Cross Country Healthcare Inc (CCRN) 2009 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare third quarter 2009 earnings conference call. At this time all participants will be in a listen-only mode.

After today's presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning and thank you for listening to our conference call was 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 2009 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, seeks, will, and variations of such words and similar expressions intended to identify 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 2009 as well as under the caption, Risk Factors, in our 10-K for the year ended December 31, 2008. Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and listeners are cautioned not to place undue reliance on these forward-looking statements which reflect management's opinions only as of this date. 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 good to morning to everyone listening in. As reported in our press release issued last evening, our revenue for the third quarter of 2009 was $130 million, down 27% from a year ago. Net income for the third quarter was just under $1 million, 84% below the year ago quarter.

Earnings per diluted share were $0.03 for the quarter as compared to $0.20 in the prior year quarter. Cash flow for the third quarter was strong at $19.5 million. Consistent with our comments made during our second quarter earnings release in August, I believe with conviction that we have seen the bottom for most of our businesses and that the third and fourth quarter 2009 results should represent the trough, especially for our Nurse and Allied Staffing segment.

As it relates to that segment specifically, orders for travel nurses are currently six times the level seen at the low point in demand during the March through May period and are above the year ago level for the first time in 2009. Our analysis of the increase in demand indicates that it is spread across numerous nursing specialties which suggests the increase is not just related to the H1N1 virus or normal seasonality, leading us to believe it should be sustainable. And the uptick in demand has resulted in third-quarter bookings for future assignments exceeding the average number of FTEs on assignment during the quarter by 12%.

However, due to the steep decline in booking activity we experienced in the first half of this year, the momentum in working field professionals resulted in the bottom being hit in September two months after our booking activity relative to our working nurse count turned positive. Thus while we have seen a 6% increase in working volume since mid-September, we expect working Nurse and Allied Staffing volumes to be roughly comparable for the third and fourth quarters as a whole.

It is important to remember that while we do not expect our staffing volume to parallel the rapid increase in demand, it does change the constraint on our growth from one of demand to one of supply. Our experience is that it takes an extended period of time to change the psychology of nurses to engage in travel staffing and thus we anticipate our improvement in staffing volumes will be much more gradual than the dramatic increase in demand we have experienced over the past several months, especially in this economic environment. So the primary challenge we face is a more familiar one to us, recruiting enough qualified nurses to meet increasing demand for contract nursing services.

Even though demand is now above the year ago level, we believe certain pressures that cause our Nurse and Allied Staffing volumes to decline over the past year still exist, including the dramatic aeration in the economy and the national labor market since the third quarter of 2008, which encouraged full and part-time staff nurses to work more hours directly for hospitals, thus reducing the hospital industry's reliance on the kind of outsourced labor we provide. Hospital admission trends have been weak for most of the past year, especially for elective surgeries, resulting in less need for contract nurses as well as for temporary physicians.

And most not-for-profit hospitals have seen material declines in the value of their endowment funds. While these factors are still at play, I believe we are beginning to see a reversal of the negative impact on our business of full and part-time nurses who significantly stepped up their engagement in the employment market to work more shifts directly for hospitals. As in past cycles, we believe this level of intensity is unsustainable over the long term and we are beginning to see staff nurses scale back the number of hours they offer to hospital employers.

And to a lesser extent, we believe the building incidence of the flu is increasing the demand for nurses, particularly in the emergency room and pediatric areas. So while the past year has seen a dramatic decline in the Nurse and Allied Staffing market, we believe we have survived the worst of it and are emerging with the strongest competitive position we have enjoyed in the last decade. We believe we have taken market share from our biggest competitors during the past year and we are poised for more of the same going forward.

The story is similar for our other businesses, weakness caused by ramification brought on by the capital markets meltdown a year ago with stabilization beginning to take shape. While our Physician Staffing segment will be off sequentially in the fourth quarter due in part to seasonal factors, we are also still feeling the impact of reduced demand for anesthesiologists, reflecting the decline in elective surgeries I mentioned earlier. This specialty has historically been the largest contributor to MDA's Locum Tenens business, so the slowdown in this area affects us disproportionately.

