to repay 10 million of term debt during the third quarter, which included an optional pre-payment of $9.2 million. At September 30th, 3 million was outstanding under our $70 million revolving credit facility. As a result of these transactions, total debt on our balance sheets declined from 69.6 million at the end of the second quarter, to 60.4 million at the end of the third quarter.

Additionally, the quarter-end balance does not reflect the subsequent pay down of $14.4 million in October, which included all net proceeds from the sale of our two health care consulting practices. We also repurchased 12,600 shares of our common stock during the quarter at an average price of $14.64 per share. To date, we have purchase more than one million shares at an average price of $13.75 per share. Under the remainder of the current $25 million authorization, we can purchase approximately 470,000 additional shares at an aggregate price not to exceed $7.8 million.

Let me go down next on our two reporting segments. Healthcare staffing, which comprises our travel and per diem nurse staffing, allied health staffing, and clinical trials staffing businesses, accounting for 92% of the revenue in the third quarter, and the other human capital management services section which is comprised of our education and training, research, and health care consulting businesses.

Revenue for the health care staffing segment was 151.5 million, and the average number of SCEs was 5,644. Revenue was down 12% on a year-over-year basis, reflecting a comparable decline in volume, and down 1% sequentially, reflecting the more cautious mindset of our hospital and nursing clients. The average revenue for SCE per week was down slightly by 4 cents a year-over-year basis but up 2% sequentially. The sequential improvement is partly due to one extra billing day in the third quarter.

Mobile contracts with nurses on the hospital payroll, accounts for approximately 2% of our segment volume, unchanged from the prior year quarter. Health care staffing contribution income as defined in our press release, was 50.3 million in the third quarter, down 25% versus the prior year quarter but up 2% sequentially. The year-over-year declining contribution income was due to the combined effects of negative operating leverage, a small reduction in the bill pay spread, and higher insurance costs partially offset by improved performance in our third clinical trials staffing, and international nurse recruitment businesses.

Turning now to the other human capital management services section, third quarter revenue was $13.6 million, up 13% from the prior year. Revenue growth was driven by the strong performance of our educational seminars and physician search businesses partially offset by a 4% reduction in our consulting revenues. Segment contribution income was $1.4 million more than double last year's, driven by the especially strong operating performance of our educational seminars business. The consulting businesses, which will be accounted for as discontinued operations in the fourth quarter, contributed $3.3 million of the segment's third quarter revenues and operated essentially at break even.

This brings me to our guidance for the fourth quarter and full-year 2004. The following statements are based on current management expectations. These statements are forward-looking statements and actual results may differ materially. These statements do not include the potential impact of any future mergers and acquisitions and other business combinations; the repurchase of any of our common stock; pending legal matters, or the results of our healthcare consulting business which will be accounted for as discontinued operations.

As Joe indicated, in the short term, we believe we will continue to face challenging conditions in the nurse staffing market. Our bookings in the third quarter, excluding Med-staff, were 14% below the prior year. Bookings in the third quarter reflects the adverse impact of hurricanes on the bookings and productivity of our Boca Raton and Tampa offices. Based on these booking trends, and after adjusting for the impact of the hurricanes, we project the average field SCE count in the fourth quarter to be in the 5,450 to 5,550 range, or 8% to 10% below the prior year.

We expect average staffing revenues per SCE per week, to be flat to slightly off as compared to the prior year. We expect gross profit margins to be in the 22% to 23% range reflecting a sequential improvement from the 21.7% gross profit margin, which achieved on a pro-forma basis from continued operations in the third quarter. SG&A expenses in the fourth quarter are expected to be consistent with the third quarter.

Based on these dynamics, we expect fourth quarter revenue from continued operations to be in the $157 to $160 million range, as compared to $161.8 million in pro-forma revenue from continuing operations in the third quarter. E.P.S. per diluted share from continued operations are expected to be in the 14-cent to 16-cent range. For the year as a whole and excluding the discontinued consulting businesses, we expect revenue to be in the $651 to $654 million range and E.P.S. per diluted share from continuing operations to be in a 59 to 61-cent range.

