Cross Country Healthcare Inc (CCRN) 2006 Q3 法說會逐字稿

Good morning, and welcome to the Cross Country Healthcare Third Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I will now turn the meeting over to Mr. Howard Goldman, Director of Investor & 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, our President and Chief Executive Officer, and Emil Hensel, our Chief Financial Officer. On this call we will review our third quarter and year-to-date 2006 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 website at www.crosscountryhealthcare.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 or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "suggests" 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 statement section of our press release for the third quarter of 2006, as well as under the caption "Risk Factors" in our Form 10-K for the year ended December 31, 2005.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed in 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.

And now I'll turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening in for your continued interest in Cross Country Healthcare.

As reported in our press release issued last evening, our revenue for the third quarter of 2006 was $163 million, essentially flat with a year ago quarter. Our net income was $122,000, or $0.00 cent per diluted share, reflecting a previously disclosed $0.17 per diluted share charge taken in the third quarter to reserve for the cost of settling a class action lawsuit filed against the company in California. Excluding this charge, net income per diluted share of $0.17 would have been approximately $0.02 ahead of the prior year quarter and above the high end of our guidance range for the third quarter that we provided in August. These results reflect improving operating performance and continued strong cash flow generation of $9.6 million in the third quarter, which allowed us to continue paying down our outstanding debt during the quarter.

As Emil will describe for you in a moment, the improving trend line of our business is continuing in the fourth quarter, with organic staffing volumes likely to grow sequentially from the third quarter at the highest rate since the fourth quarter of 2001, and this is despite the normal seasonal trough that occurs in December as many nurses and other professionals take off during the holidays in order to be with family and then return during the first two weeks of January to begin their next assignment. These higher staffing volumes are primarily driven by our contract travel nursing business, but also reflect substantial sequential organic improvement in our clinical trials business, which will be supplemented by a full quarter of contribution from the Metropolitan Research acquisition as well.

The momentum we are experiencing in our travel nurse staffing business reflects strong demand from acute care hospitals throughout the country, including key markets like Florida. We believe relatively weak hospital admission trends in the first half of 2006 caused hospital customers to further lower their admissions expectations for the second half of 2006. However, a modest improvement in admissions trends occurred in the third quarter, which we believe has been magnified -- has had a magnified impact on our business as a result. In addition, high levels of demand typically translate into a favorable pricing environment, which we experienced in the third quarter and continue to enjoy in the fourth quarter.

Turning to our non-travel nurse staffing businesses, as I mentioned, our clinical trials staffing business appears to be on a solid organic growth track, and the new Metropolitan Research business is continuing the attractive growth trend it had achieved prior to our acquisition. We remain very excited about our prospects in this market.

Our retained search business also saw strong top-line growth, which was mitigated to a large degree by investments we made to continue the growth of this business into 2007. On the other hand, our per diem business remains weak. While still profitable, the revenue decline in this business line has reduced its relative contribution to total company revenue generation to less than 8%. Based on experience, we expect the turnaround in per diem staffing to lag the travel staffing business by approximately one year, but ultimately to return to being a strong growth platform in the future.

With that, I would like to now turn the call over to Emil to update you in more detail on our financial performance.

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, consolidated revenue in the third quarter was $163 million, essentially flat versus the prior year, but up 4% sequentially. Revenue came in at the upper end of the guidance range that we provided in August, reflecting the improved trends in our core travel nurse staffing business that Joe referred to earlier.

Our per diem nurse staffing and education and training businesses registered year-over-year revenue decreases that were partially offset by revenue growth in our travel nurse -- travel staffing and position search businesses. Revenue in our clinical trial business also increased year over year as a result of the acquisition of Metropolitan Research, which we completed on August 31. The sequential revenue increase came primarily from our travel nurse staffing business, as well as the aforementioned acquisition of Metropolitan Research, which contributed $2 million to the current quarter's revenue.

Our gross profit margin was 23.2%, unchanged versus prior year, and up 10 basis points sequentially. The sequential improvement was primarily due to lower insurance costs, partially offset by higher housing expense. SG&A expenses in the third quarter represented 16.4% of revenue, unchanged from the prior year, and down 70 basis points sequentially. The sequential improvement was a result of operating leverage, as our SG&A expenses were flat sequentially despite a 4% increase in revenue.