In our Clinical Trials Services business, we have recently seen improvement in the core staffing piece of this business, though drug safety monitoring, CRO activity and regulatory consulting remain weak for us. Nevertheless we are optimistic that the fourth quarter can represent the nadir for this business as well.

Finally, as a result of effective margin management, cost controls and a reduction of receivables, our strong cash flow has allowed us to delever our balance sheet by $75 million in the past 12 months. During the third quarter alone, we reduced our debt outstanding by $24 million. And with that, I would now like to turn the call over to Emil who will update you in more detail on our third quarter financial performance. 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 for the fourth quarter as we provided in the press release issued last evening. Revenue in the third quarter was $130 million, down 27% versus the prior year and 13% sequentially.

On an organic basis excluding MDA, revenue declined 47% year over year. Although we have seen key leading indicators turn positive in most of our businesses in the past few months, the third-quarter revenue decline reflects the lag effect of the extraordinarily weak demand we experienced during the first half of the year that Joe referred to earlier.

Our gross profit margin was 27.3%, up 70 basis points year over year. The margin improvement was due primarily to an expansion of the bill pay spread as well as lower housing expenses. SG&A expenses in the third quarter were down 14% over the prior year and down 12% sequentially, reflecting our efforts to reduce overhead expenses in the current business environment. Our SG&A expenses in the third quarter included approximately $300,000 in severance expenses and $600,000 in equity-based compensation.

Net interest expense was $1.7 million as compared to approximately $800,000 a year ago and $1.5 million in the second quarter. The year-over-year increase reflects the additional debt taken down to fund the MDA acquisition, partially offset by lower interest rates.

This quarter's interest expense included approximately $350,000 in non-cash loan fee amortization and approximately $200,000 related to the marked to market accounting for our interest rate hedge. The higher than anticipated rapid prepayment of our floating rate term debt, made possible by our very strong cash flow, has made a $20 million fixed rate hedge that we entered into last October ineffective under current accounting rules. Another $50 million fixed rate hedge that we entered into at the same time remains highly effective under the current accounting rules.

Depreciation and amortization expenses were up 21% from the prior year, reflecting the acquisition of MDA. The effective income tax rate was 57% as compared to 21% in the second quarter. The substantially higher tax rate was due to certain discrete one-time items which affected us unfavorably in the third quarter and favorably in the second quarter.

For the year as a whole, we expect the tax rate to be in the 41 to 43% range. Net income in the third quarter was just under $1 million or $0.03 per diluted share, $0.01 above the upper end of the guidance range we provided in August. The above average tax rate reduced the third-quarter EPS per diluted share by approximately $0.01.

Turning to the balance sheet, we ended the third quarter with $69 million of debt and $12 million of cash. Our leverage ratio as defined in our credit agreement was just under 1.7 to 1 at the end of the third quarter while under the 2.5 to 1 ratio allowed. Net of cash, our debt to total capital ratio, was 18% and the current ratio was 2.5 to 1 at the end of the third quarter. DSOs were 50 days, unchanged from the prior quarter and down four days from the prior year quarter.

We generated $19 million of cash from operating activities in the third quarter, partly due to a $15 million reduction in operating working capital. Year to date, our cash flow from operations is $70 million as compared to $51 million in all of 2008. Capital expenditures totaled approximately $500,000 in the third quarter.

The excess cash was used to repay another $24 million of debt during the quarter. Subsequent to the end of the third quarter, we made an additional $3 million optional prepayment on our term debt, made possible by our continued strong cash flow.

Let me drill down next into our four reporting segments. Revenue for the Nurse and Allied Staffing segment was $64.1 million, down 50% versus the prior year and 18% sequentially. We averaged 2234 field FTEs in the third quarter, down 48% versus the prior year and 19% sequentially.