Including the discontinued operations, our E.P.S. per diluted share is expected to be in the 60 to 62-cent range. We also expect to report a one-time pre-tax gain of $3.6 million from the sales of the Jennings Ryan and Kolb and Gil/Balsano health care consulting practices. This concludes our formal comments. Thank you for your attention and at this time we will open up the lines to answer any questions that you may have.

We will now begin the question and answer session. If you'd like to ask a question please press star one. You'll be prompted to record your name. To withdraw your question press star two. It will be just a moment here for our first question. Your first question is coming from Toby Summer with Suntrust -- excuse me-- Robinson and Humphrey.

Good morning. I wanted to ask you a little bit more on the supply side what you're seeing in terms of the effectiveness of your marketing. We're inching our way through the recovery with a pretty modest job growth and am just wondering what your sense is for how your travel nurse candidates are feeling and how they are responding to your efforts?

As we look at our incoming applicant accounts, I would say the dynamics are more favorable at this time of the year than there were a year ago. Now, what I mean by that is they were in a significant declining trend in the fourth quarter of 2003. While they're still below a year ago, the gap has narrowed significantly. In fact, in October we had a slight bump up from September. I would say September's numbers just as our contract bookings, as Emil said in his prepared comments, were affected by the impact of several hurricanes that hit our area so applicant activity was clearly a disruption across the board as it relates to our ability to get on the phone and attract new candidates to us. I am somewhat encouraged by that. I think as we look at the year, we are trending favorably as we go through the year and I think that is a reflection of again, kind of a process that we are going through as nurses become more confident largely through word of mouth. We can't run an advertising campaign to get nurses to come back to travel nursing. It's really a function of what they hear from other nurses. I am somewhat encouraged that the word is getting out that good jobs are out there, and that nurses can feel more comfortable leaving a job and coming back in the travel nursing market.

Thanks. As a follow up, and I was interested if you could maybe give us an update on your vendor management relationships, and if you think that the expansion of that is going to help lure candidates to you perhaps ahead of the market? Maybe just update us on how your progress is in that regard.

I am sure if you look at the industry as a total, and unfortunately, there aren't very good statistics available, we have a lot of confidence that we have taken significant market share in the past two years. The larger companies generally have benefited from a trend toward consolidation of vendors in this state; that the hospitals-- as they look to narrow the number of vendors whether it's from 60 to 20, or 20 to 5. Generally the companies that gives them the highest bill rates on the orders that they have, will be continued to be allowed to be the vendors of the facilities. It's the smaller companies I think have suffered disproportionately. So in an of itself I think that dynamic would help us. I think vendor management are -- whereas we described it as single-source relationships that we've been increasingly successful in selling to the larger users of travel nursing services, as those are some of the more desirable accounts, as that word of mouth gets into the nursing community that if you want to go to X facility only Cross Country can get you there, I think that will also be a driver of increased market share, and I would expect it to be a driver of increased applicant activity relative to other companies in the states.

Thanks. Last question, and then I will let some other people get in theirs. Regarding clinical trials business, you said revenue growth's real strong there and you said generally improving margins for that other HCN services category. I wonder if you could drill down into clinical trials and maybe us know what the dynamics are that are driving that growth?

I think I will let-- if you want to get into this specific improvement-- I'll let Emil handle that. But at just a high level, I think there's two things. We've seen more trials come to the marketplace for staffing services, and then relatively, I think our unit has been relatively successful in getting a disproportionate share of those trials, of being able to really increase-- as we look at some of the public companies in the space, we are clearly growing our business at a more rapid rate than some of the others in the space at this point. A few years ago, that may not been true but it's clearly true today. I think we have excellent management in that area, very experienced management and I think they have been creative in providing solutions, particularly to the pharmaceutical companies to allow them to really have alternatives to have -- going to be able to deliver a successful drug trial. I think it's a -- and in doing so they've been able to sustain and even improve margins through some of these creative offerings that they do bring to the market. Beyond that, Emil, I don't know there's anything additionally you want to offer?

I 'm not sure there's much. I just want to clarify that the [inaudible] business is a part of our staffing segment. We don't , for obvious competitive reasons, disclose specific gross profit margins for any of our operating units, but [inaudible] has been able to grow the top line without having to sacrifice any margins and continues to enjoy very attractive margins.