Net interest expense was $273,000, down 71% from the prior year quarter, reflecting the further de-levering of our balance sheet prior to the acquisition of Metropolitan Research, made possible by our strong operating cash flow. Net income in the third quarter was $122,000, or $0.00 per diluted share, which included a $5.4 million after-tax charge associated with the aforementioned settlement of the California class action lawsuit. Excluding this charge, net income would have been $5.5 million, up 11% from the prior year, and equivalent to $0.17 per diluted share, as compared to $0.15 per diluted share in the third quarter of 2005.

Our balance sheet remains strong. We ended the quarter with a debt to total capital ratio of 5.3% and a current ratio of 2 to 1. DSOs at the end of the third quarter, excluding Metropolitan Research, were 59 days, unchanged from the prior year but up three days from the end of the second quarter. We generated $9.6 million of cash from operating activities during the third quarter, of which $2.6 million was used for capital expenditures. At September 30, we had $20.7 million of total debt on our balance sheet, which includes $16 million drawn down from our revolving credit facility to fund the recently completed Metropolitan Research acquisition. These borrowings were offset by net payments of $5.7 million from operating cash flow during the third quarter.

We also repurchased approximately 74,000 shares of our common stock during the third quarter, at an average cost of $16.35 per share, pursuant to the repurchase plan authorized by our Board of Directors in November of 2002. To date, we have purchased approximately 95% of the 1.5 million shares under that authorization, at an average cost of $14.83 per share. In May of 2006, our Board of Directors authorized a new stock repurchase program of up to an additional 1.5 million shares, to commence upon the completion of the prior stock repurchase authorization.

Let me drill down next on our two reporting segments, healthcare staffing, which comprises our travel and per diem nurse staffing, travel allied health staffing and clinical research staffing businesses, accounting for approximately 93% of revenue in the third quarter, and the other human capital management services segment, which is comprised of our education and training and retained search businesses.

Revenue for the healthcare staffing segment was $151.4 million, flat versus the prior year but up 4.5% sequentially. Approximately $2 million of the $6.5 million sequential increase in revenue was due to the acquisition of Metropolitan Research. The remaining organic revenue increase of $4.5 million resulted from a combination of improved pricing, higher staffing volumes and one additional day in the third quarter compared to the second quarter.

We averaged 5,294 field FTEs in the third quarter, down 5% versus the prior year, but up 1% sequentially. The year-over-year decline in field FTEs was attributable to our per diem business, which, as Joe indicated, remains under pressure, and weak bookings during the second quarter which impacted travel nurse volumes in the third quarter. However, booking trends improved during the third quarter and so far continue to be well above the prior year quarter, which we expect to result in sequential volume growth in the fourth quarter.

Bill rates, as measured by revenue per hour in our core travel nurse staffing business, increased by 5% year over year, continuing the favorable trends in this metric. The average revenue per FTE per week was up 4% versus the prior year. The latter statistic includes all of our healthcare staffing businesses except the recently acquired Metropolitan Research. Mobile contracts, where the nurse is on the hospital's payroll, accounted for approximately 1% of our segment volume, both in the current quarter and in the prior year quarter.

Healthcare staffing contribution income, as defined in our press release, was $15.2 million in the third quarter, down 1% compared to prior year, but up 13% sequentially. Segment contribution margin was 10%, down 10 basis points from the prior year, with an improvement in the bill-to-pay spread and lower professional liability costs, offset by higher housing and health insurance expenses. On a sequential basis, contribution margin improved by 70 basis points, primarily due to improved operating leverage on overhead.

Turning now to the other human capital management services segment, third quarter revenue was $11.5 million, down 2% from prior year, as the revenue increase in our physician and healthcare executive search business was offset by a revenue decline in our education business due to lower seminar attendance. Segment contribution income was $2.2 million, essentially flat versus prior year.

This brings me to our guidance for the fourth quarter of 2006. The following statements are based on current management expectations. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions and other business combinations, the repurchase of our common stock or pending legal matters.

Our booking activity improved gradually during the third quarter and has continued to improve into the fourth quarter. For the third quarter as a whole, bookings were up between 2 to 3% over prior year. Based on these booking trends, we project the average field FTE count in the fourth quarter to be in the 5,500 to 5,650 range. This includes approximately 125 to 150 FTEs for Metropolitan Research. We expect average staffing revenue per FTE per week to be up year over year approximately 4% on an organic basis and up approximately 5 to 6%, including Metropolitan Research, which has a higher bill rate, average bill rate, than our organic business.