The decline in staffing volume reflects the steep drop in booking activity we experienced in the first half of the year which we believe was caused by a combination of a weak national labor market, a reduction in elective surgeries and the impact of the liquidity crisis on our hospital clients. (inaudible) booked was down 49% versus the prior year.

Relative bookings, defined as net weeks booked as a percentage of the average number of FTEs on assignment, averaged 112% in the third quarter as compared to 75% in the first half of the year. When relative bookings average consistently over 100% as they have since the beginning of the third quarter, they are indicative of favorable sequential volume trends on a seasonally adjusted basis.

However, there's typically a couple of months lag due to the three-month contractual nature of our business and the normal lags between between the time an assignment is booked and the assignment start date. In fact, we have seen just such a sequential improvement in volume beginning in mid-September.

The average revenue per FTE per week that we reported for the third quarter declined 3.5% from the prior year due to a higher mix of per diem staffing, coupled with a change of mix within per diem staffing to lower skilled professionals. The average hourly bill rate in our travel nurse staffing business was essentially flat year-over-year.

Contribution income as defined in our press release was $6.2 million in the third quarter, down 56% from the prior year and 13% sequentially. Segment contribution margin was 9.7%, down 140 basis points from the prior year but up 50 basis points sequentially.

The year-over-year decrease in margin is due to negative operating leverage and higher insurance costs, partially offset by continued improvement in the bill pay spread and lower housing expenses. The sequential improvement in margin us due primarily to lower SG&A expenses.

Let me turn next to our Physician Staffing segment. Revenue was $39.6 million in the third quarter, down 3% sequentially. Physician Staffing days [filled] with down pro forma 13% from the prior year and 3% sequentially.

The recession, the stock market decline and the weakened housing market appear to have delayed the retirement plans of many older physicians as well as reduced the number of elective surgeries. This has resulted in a decrease in demand for temporary physicians, particularly in such specialties as anesthesiology and surgery.

Contribution income for the third quarter was $4 million, representing a 10% contribution margin, essentially unchanged from the prior quarter. Revenue in our clinical trial services segment was $16.4 million, down 35% from the prior year and 15% sequentially.

Contribution income was $1.7 million, down 56% from the prior year and 27% sequentially. The environment for clinical trial services has been weak during the year, stemming from a slowdown in clinical trials caused largely by economic factors and financial market conditions along with uncertainty concerning research and development activities following the recent wave of mergers and acquisitions in the pharmaceutical and biotechnology sectors.

However, we have recently seen an improvement in access to capital markets for biotechnology companies which we view as a positive sign for our business. We are seeing gradual improvement in the core clinical staffing components of this business which however is offset by continued weakness in our other service offerings due to project specific factors in our CRO activities and in drug safety monitoring.

Revenue for the Other Human Capital Management Services segment was $9.6 million, down 26% from the prior year and 7% sequentially. Contribution income was approximately $700,000, down 57% from the prior year but up 107% sequentially.

The year-over-year decline in contribution margin was due to a slowdown in new search activity in our retained physician search business which has the highest fixed cost structure of all of our businesses and thus suffers a disproportionate margin decline when revenue decreases. This brings me to our guidance for the fourth quarter of 2009.

The following statements are based on current management expectations. Such statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions or other business combinations, impairment charges or valuation allowances, material legal proceedings or significant repurchases of our common stock.

We project the average Nurse and Allied field FTE count to be in the 2,200 to 2,250 range in the fourth quarter, implying essentially flat revenue on a sequential basis for this segment. On a consolidated basis, revenue for the fourth quarter is expected to be in the $120 million to $123 million range, representing a 5 to 7% sequential decline.

This sequential decline is expected to be due to a combination of lower Physician Staffing revenue, partly attributable to seasonal factors and partly due to lower demand in certain specialties, as well as lower expected Clinical Trial Services revenue, due primarily to the completion of a major CRO project. We expect our gross profit margin to be in the 28 to 29% range in the fourth quarter and our EBITDA margin to be in the range from 4.5 to 5.5%.