There's been a significant leverage at the contribution line from that unit in excess of the rate of growth in revenue.

Our next question comes from David Cohen with Midwood Capital. You have an open line.

Hi, gentlemen. I was wondering if you could shed a little light on Med-staff. What is its current run rate revenue? What percentage of the nurse staffing business does that represent today?

Med-staff represents roughly 20% of our healthcare staffing segment. That would include the per diem elements of Med-staff.

What is the for G.M. element in particular have is that dealing with the same sort of market factors, drivers in that market, I mean in terms of bill pay spreads, availability, you know, supply can you characterize that it as it relates to the per diem portion?

At a high level clearly the same market dynamics are affecting both the travel and per diem components of the healthcare staffing universe. I think we've described on prior calls, the Med-staff per diem business actually significantly outperformed the travel business for much of 2003, and in the first half of 2004. But we have seen in the last two quarters is a sequential under performance from the per diem unit. Conversely the Med-staff travel unit which has underperformed the Cross Country Staffing's activity for much of 2003 and 2004, is beginning to show an acceleration of activity going into the fourth quarter. We actually expect the Med-staff business to show sequential improvement while again we are more cautious on the larger Cross Country brand. I think as I said a couple reasons for that potentially. One is Med-staff tends to focus on smaller users of travel nurse staffing services. The larger users, which is the core of Cross Country's client list, they're more sophisticated. They're still focused on this as an opportunity to improve profitability in units, whereas the hospital that is using two or three nurses doesn't tend to focus on it. As the market turns you'd expect to see it turning in those accounts more quickly and I think we're seeing that. And then the second reason I think you're seeing relatively stronger performance from Med-staff is their business model, their operating model tends to have relatively more recruiters with lower inventories of nurses that they handle in a given time so directionally they have more capacity to respond more quickly to changes in the market on the margin.

Ok. Good to hear the travel part has picked up in the Q4 but, not to harp on the negative, what is the weakness behind what you are seeing on the per diem side? Are you losing market share? Or is that shifting market dynamics?

Well, unlike the travel business, the per diem business, every location is its own market and I don't sense that the Med-staff per diem business is losing market share. [coughing] Excuse me -- in its market. [coughing] I am doing my own part in spreading in [inaudible] in the fourth quarter. I hope we're getting expense accounts up. As you look at the Med-staff business, I think they are a strong player in the markets they serve, and is one of the things that attracted us to Med-staff as well, I think they outperformed the per diem nurse staffing business through 2003, partly through I think excellent management partly through maybe some serendipity in being in stronger markets because they don't have a national footprint they tend to be concentrated on the east and west coast some of those markets may be relatively weaker today, particularly Florida. Florida is a very weak market to what we would expect to see. I don't think there's anything new we haven't had any significant changes in management in that unit. I think their focused, they have a good strategy on how to achieve market share gains. So I'm comfortable as that business turns we're seeing some conflicting evidence from some of the larger players in that space. I know one of the larger public companies reported last night and we were encouraged by a sequential improvement in revenue in that business, so as that business improves I think that the Med-staff per diem basis should improve and are above the gains in the overall market. We're also encouraged by the fact that the Med-staff per diem of business has been able to improve its gross profit margin even in this environment.

Thank you

Our next question comes from Jeff Silber with Harris Nesbitt.

Good morning. You mentioned the hurricane impact in the effect on productivity. Did you see any impact from a client perspective. I know you talked about from a nurse perspective. I'm just wondering what feedback you've gotten from your clients?

