Cross Country Healthcare Inc (CCRN) 2012 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare third-quarter 2012 earnings conference call. All participants are on a listen-only mode until the question-and-answer session of today's conference.

(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, 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 2012 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, believes, appears, 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 2012, as well as under the caption, Risk Factors, in our 10-K for the year ended December 31, 2011, and our other SEC filings.

Although we believe that these statements are based upon reasonable assumptions, 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.

Also, our remarks during this teleconference reference non-GAAP financial measures. Such non-GAAP financial measures are provided as additional information, and should not be considered substitutes for, or superior to, financial measures calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release.

And now I will turn the call over to Joe.

Thank you, Howard, and thank to you everyone listening in for your interest in Cross Country. As reported in our press release issued last evening, our revenue for the third quarter of 2012 was $129 million, down 2% from the prior year, but up 2% from the prior quarter. We had a net loss in the third quarter of $17.6 million or $0.57 per diluted share, which includes non-cash goodwill and trademark impairment charges related entirely to our clinical trial services segment. Excluding these impairment charges, our adjusted net loss was $0.02 per diluted share. This compares to net income of $0.06 per diluted share in the year-ago quarter. Cash flow from operations for the third quarter was $1.9 million.

While our revenue was in line with our expectations, our earnings performance was below expectations, as we continue to face unusually severe direct cost pressure, primarily from insurance claims, bill pay spread compression, and housing costs in our nurse and allied staffing business in an operating environment that, until recently, has provided little opportunity to raise bill rates. This is especially true of our nurse and allied staffing, and our clinical trial services business segments, where, on a combined basis, nearly all of our field professionals are W-2 employees of the Company.

In our travel nurse and allied staffing segment, third-quarter costs on a combined hourly basis for health and workers' compensation insurance were up 87% from a year ago. In our clinical trial services segment, health insurance expense is running 151% ahead of a year ago. Keep in mind that in the past year, our Company has made only those enhancements to our health insurance offering that were required by law. Over time, we expect the extraordinary unfavorable run of large claims to revert to a more normal trend line.

As part of our overall plans to improve operating results in our nurse and allied staffing segment, we are engaged in a very focused campaign to give our hospital clients greater transparency to our costs, so they can make an informed choice as to whether or not to give us the ability to maintain a competitive pay package by increasing bill rates. Recently, this effort has been yielding encouraging results.

Open orders in our contract nursing business are at a multi-year high, and nearly double the level of demand seen earlier this year. Furthermore, our book-to-bill ratio for contract nurse and allied professionals averaged 108% throughout the third quarter. Unlike last year, where demand seemed to falter as hospitals got deeper into their year-end budget discussions, it does not appear that a similar dynamic will take shape this year. Revenue in our nurse and allied business was in line with expectations in the third quarter, as several large EMR projects, and the ongoing implementation of recently awarded MSP accounts, began as anticipated late in the quarter. We expect that the benefit from these activities and generally stronger momentum in demand in this segment will result in rising sequential revenue in the fourth quarter.

Our physician staffing business had a strong third quarter, with revenues up 6% both year over year and sequentially, the latter due in part to seasonal factors. While we are seeing some competitor pressure on bill pay spreads in this business, the revenue growth did result in improved contribution income for this segment. It is worth noting that our locum physicians are independent contractors who do not receive health benefits from our Company. Thus, this business segment is not suffering margin pressure from higher insurance and payroll taxes as our W-2-based staffing businesses are.

We experienced lower-than-expected performance in our other human capital management services segment. This decline is attributable to a number of factors, but is largely due to a continuing decrease in average seminar attendance in our education and training business. Our retained search business also came into the quarter with a weak pipeline of searches, but saw renewed momentum in sales as the quarter went on. We are optimistic regarding improved performance from our search business in the fourth quarter.

Clearly we have much work to do to restore a normal level of profitability to our Company. These efforts are ongoing, and I have every confidence in our experienced team's ability to execute effectively, especially as the market environment continues to move in a more positive direction.