Interest expense is projected to be in the $1.3 million to $1.4 million range. Based on these assumptions, EPS per diluted share is expected to be in the $0.02 to $0.04 range. Additionally, we expect our debt leverage ratio at the end of the year to be around 1.9 to 1, well below the 2.5 to 1 allowed under our credit agreement.

The preceding leverage ratio projection excludes the potentially favorable impact of cash flow iu from option exercises in the fourth quarter. During the fourth quarter, approximately $1.3 million options granted in 1999 will be expiring, out of which 198,000 are currently in the money.

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

(Operator Instructions) Jim Jansky, Stifel Nicolaus.

A couple of questions. First, when you look at the actual bookings going through the fourth quarter and into the first quarter, would you expect that Nurse and Allied could be up sequentially from December through March?

Yes, we can certainly expect that. If our booking trends continue, then we should expect a sequential improvement between Q4 and Q1.

What's very encouraging to us is that these booking trends that we've been experiencing since the beginning of the third quarter are not only continuing, but they appear to be improving. For the first five weeks of the fourth quarter, our average bookings were 119% of our average FTE count as compared to 112% during the third quarter. So our booking trends are in fact accelerating.

And then as you look at the backlog of either orders or possible work within the clinical trials, I guess orders within physician and clinical trials backlog, could we expect similar trends in the fourth quarter into the first quarter as well or is that a little bit more up in the air as we move throughout the next couple months?

As far as the Physician Staffing segment, we're seeing a stabilization in the order level and the demand level. So, at this point, it's probably a little too early for us to project out to Q1. As you know, we don't provide guidance beyond one quarter out. But the fact that order levels are stabilizing is an encouraging fact. And in the clinical trials staffing segment, we have seen some modest improvement in orders. So that's another favorable leading indicator.

Okay, and if you were to -- Joe, you talked about you wish you had more nurses available, you'd be able to fill more orders. Can you kind of rank order where you think -- what is holding back you filling orders? Is it still hospitals? They might put out an order and then might pull it? Is number one the lack of available nurses and the employment market? If you could just kind of give us an idea of how that ranks?

I think the most important factor, Jim, is really the psychology of the nurse that might be considering travel nursing. They're all full-time nurse. They want full-time hours. And while we always offer them a current contract, their risk is that after that three month contract is over, we won't have a commensurately attractive opportunity to follow up on that and they'll have to go back to the hospital they left and they will be at the bottom of the pecking order for the desirable shifts.

So it's a process. We went through a really horrendous period in the first half of this year with very low levels of demand where we really didn't have opportunities to keep our current nurses coming off contract working, even if they were willing to travel to where the jobs were. So that is some psychological damage that we're just going to have to heal and it's going to take time.

As Emil just indicated, we are encouraged that while it's not paralleling the multifold increase in order levels that we have seen over the last couple of months, we are seeing booking trends continue. So we are having some success encouraging more nurses to come back into the travel nursing market.

I think what's particularly encouraging is a lot of the activity we are seeing is what we call pass working nurses, nurses that have worked for us in the past but are not currently working for us or booked on an assignment calling us because of their level of interest just because apparently they are hearing that there's more attractive jobs available to them.

Okay, great. Last question is you said that there was definitely -- there was numerous nursing specialties and the increase in booking and order activity was not just associated with the H1N1 flu. What percent would you associate with the H1N1, lower than 25%?

It's a great question, Jim. Internally we have a very healthy debate. When you are talking to the client, all they are talking about is H1N1. But when you analyze where the actual orders are, it suggests the majority of the demand is not related to H1N1, but it's really just kind of an across-the-board increase in demand levels.

So I don't have any empirical evidence to give you. The empirical evidence suggests the majority is not H1N1, but the anecdotal evidence would suggest it's certainly half of what we are seeing in this dramatically increasing demand environment.