I think it depends. It's almost a hospital by hospital. Some still have significant issues that they're dealing with, but they're very few areas of Florida that weren't affected at some point during the month of August and September. Ironically, Miami was the only one that seemed to get away relatively unscathed, but anything north of Miami, with the exception of maybe Jacksonville, had some significant impact as we've visited with a couple of hospital and it's just been -- it's been a pretty horrific period, particularly in the central parts of the state. Historically, for the Orlando market three of the hurricanes tracked over Orlando, and for the past 30 or 40 years by the time hurricane got that far inland it didn't have a lot of strength left. All three hurricanes were still a Category 2 hurricanes or above by the time they hit Orlando. They a had a lot of issues they were dealing with. It wasn't so much that the facilities were necessarily damaged being the issues the employees had to deal with; it was being worried about their families getting home to put up shutters. For those who live outside Florida, it's a great place to live down here but putting up a hurricane shutters is not a great experience. So it was just a distraction. Again, our office wasn't without power, if it all, for very long. But our employees including myself, lost power for eight-- eight days to up to two weeks or more. Some had significant damage to their homes. So really it took our focus off the business and put it more on the personal side, which was absolutely appropriate, but it was just a reality in September and October, and I am sure every hospital in Florida had a similar experience.

Ok., great and just to shift gears a little bit. I guess this one's for Emil. We had modeled in some bad debt expense in the quarter. It doesn't look like you guys hadn't recorded anything. Could you just give us a little color? Did collections improve? Was there a policy change?

There was no change in policy, Jeff. We basically determine our bad debt allowance on the quarterly basis and we use a combination of analysis of the allowance coverages in relation to the receivable call buckets that are not specifically identified. And in during this quarter we were very successful in collecting certain receivables that were previously reserved under the specific identification method, and we were also able to collect other older receivables which improved our reserve coverage in the analytical calculations so therefore there was no need to book any additional reserve during the quarter.

That's helpful. Just one final one. In the press release, you talked a little bit about the shelf registration, and I was wondering if you could give us a little bit more color on that is there any reason why now? Just to reiterate.

Neither the company nor management are registering any shares. It's really the financial sponsors across the country from a private company into being a public company. I don't want to speak for the intentions of our shareholders but I can speak to the facts, that they've been in this investment for more than five years and Morgan Stanley's Capital Partners private equity arm was spun out from the firm earlier this year. We're not surprised by their interest in wanting to be in a position to modify the expeditiously at some point. I think one thing I want to add is, it was management's request that if any of our non-management founding stockholders filed a shelf registration which was their right per their stockholder agreement, that all would file together so we wouldn't have to go through this process repeatedly.

Ok. Great. Thanks.

Okay.

Our next question comes from Riley McCormack with Chester Capital.

Hey guys. I'm wondering if you could quantify the impact of the hurricanes on your Q4 guidance, and then whether we could expect an initial increase in Q1 as a result of this guidance being pushed out?

This is Emil. This is a bit of a challenge to quantify exactly but I can tell you that's certainly the impact of the hurricanes does lower our productivity and our bookings be lower in the third quarter. My best guess it may have lowered it is much as three to 5% but we believe that most of this business is really not lost, really just deferred, and we expect that some of these bookings will be made up an early Q4 for which can still add to RFT accounting in Q4 we factor that into our guidance.

Okay. You say most would come back in late Q4 . Any spill over into Q1 or too early to tell?

Most of the bookings that we would have lost in September were Q4 starts.

Ok.

There could be some spillover into Q1 as those assignments finish in Q1 although a large number of assignments scheduled by the nurses to begin no later than September,r end right before the holidays.

Okay. Great.

Thanks, guys. Thank you.

The next question comes from Jim Janesky with Ryan Beck.

Yes. Good morning. A couple of questions. Joe, how would you characterize the willingness of larger hospitals to use travel nurses? Again, some hospital chains are still talking about continuing to put pressure on reducing, even at these lower levels, the use of travel nurses. What are you hearing?

Let me just say and probably as I said on prior calls, I'd been in this business for coming up on 12 years and I have always heard that from our customers, that they wanted to reduce their reliance not on just particularly contract labor, but also per diem agency labor. And it's really the market that determines whether they're going to be successful or not and I think the market has in a really confluence of events, has created an environment where its nurses are more willing to work at wages that hospitals want to pay than they have in prior years. As you look at kind of the May, at where incremental missing labor is coming from two-thirds of it is coming from nurses over 50 years of age, and as far as I can tell there is nothing fundamentally has changed. So nurses working much over 50 but because of the physically demanding job and my gut is and particularly in speaking to nurses and as soon as they're not able to work as much they won't work as much. Such as the labor market improves and hopefully, in the near term we see an outside surprise and hospital admission where they are caught a little short, I think these dynamics will begin to change, but in the meantime I think it continues to be a favorable environment for hospitals to obtain nurse labor at wages they are comfortable paying and if they're able to do that they will. But as far as their philosophy, that hasn't changed. If you asked hospitals ten years ago, they would give you the same answers. As to date they're having more success in executing on that desire.