Revenue for the fourth quarter is expected to be in the $172 to $175 million range. We expect our gross profit margin in the fourth quarter to be in the 22.5 to 23% range, which factors in the expected seasonal decrease in housing occupancy in December. We expect SG&A expenses to be up 3 to 4% on a sequential basis, reflecting the full quarter's impact of the Metropolitan Research acquisition. Earnings per diluted share is expected to be in the $0.17 to $0.19 range.

And, as a brief reminder for those of you looking ahead to your models for 2007, historically the gross profit margin in our core travel nurse staffing business typically declines sequentially in the first quarter due to the reset of payroll taxes as well as two less days than in the fourth quarter.

This concludes our formal comments. Thank you for your attention. At this time, we will open up the lines to answer any questions that you may have.

[OPERATOR INSTRUCTIONS]

Our first question comes from Tobey Sommer, of SunTrust Robinson Humphrey.

Thanks. I was wondering if you could speak to the progress in bill rates that you've experienced [inaudible] the year and maybe compare how this cycle has developed relative to prior cycles.

Hi, Tobey. You sound like you've got a little cold, like I do. I would describe our experience pretty much in line with what we presented earlier this year, that we expect the bill rates to be increasing in the mid-single digits, as Emil indicated. Focusing specifically on the travel nursing business, it's up about 5% year over year.

We see really a full gamut. There are some accounts where you're not getting increases, and there are some accounts that are giving us 10 to 15% increases. Early in the last up cycle, which was the mid-1990s, call it '95, '96, you were seeing -- you had a very similar experience. And I think I've always said that in an equilibrium environment, we would expect bill rates to increase 5 to 7% just because of the inflationary aspects of our business.

We tend to be a bottom fisher in housing, and we're not the most desirable tenant, because we're only looking for three-month leases. So the 5% is actually right in line, maybe even at the low end of previous -- coming out of previous troughs in the market. We're not surprised. We expect it to continue, and we would not be at all surprised if it accelerated, but that's not really the expectation that we're setting at this point. We think mid-single digits is something that we can sustain going into 2007.

[inaudible]

I'm sorry, Tobey? Hello?

[inaudible]

Tobey, I think we're losing you.

Our next question comes from Matthew Ripperger, of Citigroup.

Hi. Thanks very much, Joe. Just a couple questions. On the fourth quarter outlook in the sequential improvement in volumes, which you said was sort of the highest since late '01, can you just maybe provide a little color as to sort of what's really contributing to that? Is it better admission volume trends that you're seeing in the fourth quarter, or greater nurse turnover, or just better fill rates in terms of applicants?

I think to some degree, I'm going to let Emil supplement my comments, I think it's been a little bit of all those things. I know Emil has done some analysis of our long-term seasonal patterns, and we expect an increase in the fourth quarter. We are a -- we're the dominant player in Florida, which tends to be a seasonal market with big upticks beginning in October-November, sometimes as early as late September. We did see that pattern unfold this year, like I said.

The labor market's been very favorable for some time. They've been possibly increasingly so in the third quarter. We have seen, I believe, a more committed client, and I believe that is likely to be because, even though volume growth in admissions has been very, very modest, in the 0 to 2% range, depending on which system is reporting, as long as those -- that outcome is better than, or higher than the expectation, and hospitals thus find themselves being short-staffed, that's good for our business and good for Cross Country. So I think we experienced a lot of that.

Our applicant activity clearly has improved as the year has unfolded. Following the hurricane, we did see a trough in applicant activity in the first quarter. It's been improving since the first quarter, and right now we're very comfortable with our applicant activity. And probably a last element of the improved booking trends is we are putting more and more applicants to work on a relative basis. A higher share of those applicants that are coming to us are actually going to work for us, which is the best news of all.

And let me, Matt, let me also give you kind of some historical perspective on our seasonal trends. Historically, we tend to gain volume in our core travel nurse business from the summer through early December, when many travel nurses schedule a break between assignments to go home for the holidays. But even if you factor in the late December drop, in most years average volume in the fourth quarter has been somewhat higher than in the third quarter.