And with that, I would 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 that we provided in the press release issued last evening. Revenue in the third quarter was $129 million, down 2% from the prior year due to low- to mid-single-digit revenue declines in our nurse and allied staffing, and other human capital management services segments, partially offset by mid-single-digit revenue growth in our physician staffing segment. Sequentially, revenue was up 2% due to growth in our nurse and allied, and our physician staffing segments, partially offset by declines in our clinical trial services and other human capital management segments.

Our gross profit margin was 24.6%, down 260 basis points from the prior year. Higher insurance costs reduced our third-quarter gross profit margin by approximately 110 basis points year over year due primarily to higher field health insurance claims, as well as a favorable workers' compensation accrual adjustment in the prior-year quarter. The bill pay spread in our nurse and allied staffing business contracted due to changes in geographic mix that typically would have been offset by a corresponding reduction in housing expenses, which did not occur due to inflation in apartment rental costs nationally. Also contributing to the year-over-year margin decrease was a contraction in the bill pay spread within our physician staffing and clinical trial services segments due in part to changes in the business mix.

Sequentially, the gross profit margin was down 60 basis points, due primarily to a contraction in the bill pay spread in our clinical trial services business, higher housing costs as a percentage of consolidated revenue, and the change in business mix with our other human capital management services segment representing a smaller portion of the total-company revenue.

SG&A for the quarter was $29.6 million, up $525,000 or 2% from the prior year due to higher state non-income-tax expenses, and higher direct mail costs in our education and training business, but it was down $1.2 million or 4% sequentially. The sequential decrease is due to a combination of cost reduction measures that we implemented in the third quarter, and an approximately $400,000 non-income-tax accrual booked in the second quarter that related to prior tax years. SG&A expenses in the third quarter included approximately $600,000 in equity-based compensation expenses, as compared to approximately $800,000 in the prior-year quarter.

Adjusted EBITDA margin, as defined in our press release, was 2% as compared to 5.6% in the prior-year quarter and 1.2% in the second quarter. Interest expense of $424,000 was down 42% from the prior-year quarter and 27% sequentially, as we further de-levered our balance sheet.

During the third quarter, we entered into an agreement to modify the maximum leverage ratio to 2.75 to 1, and the minimum fixed charge ratio to 1.25 to 1, while limiting our new revolver credit borrowings to $3 million. These credit agreement modifications are in effect through approximately March 12, 2013. During the fourth quarter, we expect to replace our existing debt facility with an asset-based lending facility, which we believe is better suited for our current needs and would result in significant interest expense savings.

Net loss in the third quarter was $17.6 million or $0.57 per diluted share, which included estimated non-cash goodwill and trademark impairment charges of $23.5 million pretax related to our clinical trial services business. As discussed in our 2011 10-K and second-quarter 10-Q, we had previously determined that we had a small margin between book value and fair market value in several of our reporting segments. During the third quarter, we concluded that the book value of our clinical trial services segment exceeded its fair market value, resulting in the aforementioned impairment charges. The impairments were due to market developments which became more apparent in the third quarter, and the year-over-year reduction in the contribution margin for this segment, which reduced our expected future results used for goodwill impairment testing. We have not yet completed our Step 2 impairment analysis, but plan to finalize it in the fourth quarter of 2012.

Adjusted net loss excluding the impairment charges, a non-GAAP measure, was $0.02 per diluted share. Approximately $0.01 of this is attributable to debt refinancing costs. The effective tax rate was 28% in the current quarter, as compared to 51% in the prior-year quarter. The lower effective tax rate in the current quarter is due to a lower tax benefit resulting from the combined impact of the non-deductibility of certain impairment charges and per diem expenses, as well as foreign taxes and state minimum taxes. As a reminder, we currently have deferred tax assets which includes federal net operating loss carry-forwards of approximately $22.5 million, which, based on current projections, we expect to fully utilize over the coming years.