Jim, just to try to give you a little bit of a statistical backup to this, if H1N1 were the main reason behind the increase in demand, then you would expect most of the increase in orders to be concentrated in certain specialties such as ER or pediatrics or pediatric ICU. But in reality, the increase in demand as Joe indicated is across the board in most specialties.

We did a correlation analysis of our demand distribution this year compared to the same time last year and two years ago and found a remarkably high 87% correlation with both years. So this is telling us that this year's demand patterns are much more similar to prior year than they are different and suggest that the improvement in demand is sustainable.

And as Joe indicated, this week we reached a major milestone and the number of open orders was up year over year for the first time in 2009. So as Joe said, probably the most important impact of the H1N1 virus was an indirect psychological one. The fear of a pandemic appears to have created a favorable buying environment for supplemental nurses staffing among many of our hospital clients.

Tobey Sommer, Suntrust.

Wanted to turn to gross margins which have been very resilient even in the face of a demand decline and get your thoughts on how you may pull that lever as you shift from a demand constrained environment to now potentially in future quarters here a supply constrained environment. Thank you.

That's a very fair question, Tobey. We have been during this really horrific demand environment in the first half, happily in a favorable direct cost environment that for the first time in more than a decade, housing costs are down year-over-year per hour as we house our nurses on contract. There was very little wage pressure because the competition for jobs was so high.

The only real direct cost pressure we saw was in the health insurance area. As we move forward, by far and away the biggest cost that we have is the wage that we pay our nurse and I think as we get into a more competitive environment for the services of the nurse, you could expect to see more wage pressure.

As Emil indicated, our bill pay spread has been improving for most of the last year. So we believe we have the opportunity to give some of that to the nurse, but only if at the end of the day we're better off with a material increase in volume across the board.

Tobey, if you kind of look at it on a consolidated basis, if Nursing and Allied segment becomes a larger percentage of our total mix, then you would expect a decrease in the consolidated gross profit margin, simply because this segment has the lowest average gross profit margin of all of our business segments.

One other thing, Tobey. We've essentially have turned the business on its head in a very short period. We have gone from a market characterized by inadequate demand for nursing service to one where we have a significant surplus of open orders vis a vis the nurses we have coming off contract.

So it would actually not surprise me to see bill rates start to move favorably as we move forward, assuming this increase in demand is sustainable. So it would give us more cushion to improve the offering to our nurse without significantly impacting the margin that we are currently able to achieve.

Right, thank you. That was very helpful color. And then kind of looking at the physician business, I wanted to get a sense for kind of geographically if you are seeing anything different and also maybe if you could describe not just in physician but also in nursing how this last year and a half or so or two years has impacted the competitive environment and whether there are any substantial changes that impact your outlook as you look out in the future.

We don't see material change geographically. We don't think that is the driver of any pressure that the business is currently seeing. It's really very specific to specialties across the country. As we indicated, it's largely anesthesiology, a little bit radiology driving that softness.

Competitively, I haven't heard of any significant change. There's a handful of significant scale competitors that we see every day. Those competitors are still actively in the market and we don't expect that to change going forward.

Again, this business held up much better than our nursing business over the past 12 months. It appears to be weakening directionally from the second to the third and the third to the fourth somewhat. But as Emil indicated, the order levels today are stabilizing which gives us encouragement as we enter 2010, we will be in a better sequential position.

Thanks and then last question and I'll get back in the queue. From a G&A standpoint, any particular costs that during this downturn you have opted to cut that would kind of automatically be restored in a better kind of growth environment? Anything that you [discretionarily] just kind of cut that would flow through in future quarters? Thanks.

The biggest expense item would be advertising which you immediately ramp up when you are in a much more aggressive recruitment mode. We believe we have more than an adequate number of recruitment capacity given the current headcount.

We think our highest producing recruiters historically are at all-time low levels of production and they would welcome an opportunity to rapidly grow their business and have the wherewithal and the capacity to do that efficiently. So we think we actually have terrific operating leverage as we move forward with the exception of advertising spending which we do intend to ramp up. We think we have a terrific cost structure that we will be able to leverage very efficiently going forward.