This year, we are guiding to a 3 to 6% sequential increase, which is about 200 to 350 increase in FTEs in the fourth quarter, based on the traction that we have gained from improved booking trends, a sequential increase that's in the high -- that's kind of at the high end of the historical range of what we experience sequentially. By contrast, last year we had a 0.5% sequential decrease in the fourth quarter after losing some traction as a result of Hurricane Wilma. So net net, this is really consistent with historical trends, but it is at the high end of our normal range.

Okay, great. I appreciate that. The second question I had is just on the SG&A costs. You did an excellent job of keeping those flat sequentially, and it's clearly a source of leverage, potentially, going forward. But can you just give a sense of how we should project that cost item to trend as the fundamentals improve going forward?

Well, what we indicated in our guidance is that we expect it to go up sequentially by about 3 to 4%, and what really drives that is the acquisition of Metropolitan Research, the full quarter's impact of that. The acquisition of Metropolitan closed a little later than we initially anticipated when we provided our previous guidance, so that may have helped us a little bit in terms of the SG&A costs. But we do have a fair amount of operating leverage in this business, and, as our volumes increase, we should be able to decrease the percentage of SG&A as a percentage of revenue.

Okay, great, and then the -- just the next question I had is related to the per diem business. You quantified that, I think, it was less than 8% of a contribution to gross profit, or contribution margin for the quarter. Can you just help frame out a little more in terms of volume or pricing or revenue what the per diem business is right now and how [inaudible]?

First, to clarify, Matt, we -- in our comments, we said it's about 8% of revenue, not gross profit. It tends to be -- well, actually, I would describe it as at or a little below the midpoint of our blended gross profit margin in the staffing segment. We have -- probably the most encouraging thing is that we have started to see some price traction for the first time in several years. When you look at the business, I mean, really, everything, all the negative forces that were against the business in the third quarter on a year-over-year basis, price, mix, volume, they were all pointing negative, but on a sequential basis, I think it's a better story.

So I believe the business has troughed. It's not getting the traction per se that the travel nursing business will see in the fourth quarter, and that traction is really a function of the booking in the third quarter. Long term, we like this business, and we think it's going to be an important part of our mix of revenue. It just -- it has some negative overhang on it, still. But I would actually not be surprised to see the business begin to grow in the early part of 2007 on a sequential basis.

Okay. Thanks very much.

Okay, Matt.

Our next question is from Jeff Silber, of BMO Capital Markets.

Thanks, and congratulations on the quarter.

Thanks, Jeff.

In terms of your recruiter headcount, I know you typically don't disclose that during the year, but should we expect continued additions to that recruiter headcount over the next few quarters?

You know, actually, I think we've been forthcoming with that. I think there's -- there are other companies that are less forthcoming, but we -- we have, in the nursing business, a little over 160 recruiters in all the brands. It's -- on a sequential basis, it's down two or three recruiters. It's down a little bit almost on an equal basis from the beginning of the year.

We think we have the right number of recruiters, Jeff. They've got more experience. We think we have the right capacity to grow the business. That's why I think, as Emil described, we do expect to get leverage on our overhead. I think we can have a substantially higher number of nurses working for the company with the existing recruiter count. So that shouldn't be an obstacle or an impediment to growth going forward.

Okay, great. That's helpful. If we could turn to the MRA business, when you announced the acquisition, I'm not sure if you had given specific guidance on the impact of that acquisition on your operations. I know you gave a little bit of color on how -- what the impact was in the third quarter. But just kind of stepping back, what is the type of accretion that you're looking for from that acquisition?

Jeff, the accretion that we're projecting for this year is approximately $0.01 per share. We acquired the business -- it really will contribute four months to the results of 2006. And for that one month that we had the business in the current quarter, we generated $2 million of revenue. So that kind of gives you an idea of its revenue run rate.

Okay, and, again, I'm not sure about the seasonality in that specific business, but would it make sense just to annualize the fourth quarter contribution to see the impact on 2007?

I think that would be a good way to estimate it. It's not particularly seasonal. And there is a growth trend in that business that you can probably superimpose on it, that it's a very attractive business that's growing nicely. But short term, annualizing the current run rate is not a bad way to go.

Okay, great. And clinical trials is roughly what percentage of your total business right now?

Well, in the third quarter, including Metropolitan, it was approximately 9% of our revenues. But, again, we didn't have a full quarter's impact from Metropolitan.

Okay, great. That's helpful.

A little higher than that in the fourth quarter.

Yes. Just, I'm sorry, just stepping back into the nursing area, are you seeing a higher number of nurses re-upping for additional assignments after they finish their existing one?