Turning to the balance sheet, we ended the quarter with $34.5 million of debt and $4.8 million of cash and cash equivalents. Net of cash, our debt-to-total-capital ratio was 11.7%, and the current ratio was 1.6 to 1. Days sales outstanding was 54 days, up 1 day from the prior quarter, and up 2 days from the prior year. As defined in our credit agreement, our leverage ratio was 2.55 to 1, and our fixed charge coverage ratio was 1.51 to 1.

We generated $1.9 million of cash from operating activities in the third quarter. The excess operating cash, supplemented with cash on the balance sheet, was used to repay a net of $1.7 million of debt during the quarter and to fund approximately $400,000 of capital expenditures.

Let me drill down next into our four reporting segments. We averaged 2,450 field FTEs in the third quarter, down 5% versus the prior year, but up 1% from the prior quarter in our nurse and allied staffing segment. Segment revenue in the third quarter was $69.8 million, down 5% versus the prior year, but up 3% sequentially. Revenue per FTE per day was down 0.6% from the prior year due to lower average hours worked per FTE. On a sequential basis, the average revenue per FTE per day was up 1% due to higher average bill rates.

The book-to-bill ratio averaged 108% in the third quarter. Open orders for contract nurse positions postings are currently up 93% from the low point in mid-February. Segment contribution income as defined in our press release was $3 million in the third quarter, representing a 4.2% contribution margin, down 440 basis points from the prior year, but up 90 basis points sequentially. The margin decline was due to a combination of higher insurance costs, reflecting unusually high field health claim activity in the quarter, as well as a favorable accrual adjustment for Workers' Compensation in the prior-year quarter, higher housing costs, a decrease in the bill pay spread due to changes in geographic mix, and negative operating leverage. Normally we would expect to see an offset to the impact of geographic mix in the bill pay spread from lower housing expenses. But this is not the case currently due to the strong headwind from rising apartment rental costs.

Let me turn next to our physician staffing segment. Revenue was $32.7 million in the third quarter, up 6% from both the prior year and the prior quarter, primarily due to higher bill rates, as well as a sequential benefit of seasonality. Physician staffing days filled were down 1% from the prior year, but up 6% sequentially. The year-over-year increase in revenue was driven by higher average revenue per day filled, due primarily to higher bill rates and secondarily to changes in specialty mix, in particular higher volume from emergency room physicians. Segment contribution income for the third quarter was $3.1 million, representing a 9.5% contribution margin, unchanged from the prior year and up 80 basis points sequentially. The sequential margin increase is due to improved operating leverage.

Revenue in our clinical trial services segment in the third quarter was $16.9 million, up 1% from the prior year, but down 3% sequentially, partly due to one less billable day in the current quarter. Contract staffing and functional outsourcing accounted for 93% of segment revenue in the third quarter. Contribution income was $1.6 million, down 30 basis points from the prior year, but up 1% sequentially -- I'm sorry, down 30% from the prior year, but up 1% sequentially. The contribution income margin was 9.3% in the third quarter, a decrease of 410 basis points from the prior-year quarter due primarily to higher field compensation and payroll tax expenses, as well as significantly higher health insurance expenses for field staff. Sequentially, contribution income margin improved 30 basis points due to lower SG&A expenses, partially offset by higher field health insurance costs.

Revenue for the other human capital management services segment in the third quarter was $9.8 million, down 4% from the prior year due to a combination of lower seminar attendance in our education and training business, and lower retainer revenue in our search business. On a sequential basis, segment revenue was down 5% due to lower seminar attendance. Contribution income margin was essentially breakeven in the third quarter.

This brings me to our guidance for the fourth quarter. 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, debt issuance costs, or any material legal proceedings.