If you have to characterize, I know you talked about the demand environment and you talk about the supply environment in detail, but if you had to, would you say that you would have much higher revenues if the supply issue were to get better?

Yes. I do want to say demand doesn't matter today because it clearly does. Even some of the orders that we have there's a lack of a sense of urgency on the part of some clients and until you have that sense of urgency the business doesn't work very well. You lose a lot of productivity in putting nurses into multiple orders for nursing, because the client just isn't moving quickly quickly to intervene and ask for that nurse to come to their facility. That is an important driver, and until we see the hospitals change, have some reason to change, their bias toward being willing to being understaffed to being more worried about being caught understaffed that they are getting heat from administration and not having enough nurses at their beds that patients may be taken to hospitals down the street, that dynamic is what drives our business and right now that's at the dynamic that we see. We see relatively weak in-patient admission trends. If it's up, it's up in low single digits, and it's up in line with expectations and that's just then a great environment for us. The demand matters, having said that we have more than five jobs printers coming off contract and what we had mourners' applicants will to go to where those jobs are with the skill sets that are required by those jobs we would clearly grow our revenue today even in what I would describe as a relatively soft environment.

Thanks. A question for Emil. This has to do with Sarbanes-Oxley, Emil.

Who?

Are you finished, or close to being finished, spending on Sarbanes this year? And what level of, considering the 2004 as a base, how much do you expect that to decline or increase in 2005? So, how much is recurring?

Let me just say that we've been spending a great deal of time and effort on this year in compliance with Section 404 of Sarbanes-Oxley. Our expenses related to this have been running significantly higher than we budgeted and we put a great deal of work into documenting our business process, these control deficiencies that we cover. And we still have some work ahead of us, although I would say that the vast majority our work is done. But then the back end of what we do, we have our independent auditors come in and they do their own independent testing and that is still ahead of us. In terms of going forward, I don't have a solid number to say what our expenditures will be next year but the numbers that I heard is that companies should budget anywhere from 40 to 60% what they spent in the initial year and all subsequent years in order to comply with Sarbanes-Oxley.

That's helpful. Thank you.

Our next question comes from Toby Summer with SunTrust-- excuse me -- Robinson Humphrey.

A couple questions. I was wondering if you could give us a sense for how business was on a geographic basis, maybe with this soft and strong pockets are? I guess you said Florida was a little bit modest. And then if you could give us a little more color on single source contracts perhaps the number of contract or percent of revenue that those present at this point.? And I will have a couple follow ups. Thanks.

As far as a geographic, Toby, without question the strongest markets nationally continue to be California, and particularly Southern California, and the Arizona market. And those are-we're seeing larger increases year-over-year. As you know, California introduced -- implemented the patient ratios in 2004. As you know those ratios get ratcheted up again in 2005, and we are optimistic we will continue to see a strong market in California in 2005. Arizona is a just a-- very strong right now. Typically, Arizona and Florida run hand in hand and we are not seeing that this year at all. I would describe Florida as being relatively weak vis a vis other areas in the country, and certainly vis a vis of what we would expect to see as far as demand in Florida this time of the year in a normalized year. Other than that, there's nothing much to report. I would say the Northeast is relatively stronger than the Mid-Atlantic and Midwest. The Rocky Mountain states are not particularly strong. But we have nurses working in all of these areas, but clearly the hot markets right now are on the west coast. As far as the single source activity. I'd rather not give a specific number of accounts, but I would offer that when you look at our core brands, that in excess of 10% of the nurses we have working, are working under these kind of contracts. Our goal is to double that ultimately get to around 25% of the total nurses working, workings under a single-source contract. We think that's achievable, hopefully it's achievable in a year, but we certainly are not committing to that, but that's our internal target. And just recognize that in the summer of 03 we had no nurses working under these kind of contracts. The other thing I'd like to say about them is, even in a weak environment, if you look at the first half of 2001, which tends to be a seasonally strong period, and where we are today, we've doubled the number of nurses we have working at these contracts. So it clearly has been a strategy that has worked for us. We have not obtained these contracts to the sacrifice of margin. They tend to be certainly in line or even about margins that we see nationally, partly because we applied a lot more overhead to being successful in these endeavors. We're very encouraged and we have a strong pipeline of accounts that we're working towards implementing these kind of relationships.