Yes, I think we've, as we've talked on prior calls, we have seen renewal rates, particularly renewal rates at the same facility, improve. So that says there's kind of durability in the demand of the clients that we're serving, and we're giving them high-quality nurses and they're tending to like the circumstances that we put them in and staying on for longer than three months at a time. So that's been a trend. It's not a powerful trend, I wouldn't describe it as, but it's a positive trend.

Okay, great. Just one final one, roughly, how much was stock-based compensation in the quarter?

It was really insignificant for us. We issued only about 28,000 options, so there was no impact.

Okay, great. Thanks so much.

Okay, Jeff. Thanks for calling.

Our next question is from Mike Fitz, of SunTrust Robinson Humphrey.

Yes, good morning. If I could, I'd just like to follow up on some of [Silbie's] questions on the bill rate. Looking at kind of the past cycles, when you've gotten some significant bill rate increases, how long does that cycle typically last?

Well, I mean, if you look just specifically at the last cycle -- we would describe the business on a long-term panoramic view as kind of five-year peak and five-year trough. I think in the more recent cycles, you are overlaying the demographics of our society on top of that. So the last up cycle was more like seven years. So I describe it as the up cycles are getting higher and longer, and the down cycles are getting higher and shorter.

But that up cycle began, for us, in '94, for most of our competitors in '95, began to see growth. It lasted into 2002. And then the business began to erode a little bit in 2003. So it was a solid seven to eight-year cycle for us. And, again, initially, 5 to 7% into the late 1990s. Beginning '98, '99, we started to see double-digit pricing, Mike. Hope that helps.

Very much. And then just kind of moving on to the pay rate side, just wondering how much of these increases -- have you started to increase the pay rates along with the bill rates that you're getting?

Yes, we have.

And if you could discuss to what degree and maybe what kind of signing bonuses you're giving?

I don't think we want to get that specific, Mike. I hope investors don't need that level of information to get comfortable with the company. We view that as important competitive issue for us. So we don't want to signal with that kind of clarity, but we are, with 5% price increases, we are clearly increasing the wage and benefit package that we offer nurses. And, as I indicated previously, we are seeing a higher number of, higher percentage of applicants coming to work for us. So we feel what we're offering is certainly market-competitive.

Okay. Looking, when you say that the applicant trends are picking up, just wondering if you have any sense of, is some of this new applicant coming from the increasing size of the recent graduating nursing classes, or where do you see the supply coming from?

We -- historically, there's a high correlation between the number of nursing school graduates and our -- over a five-year kind of rolling average, if that number is increasing, we tend to see higher numbers of applicant activity. So I think that's a strong likelihood, Mike, that the higher graduation rates of relatively younger nurses is having a very positive impact on our business.

Okay, great. And just a couple more. Looking at SG&A, the pickup in 4Q that's anticipated, is that expected to continue? Are there some of the costs in that associated just kind of with integrating the acquisition, that maybe some of those are going to fall off?

No, that's just kind of sort of the annualizing the SG&A burden that's associated with the acquisition. There's no additional incremental SG&A beyond that that we're anticipating that's significant. We do -- we have begun the process of integrating certain aspects of Metropolitan with the -- with our other clinical trials [inaudible]. But in terms of the overall impact on SG&A, we don't believe that that's going to be significant going forward.

Okay, so this level in 4Q we can kind of extrapolate into 2007?

Right. Again, there is an element of operating leverage as our business has grown, so we should be able to see some benefits in terms of percentage of revenue.

Great. Thanks. And one more, just wondering, now that the nurse business, or the travel nurse business is starting to take off a little bit, and you continue to generate solid cash flow, just wondering what your acquisition appetite [inaudible]?

Well, we're very hungry. And we -- I think we've seen an uptick in deal activity in our space, in various niches of our space. Just the issue for us is maintaining our discipline. We obviously just completed the Metropolitan acquisition. We think it's a very high-quality management team. It's a very complementary services and client base to our existing platform in clinical research staffing. So we're excited about it.

But there's other aspects of healthcare staffing and other aspects of healthcare human capital management that are attractive to us, and, without getting too specific, we have seen an increase in the number of deals that we're evaluating, and we're optimistic that we'll be able to use our very de-levered balance sheet to grow the business through acquisition. But I'd just caution you, we're maintaining our discipline. We want the business to be -- acquisitions to be accreted immediately and to ultimately generate returns on capital higher than our cost of capital, which we estimate to be around 10%.