We project the average nurse and allied staffing field FTE count to be in the 2,500 to 2,550 range in the fourth quarter. Consolidated revenue for the fourth quarter is expected to be in the $126 million to $129 million range, with an expected revenue increase in our nurse and allied staffing segment offset by a seasonal decrease in our physician staffing segment. We expect our gross profit margin to be in the 24.5% to 25% range, and adjusted EBITDA margin to be in the 1% to 2% range. Net interest expense is expected to be approximately $400,000 in the fourth quarter. Based on these assumptions, our loss per diluted share is expected to be in the $0.01 to $0.03 range. This EPS guidance range is based on an estimated effective tax rate in the 25% to 30% range in the fourth quarter.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Mr. Sommer with SunTrust.

I was wondering if you could give some color on the cost pressures that you're seeing and whether you think that's an industry phenomenon or for some reason may be impacting Cross Country a bit more. And if the latter happens to be true, why is that?

That's a great question, Tobey. There's really not a lot of variables, particularly in our nurse and allied staffing businesses historically we and our largest competitor have very similar profiles. Housing, which is an issue for us, we are running roughly in that 10% range, up year-over-year and it's not a market-specific phenomenon. It's a nationwide phenomenon, some markets up more than other markets but pretty much all the markets up across the country. It's a much tighter rental market. When I listen to our competitor they indicated they are seeing inflation, roughly half that level and are able to offset that with greater utilization of their housing. Our utilization is 96%. It's historically high. And so there doesn't-- not a really a lot of room. Of all the apartments we have opened across the country, all the days that we have them open, 96% of the time we have a nurse occupying that housing and generating billable revenues for us. So it's actually a very high utilization even on an historical look back.

So I'm a little puzzled by that and again it can vary by market but pretty much across the country. So we just got to give them credit for managing that particular expense. The other major areas of cost inflation year-over-year for us are in health insurance and Workers' Comp. Health insurance probably deserves a little discussion. Both companies, as almost every company in America did, applied for a waiver of the implications-- the immediate impact of health care reform after it was passed. Both companies had almost identical health insurance offerings. The key component of those offerings was a $100,000 cap.

We're bringing on nurses oftentimes for no more than three months. We certainly never look to have unlimited health expense exposure for those professionals. The differences in our plan were really pretty de minimis in the context of the current impact that we're feeling it just seems almost preposterous. Again, this is my understanding of the situation at that time. So they were granted a waiver. We were not granted a waiver. So our-- the biggest impact today is that our cap went from $100,000 in our standard offering to today well over a $1 million, $1.25 million. So we have to-- as a self-insured provider of healthcare, we went out and bought a cap on our health care exposure of $300,000. Historically, when we-- over a very long period, we very few claims that approach that level. So we actually didn't expect to pierce it, but it was just a relatively low cost way to cap our exposure to healthcare.

In the current environment, we have roughly 25 claims that are in excess of $25,000 in a month. Many are in the-- are actually-- we have several that have already pierced our $300,000 cap, so it's just an unprecedented run of healthcare claims for the Company. And unfortunately our situation, vis-a-vis our competitor, are not comparable. They've been able to maintain a $100,000 cap. We unfortunately were not able to and it is currently hitting us pretty hard. The year-over-year cost of healthcare is in excess of a $1 million in the quarter for our field employees. The other area is Workers' Comp, a year ago we actually had a favorable adjustment, this year our claims experience is running higher than historically normal so that when you combine the two that also is up very significantly year-over-year. And that's given-- that's just our experience. It's the experience of claims of our population, vis-a-vis their population.

And the other major area that we're seeing is payroll taxes, which are running much higher for this point in the year. Typically payroll tax rates decline as you get past the first quarter. We're actually paying higher payroll tax expense than we were in the first quarter of 2012 as states replenish their unemployment funds. I would expect any employer-- any national employers experiencing similar dynamics, and obviously it also varies by state but it is not limited to any one specific state that we're-- that's driving this year-over-year cost for us. The last area is we suffered in our nurse and allied business modest bill pay compression. When we look at it, we believe it's almost entirely due to the shift in geographic mix of our business. We have a lot less people working in New York City than we did a year ago. When we look at our revenue per day year-over-year it's off less than 1%, about 0.6%. Theirs is up roughly 1%. We think both our decline in New York City was their gain in New York City so we don't think they're getting dramatically higher bill rates than us.