Thank you. Just to kind of follow up. One, regarding patient ratio legislation that you discussed in California. Any sense that there is kind of a verdict out there among the other states that are at various stages of considering adopting a similar move? And then I was also interested on your perspective on pricing. I think on the last call you suggested that pricing should be kind of directionally positive and I was wondering if that is still okay. Thanks.

Okay. And as we said on our prior calls, our three most important states are California, Florida and Massachusetts in that order historically. California has put the been the leader as it relates to the patient-ratio trend. Both Florida and Massachusetts, as well as the number of other states, are considering legislation on patient ratios. And I think to your point, I am not aware of the verdict. I think the jury continues to be out. There are clearly pros and cons of implementing these ratios. In my mind patient acuity should dictate how many patients should be under a nurse's charge, but having said that, obviously there was concern that hospitals were pushing the envelope and trying to do more with less as one means of dealing with a shortage of nurses willing to work at wages they were willing to pay, and I think the other states will continue to monitor the feedback in California. What I haven't heard is anything significantly negative: that there's been a deterioration of care, that the hospitals have been put on divert I think the reality is, I think the last statistics I saw, only about 70% of hospitals in California were meeting their ratios today. I think they are all trying to but only about 17% are consistently meeting them. So I think there's going to be renewed emphasis and effort to get more nurses on the bedsides, and I think that is generally good for our business. And the fact that you haven't heard an outcry in hospitals that patients are dying in ambulances because they're not allowed to be admitted to hospitals. I haven't heard that anecdotally, and I think that would be certainly a positive influence on other states following through on this legislation. Oh I'm sorry, pricing was in the second part of your question. As we said on the last call we're encouraged by what we see. Again, California. Because of the relatively strong demand, we're seeing an ability on our part to obtain more favorable pricing, but even outside California encouraged by generally a tend toward higher price, price inflation, as opposed to price deflation. Which there was more pressure on pricing in the last two years, I think directionally there's upward pressure on pricing today and I think very modest price inflation.

Thank you. One last question and then I will get out of the queue. I don't want to monopolize this. Regarding debt repayment: Your balance sheet, you've accelerated that and you appear to be in pretty good shape from that perspective. So I was wondering what your uses of cash may be, and kind of what your sense is for your acquisition pipeline? And if buyers and sellers are perhaps moving closer than they were in the last quarter when we talked about it? Thanks.

I'll tackle the first part of that about our use of cash strategy, and I'll let Joe drill more into the acquisition pipeline. We continually evaluate the optimal use of our excess cash to build shareholder value. We believe that in the current environment net repayment and share repurchase remain the best use of cash other than strategic acquisition. Obviously, if we have the right strategic acquisition, that does take precedence. As you can see, our emphasis has been on accelerated debt repayment. Partly, because it gives us more financial flexibility down the road including potentially putting a new share repurchase program in place when the current one is used up. In the meantime we will continue to be opportunistic and disciplined in our share repurchases. As far as our acquisition pipeline--

I would just say Toby that we almost continuously are in discussions with other firms regarding potential acquisitions. Some of the areas that interest us today clearly nurse staffing is our core business, we would be interested in small per diem operations that have very high levels of share and important markets. What we don't work to be is a very broad-based per diem company, with a hundred offices, each with one or two million of revenue. That's not a business model that attracts us, but if we could identify very strong regional players, that would be something that would attract us. We're very interested in growing our position in the clinical trials staffing space. We clearly had strong organic growth in that area and we would certainly welcome an opportunity to supplement that growth through acquisition. And then lastly, I would say that the physician-staffing space is something that appeals to us. And as we look to these opportunities, I think one of the strengths of the company is that we have had a very disciplined approach toward acquisitions. I think the divestiture of the consulting businesses are reflection of that. We've been able to apply cash and if our strategy changes, we've been able to sell those businesses at prices that realize a strong return for shareholders. Just because we generate a lot of cash doesn't mean we're going to do an acquisition just for the sake of acquisition. We can always repurchase our shares if we have confidence in our growth going forward. But clearly the best use of cash is an acquisition at the right price, and the right price to us is an acquisition that would yield a return greater than the cost of capital. If we can't get comfort that we can achieve that, we're not going to make an acquisition. If we can, I think we would be aggressive purchasers.