Well I guess you intrigued me with that response and I one follow-up and I'll get back in the queue. Is the incremental margin different and improved because of the downturn over the last 12 months and cuts you have taken to the expense structure and maybe just the significant capacity of the recruiters that you have that maybe kind of -- they might be operating at a lower capacity utilization than in prior downturns?

I think that's a fair comment. Emil, this is really your area of expertise but I --

We always -- we have been attributing our increased SG&A expense as a percentage of revenue due to negative operating leverage. And of course the flip side is equally true, particularly since we have what I believe, more than adequate capacity.

So in the short-term as Joe indicated, the most immediate area where we will be increasing SG&A would be in sourcing related activities. But the bulk of our expenses which are personnel related do not have to increase anywhere near the rate at which volume is projected -- is hopefully will be increasing.

Jeff Silber, BMO Capital Markets.

Joe, in your prepared remarks, you talked about the fact that you think that you're taking market share in the Nurse Allied segment from some of your larger competitors. What do you attribute that to?

I would attribute it most to the effectiveness and the commitment of our teams to provide terrific service. Because when you look at where the demand has been disproportionately over the last six months, it turned up first in California where historically we have not been the -- a market where we've not had our best market share experience.

So it's actually a little bit surprising. I think to some degree, it is a reflection of what we think is the industry-leading VMS, vendor managed solution, that we can offer to large users of travel nursing services which allowed us to take significant share at some of the biggest users during this very week period. So it's a function of execution and strategy playing out in a very difficult environment.

I think if you look at -- it's not just nursing. We also think we're taking market share in the physician space. We think we've executed well. It's kind of [appeared] victory because the size of the pie is so much smaller. But we believe we are entering a period where the market is going to grow rapidly and we think we're very well positioned to take disproportionate share in an improving environment.

Okay, that's helpful. My question was going to be about if there was a difference in the end market but I think you answered that as well. Just circling back to gross margins and just focusing on the near term, it looks like you are guiding for a sizable sequential increase in the fourth quarter. Can you just give us the thoughts behind that?

Well there were some certain costs in the third quarter where they were one-time in nature that were above the gross profit line. In particular, workers comp expense had an unfavorable adjustment that was one-time in nature of about $300,000. So that's a piece of it. But generally we are seeing -- we're expecting continuation of the trend that we have been experiencing for the last year or so in terms of the bill pay spread widening.

We're also expecting a lower tax rate in the fourth quarter, Jeff.

Lower tax rate in terms of employment taxes?

No, that would be below the gross profit. That would be the income tax.

We had someone one-time costs in the tax area that won't repeat in the fourth quarter.

I'm sorry. So you're talking about income tax line or you're talking about the cost of services line?

I thought your question was on the gross profit margin?

It was on the gross profit.

Sorry, Jeff (multiple speakers)

But that's good to know as well.

Let me [uninsinuate] myself from the (multiple speakers)

So I have to (inaudible) these questions. Just a couple more numbers questions. You mentioned the severance charge in the third quarter. Are we going to be seeing any more of that in the fourth quarter?

We don't expect any additional severance charges in the fourth quarter.

Okay, great. And then also the clinical trial, you mentioned that CRO project that would be ending. Can you give us an order of magnitude how large is that project?

At the peak, our clinical trials business did between 15 and $18 million annually. So essentially in the fourth quarter, we have zero CRO revenue which is -- the good news is it can't get any lower and has only the prospect to go higher. The majority of the revenue we achieve in our clinical trials business is driven by staffing activity and we are pleased that that that staffing activity is starting to show sequential improvement.

Was there any CRO revenue in the third quarter?

Very small amount. The trial ended in June but there was a tail of activity I believe into August.

One final one. In terms of the debt payments, you mentioned the one in the fourth quarter. Are there any restrictions on debt prepayments?