So, Tobey, to be honest a little bit of a puzzle for us. Some of it I can explain. Not all of it I can explain. I don't-- I do anticipate actuaries would look at this and say eventually your experience will revert to a more normal trend line. We anticipated that to begin occurring in the third quarter. Frankly it didn't. It actually got worse than the terrible experience we saw in the second quarter on claims. That doesn't mean it is going to be like that forever. We can't-- certainly can't say with assurance that it will be better but it is highly probable we will not continue this very unfavorable run that we've been experiencing. Emil, I don't know if you want to add anything.

I think you covered all of it. I think on the insurance side, it doesn't only affect our field health insurance but also our corporate employees health insurance. It's a different plan but it also has a cap at $250,000. We're continuing to experience pressure on that side as well.

Thank you very much. It was helpful. I had two other questions. One, what do forward-looking indicators such as newly signed MSP contracts and the ability of those to ramp look like, and does your guidance assume that these actuarially unusual claims levels persist in the fourth quarter or that they start to revert to the mean?

Two questions. I'll answer the first part, Tobey. We have brought on a couple a more fairly significant MSP clients in the $5 million to $10 million range of utilization in the third quarter. Very attractive contracts. They're not high margin but they're certainly what we would consider average margin for our book of MSP business. When you look at our book of MSP business it's in line with our overall margins for the Company, maybe even a little above in totality. So we feel good about the momentum of the business. When we look forward on the booked business and the margin of that business, it is growing as we go forward. We've taken a number of steps that we think will have significant impact. We have a very focused, as I said in my prepared comments, effort underway with our clients just to get them to understand, just to lay out for them what our situation is, and if they want us to continue doing a very good job bringing high-quality nurses to their facilities, something has to give. And we've had some very encouraging results from that exercise but it is really -- it's an account by account exercise. So I feel good directionally. Obviously our fourth quarter guidance is what it is and I think Emil will give you some insight into that. We do expect to return to a more attractive level of margins in -- beginning in first quarter of 2013. Every month we expect our situation to improve given the actions that we're taking, but it is just going to be a process to get from here to there. Emile?

And more specifically, the assumptions in our guidance incorporate a normalized Workers' Compensation expense. We believe that in the Workers' Comp area we are going to be back to our normal claims pattern. We had a number of claims with high severity that are behind us at this point. So I don't really expect Worker's Comp to be an issue in the fourth quarter. Health insurance, we still expect a high level of claims. At this point the covered employees are past their deductible so generally you do not expect moderation at this point from that side of the equation. But when the new policy year starts, we kind of start with a fresh slate. In the housing area, we do expect continued effects of the inflation that we are seeing in the rental markets (inaudible) to our guidance.

Tobey, just one more thing. It's much farther out. But now that the election has been decided and it looks like health care reform is here to stay, we do have to have get through 2013 and the caps do increase in 2013. Eventually in 2014 it would be our intention to cap our exposure to healthcare by putting our nurses on the state exchanges. We think that will be a very attractive option, particularly vis-a-vis our current experience.

AJ Rice with UBS.

I had a couple of questions. If could I ask maybe just first of all following up on the previous line of questioning, so you've got a couple of $5 million to $10 million MSP contracts that are starting to ramp up in third quarter. I'm trying to make sure I understand, how does that relate-- I know last quarter we talked about $60 million in potential MSP business in the pipeline. Is that still in the pipeline, or did anything happen to that?