Thank you very much.

Okay.

Our next question comes from Borden -- excuse me-- Borden Putnam with Eastman Capital.

Good morning, Joe. How are you?

I'm doing good, Borden. Thanks.

I want to expand on something you've mentioned last quarter. As your recruiter staffing parts stabilize, there was some volatility, let's call it last quarter and you're going to spend some attention to that this current quarter. What's the current status?

We did -- on a net basis, we increased our recruiter counts by four. And the core brand is relatively stable at Med-staff and Med-staff inherently has more capacity. We think we're moving in the right direction. We would expect to could see continued improvement in qualified recruiters through the fourth quarter. We're having a strong pipeline of individuals we've identified and brought in-house and are putting through a pretty extensive training program, so you it should expect us to continue to add recruiters at a net basis. There continues to be turn over, Borden, I don't want to tell you that everyone we have added is incremental. Clearly, you are making up for some that do leave the organization. But we've identified that issue and are planning and bringing on recruiters to hit our targets to reflect a relatively higher level of turnover as well.

I appreciate that. It sounds like the right kind of attention in the right spot. Thanks, Joe.

Thanks, Borden.

The next question comes from A.J. Rice with Merrill Lynch.

Good morning, guys. It's actually Chris in for A.J. Just thinking about the international recruiting effort. It seems like you're still in a pretty significant ramp-up mode here. I was just wondering if you could comment on the life cycle of that business. Where you think you are and possibly a year or so from now ,how much of a contribution that could potentially be making at least to the supply of nurses you have for hospitals?

Clearly, as we indicated today the businesses earnings are positive, cash positive. It has taken as much longer than we anticipated to get there for a variety of reason,s not the least of which was the impact of 9/11 on the immigration process and the different plus points of the immigration process. But we have a strong team and we think we have a good strategy and ultimately, we would like to see more than a couple hundred nurses every year join our inventory of placeable nurses in the U.S. We're not clear to get there in 2005, but we think by 2006 and maybe even in late 2005, we can be bringing this is in at that rate but I think we have a good strategy. Going it alone as well as working with partners in some strong countries before recruitment in that element of our business will be an increasingly important element as we go forward, and as I think as Emil has shared, it tends to be a higher-margin component of our business. The business model has worked as we expected it's just taking much longer and we have much lower volumes than we expected a year ago even today.

Okay. And in the only other thing I guess, with regard to cash flow or debt level for that matter, have you guys thought about that in terms of where you think optimally you'd like to be in terms of debt? I mean do you want to have any at al?l I mean I guess that kind of spells out potentially what to do with some of your excess cash in addition to small acquisitions and stock purchases? But if you do want to keep some debt at what point do you think you could potentially go back and get some additional capacity on the share repurchase? Or just really what you are thinking in cash flow year over term?

We're certainly very comfortable with debt. We grew up as an LBO and in the '90s and we know how to manage for cash flow. We believe this business is inherently it leveragable, because of the strong cash flow generation capability, and I personally would be very comfortable with debt to capital ratios in the 30 to 40% range. Right now we're down to 15%, so we're obviously under leverage from that standpoint. And if the right opportunity comes up to warrant us in getting more leverage we certainly have the capacity to do so and we have the ability to manage this cycle and that type of environment and. And clearly, Chris to your point, we will pay down debt if we feel that is the best use of cash but fundamentally, we like having some level of debt on the balance sheet. We think it's an opportunity to create higher shareholder returns so at some point we will get to an area where we will look at other alternatives as being better uses for the cash that we generate.

Thanks a lot.

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