So, you know, it's -- sometimes, there's been a little bit of a trough in private deals, a lot of private equity money out there. We're trying to maintain our focus and our discipline and deliver shareholder value going forward. In the absence of acquisitions, clearly we have the opportunity to continue repurchasing stock and, obviously, de-levering the very modest debt that we have currently. But our number one priority at this point -- I started this by saying we're hungry for acquisitions. We clearly would like to continue building the business, using the strong cash flow to find complementary acquisitions going forward.

Great. Thank you very much. Congratulations on the last quarter.

Thanks, Mike.

Our next question is from Michel Morin, of Merrill Lynch.

Yes, good morning. Actually, just two questions. Firstly, just following up on that previous question, I was a bit surprised by the amount of buyback activity, or the relatively limited amount of buyback activity in the quarter. Were you limited in any way from the acquisition, or are you really just trying to keep the powder dry, as it were?

Well, we always evaluate the optimal use of our excess cash. And, as Joe indicated correctly, acquisitions are an important element of that. We believe that the -- a strategic acquisition at a reasonable price is really the best use of our excess cash to build shareholder value. And, historically, acquisitions have played a significant role in complementing our organic growth. And Metropolitan Research, the acquisition that we completed in the third quarter, falls in that category. As Joe indicated, the level of deal-related activity has definitely picked up this year, and we continue to evaluate opportunities, but we remain disciplined in our approach.

Having said all of that, asset acquisitions, we will continue to evaluate both additional debt repayment and share repurchases, with the objective of enhancing shareholder value. And we do have the authorization that will allow us to continue that program. We expect, depending on what is -- what we assess to be the best way to enhance shareholder value, to use a combination of both debt repayment and share repurchases going forward.

Okay, great. And then just secondly, on the cost, I was hoping to drill down a bit further. Specific to MRA, could you walk us through, Emil, maybe the incremental DNA that we should see from that? I was a bit surprised, particularly on the amortization front, to see that it hadn't ticked up more than it did.

Well, we -- I would encourage you to take a look at the 10-Q which we'll be publishing later today, which will have more detail on this. But we have done a -- we engaged a third party to do a valuation of the assets acquired. And roughly, of the intangible assets that we're acquiring, roughly 40% are amortizable. So there will be an increase in the amortization expense. We don't expect that increase to be more than about $100,000 per quarter going forward.

The depreciation aspect is relatively modest. This is not a capital-intensive business, so there's going to be a very minor impact on our depreciation expense.

Okay. And then I think in your prepared remarks you mentioned lower insurance costs also might've helped a bit on the margin front. Could -- is there any way to quantify that, or what kind of insurance costs are we talking about?

Well, really, there are two different areas where we had kind of offsetting trends. On the professional liability side, we have been seeing a decrease in our insurance expense, really driven by some changes that we have put in place back in late 2004 in terms of the policies that we were able to secure for our nurses. And that change has resulted in long-term benefits in that our previous policy had a large layer of self-insurance. And, as time goes on, that tail is ebbing. Less and less incurred but not reported losses can be attributed to that tail. So that's helping us long term.

On the other side of the coin, we had health insurance expenses which have been rising, partially because last year we had an unusually good year in terms of claim activity. Again, we had a layer of self-insurance, [retention in] health insurance, so the claim activity has a significant impact on our insurance cost. What we're seeing this year is probably more a reversion back to the norm, as opposed to an unusually high expense. Of course, health insurance expenses are rising at low single -- high single, low double-digit rates nationally. And, of course, we're not immune to that.

Right. And then, just finally, on the cost side, I think, presumably, from the lawsuit settlement, you've also started saving a bit on the legal expense front. Have you quantified how much that might have translated in terms of savings?

It clearly helped our SG&A expenses, Michel, but I would prefer not to get into that level of detail on it.

And I wouldn't describe it as helping the third quarter, Michel. There's more of a -- we'll begin to see the benefit in the fourth quarter. And I would just -- on the order of basically $200,000.

Okay. Great. Thanks very much.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions.

Thank you, Marianne. Then, once again, we want to thank everyone for joining us this morning, and we'll look forward to updating you on our fourth quarter call in February. Take care.

This concludes today's conference call. Please disconnect your phone at this time.