AJ, let me clarify. The new accounts aren't going to ramp up in the third quarter. They're really going to be first-quarter 2013 opportunities for us. You get the contract, and then you go through a process of on-boarding them so we wouldn't expect it -- get revenue from those. The $60 million that we talked about, all those contracts are in place. The largest of the contracts of the MSPs in that $60 million number has taken -- it's a very large system that has taken far longer than we anticipated. It was not a system that had an MSP in place. So we're doing a lot of the heavy lifting. It's a client that we're kind of teaching how to do this.

It's a process and-- it's a-- in a more onerous process. They had a sense of urgency when we began talking to them. We were informed we had won the engagement in the second quarter of 2012 that they had EMR implementation scheduled. Those have-- for a variety of reasons, those have been pushed back so the sense of urgency was significantly reduced because of the timelines of those projects. It's actually a good news story for us, the probability of us getting the benefit of those EMR projects is higher as we -- the further they get pushed out into 2013.

But it's still a very attractive account. We have had a very constructive dialogue with them. I think we're in a very good place. I think it's going to deliver tremendous value over a period of time but at this point it is going to take us more than a year to really reap meaningful value from that client. There's six regions. Four have been implemented within the last several months. They're beginning to deliver volume for us in the fourth quarter. One of the two that have not been implemented, one of those two regions is the largest -- historically the largest user of contingent labor within the system. So it just -- it has taken much longer than we anticipated. Having said that, I'm probably more enthusiastic about the potential for this relationship than I was even a couple months ago. There were a number of things that concerned me. I actually think we're in a better place today than we have been in quite some time. The rest are continuing to ramp up so we -- kind of net-net, AJ, we do anticipate volume growth in 2013 driven in part by these -- the ramp-up of these accounts. And then separately, the demand environment is clearly improving.

When I logged on this morning, Emil, referenced a 93% increase from the low point in February. This morning we were up well over double the low point in February. A lot of the recent additions have been seasonal orders, but seasonal orders are orders. We feel very good about the direction of the demand environment and we think it really bodes well for us to get improved volume, better leverage on overhead in 2013. We are seeing some sequential momentum in our nursing business in the fourth quarter, several million dollars sequentially, driven by the 108% book-to-bill backlog that we talked about in our prepared comments. It's just -- you're seeing that show up in the fourth quarter so the third quarter was really the nadir for our nurse and allied business in 2012.

From time to time you have talked about the fact that this EMR implementation you referenced with this one account is having a positive tailwind to the business. Can you just comment on where we're at on that? Is that still the case? As you're looking at futures orders is that diminishing in any way or is it about the same or is it maybe picking up?

I would describe it as -- 2012 has been an up year for EMR activity. We have a lot of activity going on as we speak. We had one project that was booked for the fourth -- to begin in the late fourth quarter that will be pushed back because of the disruption of Hurricane Sandy. We do anticipate that project going off in 2013 and having said that, there is a lot of activity that we are aware of, we are working on for 2013 that would suggest to me that 2013 will be a better year for EMR activity for us than 2012 was.

Maybe if just I could ask you a little bit about the reworking of the different financial covenants and so forth. So I guess you have this modification period where you have some limitations on you that you're in. That's going to end on March 12, 2013. What happens after that?

Well before that, AJ, we expect to replace this facility with our asset-based lending -- new asset-based lending credit facility. We believe it is much better suited for our current operating needs. This new facility will have significantly higher borrowing availability than our current $3 million incremental revolver availability. And the borrowing base would be -- would grow in line with receivables that would fund our expected increase in revenue growth. A benefit that I did not initially anticipate is that the interest expense will actually be lower than our current facility. We expect that our savings under the new facility would be in the order of $100,000 of interest expense per quarter. And we have a very attractive proposal on the table for one of the syndicate members, not the lead bank but one of the members of our current syndicate. Their feedback has been very encouraging. They're well along in the process. The field audit at this point is done. There were no surprises. We expect to receive a commitment within a week, maybe as early as the end of this week. After that, the only open item -- significant open item is completing the legal work. Well before year end we should have it in place.