No, we don't have any restrictions. Paradoxically as we made these debt repayments, we have kind of a one-time hits, both to our loan amortization expense which is due to the constant interest rate method where you kind of have to book a catchup amortization every time you prepay some term debt, as well as the marked to market accounting. But this is sort of a good news -- kind of a high-class problem. Much rather be in a position where I can prepay debt than to worry about the non-cash P&L hits.

Sure, absolutely. Okay, great. I'll jump back in the queue. Thanks so much.

(Operator Instructions) Tobey Sommer.

In terms of the I guess vendor managed solutions, I was wondering if you could give us a comment on that. I guess it's been helpful. During the last year, you have been able to increase your fill rate and certainly I would imagine that volume performance in those accounts has exceeded the overall book of business.

How might we think about the impact of those accounts on the business going forward and do you have any strategic thoughts about what proportion of revenue you may desire to generate from those on kind of a longer-term basis?

We think our reliance on the subcontractors who help us with that business will likely increase, assuming this increase in demand is sustainable or even continues to grow. That it is -- historically we would fill 80% of the jobs. Today the fill rate -- the Cross Country fill rate is closer to 96, 97%.

So we would expect it to migrate to a lower level and increases the utilization of subcontractors, but only if there is a significant other opportunity that we can offer to our nurses. Again the competition for the nursing -- the nurse's services becomes the critical obstacle going forward.

We think strategically that the vendor management market, the likelihood that our significant customers will continue to look at this as a viable solution to improve the efficiency with which they on-board temporary clinical staff is likely to continue. We think we have really a terrific track record with our clients.

We have great references when we get involved in a bake-off for a vendor manager and we see no slowdown. And I really at this point have no cap. There's only so many we can take on at any given time. I mean it is a complicated process to put yourself in a position to be in a successful vendor manager. So that's the obstacle.

Not ultimately how big a percentage of our total business it can be. We can bring on two to three a quarter and even that is pressing it. So we really focus our interest on the largest users of temporary clinical staff.

Joe, just looking at that as a concept, you can't have a whole lot of those arrangements in the same marketplace. So how should we think about the Company's penetration of different geographies? In other words, is there a long list of cities in areas still to go?

Today, our VMS and our Cross Country staffing business is well over 30% -- closer to 35% of our current working counts. But it's a very small number of total VMS relationships. There's a large number of facilities, typically multi-hospital systems. They're all not-for-profit systems, largely not-for-profit systems.

So, we think we have many geographic areas that are untapped and unpenetrated by this service offering for us. So certainly in the near term over the next one to two year horizon, our market saturation will not be an impediment to growing this business for us.

And then maybe asking a farther question, a little further field. The balance sheet -- the debt has been winnowed away very successfully with the cash flow. And just thinking about the business getting better here over the next couple of quarters, if this demand holds up, what are you seeing out there in terms of M&A opportunities and how would you describe the Company's appetite for that kind of activity at this stage?

Well I would say our number one priority continues to be on delevering the balance sheet because our current credit agreement we believe is very favorable relative to where the current market is, the current credit market is. Having said that, we think there are and are likely to be compelling opportunities that are very accretive in nature, even if we had to reset our debt to the higher current current credit market conditions.

So I wouldn't rule it out as a possibility. I think it's increasingly likely as we go forward. But a we have said consistently over the last year, we have been laser focused on delevering our balance sheet to decrease any potential for a credit agreement violation. We think we've been very successful at doing that and it now puts us in a very attractive position to be a consolidator in what we hope and believe to be a rapidly improving environment.

Thank you and one last question. I was hoping you could remind us about the typical seasonality -- and I know this isn't necessarily a typical market yet -- between fourth quarter and first. Because in years past, expectations can seem to be a little bit out of line with what the typical seasonality is. Thanks.

I will let Emil speak to the margins seasonally. The volumes seasonally, we would expect those in our Nurse and Allied Staffing business in particular to be the peak periods. You have a buildup in the seasonal markets of Florida and Arizona.

Those are still relatively weak markets but we have seen more activity, much more activity this year than we did last year. So the volume we would expect to be flat. But at this point without providing first-quarter guidance, we are on an encouraging trend as Emil said earlier. I will let Emil walk you through the margin impact sequentially that we typically get from a reset of the payroll taxes.

That is a primary margin impact. As we reset the payroll taxes at the beginning of the year, we generally have lower gross profit margins of a couple hundred basis points. The other impact is the fact that there are two less billing days in the first quarter as compared to the fourth quarter, but our housing expenses are essentially the same. So the housing cost is spread over fewer hours of work.

AJ Rice, Soleil Securities.

It's actually Chriss Rigg for AJ. I jumped on here a little bit late, so forgive me if any of these questions have been asked. But I guess obviously the cash flow throughout the course of the year has been very strong. And as we are sort of seeing a bottoming out -- it appears we're seeing a bottoming out in the business either in the fourth quarter or somewhere in the first quarter.

As the revenue begins to ramp, I guess I'm wondering where do you think the DSOs will bottom out? At what point or is the right point where the revenues begin to ramp up that you start to see a working capital drag from the increase in receivables? I'm just wondering about how you guys are thinking about internally, whether at some point you would actually see cash flow contract for a bit or how should we think about that?

You are absolutely right. A big driver of the cash flow picture has been the free-up of receivables. If we do experience a rapid ramp-up in revenue, the slope of that ramp-up is going to essentially determine whether -- how much incremental working capital we will be using up in the short term.

As things begin to normalize, the higher EBITDA level helps you in your cash flow. But while ramping up, it actually hurts you in the short term. We have -- really we do not offer a long-term cash flow guidance because there's a tremendous amount of volatility in trying to anticipate changes in working capital. But the one constant that we do have is the tax benefit that we get from the amortization of good will, which on an annualized basis adds about $0.30 per share to our cash flow.

Right, right. I guess well asked another way, you ended the quarter with about $70 million of receivables. Where do you think that that will ultimately bottom out, assuming business has stabilized at current levels?

Well I guess the best way to look at that is just to kind of look at it in terms of days outstanding. We are at 50 days today. That is -- by historical standards, it is a low end of our normal range. I wouldn't be surprised if that number increases by a couple of days as we go forward. But I certainly don't expect it to rise dramatically, but where we are is at the low end of the range.

Answered differently, and again without providing guidance, when we look forward, even assuming an improvement in revenues and thus a buildup of receivables, we are still anticipating being cash positive. I've been doing this 18 years and there have been very few quarters where we didn't generate positive cash irrespective of the market environment.

I guess I just want make sure I understood this and it sounds like -- well you guys answered this pretty clearly but just to make sure. So in terms of the cost you've taken out of the business, obviously we have seen a pretty significant cost reduction in the SG&A expenses.

You haven't done anything structurally that at least over the short term -- and again, this is sort of an optimistic scenario. But if you did see your actual orders come in and really spike up, there's nothing that you have done structurally that would prohibit the growth of the business. Is that correct?

This question was asked in a different way earlier. Other than advertising expense, which we have reduced significantly in the past year, we would anticipate ramping advertising spending up to improve our recruitment of nurses in what is now a supply constrained environment. Other than that, as Emil answered before, our salary expense is our largest expense from an SG&A standpoint and we don't see that we have to add significantly under any reasonable scenario as the business builds to accommodate the increase in field headcount.

My last question. Are there any earnout payments left with regard to the MDNA transaction?

Yes, there's one more earnnot left that is based on -- that will be based on the actual performance of MDNA in 2009. We currently expect that earnout payment to be approximately $10 million and it would be payable in the second quarter of 2010.

And that relates to EBITDA, revenues or how --

Yes, it relates to EBITDA.

Thank you. At this time I have no further questions in the queue.

In that case, we will thank everyone for listening and we look forward to updating you on our fourth quarter results next year. Thanks again.