Of your $34.5 million of total debt how much is wrapped up in this that you are hoping to -- when you do away with this facility that will flip over into an asset-based lending facility?

The entire senior borrowing, which consists of the $34.5 million that you are referring to plus our LOCs will all be under the new facility.

Basically, just, I know it sounds like this thing is 95% there, but if the asset lending thing does not move forward for some reason, then what happens on March 12, 2013? It all becomes due and payable, or you just renegotiate again and hope for another modification or --?

Yes, we would have a number of options. Obviously one of them is to renegotiate an extension of the covenant relief. The other option would be to engage discussions with another bank or another financial institution. Out of the five members in our banking syndicate, four our of the five gave us attractive proposals, so we have other options.

Any sense of how big the asset base lending -- how much you're thinking about there or what you might go for?

The total facility would be in the $65 million range.

(Operator Instructions)

Jeff Silber with BMO Capital Markets.

I just wanted to return to the nurse allied segment for a second. You guys gave a lot of information about the impact of health insurance and the issues there. How about the other issues dealing with the gross margin pressure in that segment? What can you do to reverse that?

We have a lot of options. The housing inflation, Jeff, we believe is here to stay for the foreseeable future so we're taking a number of steps. We're aware our competition has taken steps that may be similar or identical to what we have put in place. I don't want to get into the specifics of what our options are to mitigate the inflation that we're experiencing but we do have some levers we can pull and we are pulling them.

And in terms of the pressure on the bill pay spread?

Jeff, the pressure to the nurse and allied segment was really -- the bill pay spread contraction was really driven by geographic mix. The fundamental driver of the compression was the housing, because what happens is, as your geographic mix shifts to lower housing cost market, you have a -- we price our contracts to generate a lower bill pay spread because we expect to offset it with lower housing costs. So it's really the housing cost that was the problem. When you look at our spread, we really need to look at it in terms of bill pay and housing combined. The fact that the housing costs have risen offset the expected benefit that we should have realized from housing expenses due to changes in geographic mix.

Jeff, just to add to that, the first half of this year we came into the year anticipating we would be able to drive 2% to 3% bill rate improvement given the pretty favorable dynamics in 2011, which faded as we got to the end of the year. I talked about that -- the decline in demand that we saw that seemed to correspond to the budget cycle. Demand troughed in February of 2012 but since then we've seen pretty dramatic increases. In the first half I would describe our experience in getting our clients to understand the need for bill rate increases to keep their -- the package that we can offer at their facilities competitive as being pretty disappointing but I would describe, particularly in the last four to six weeks, a much more encouraging tone to these conversations. The clients seem to get it. We have been very transparent as to what our issues are as we have been on this call and something has to give. We're not going to lose money providing service to them. The only other lever to pull in addition to some of the actions we can take to mitigate housing costs are either to get bill rate increases or to reduce nurse wage. And if you reduce nurse wage you get less nurses to that facility. We think it's -- the dialogue has been constructive but something has to happen. And as you have more demand and have more options to place nurses, generally the conversations do become more constructive and the outcome gets -- improves for us. So I would actually anticipate our bill pay spread to expand as we go over the next several quarters, given the actions that we have taken over the last several months.

Just a couple quick numbers questions. For capital spending for the fourth quarter what should we expect?

Neighborhood of $0.5 million dollars.

I know we're not looking -- you're not giving any guidance in 2013 but in terms of what would be a normalized tax rate what should we be modeling?

That's a good question. Our tax rate would be higher under normal conditions than the statutory 35% or 39%, if you include state taxes, due to the non-deductibility of certain per diem expenses. With a normalized pretax profit number you would expect our tax rate to be in the high 40% range. Thank you, Jeff.

(Operator Instructions)

Okay. Amy, if there's no further questions?

Not at this time.

Thank you very much. Thank to you everyone that participated in this call and we will look forward to updating you on our fourth quarter in March of next year. Take care.

Thank you for participating in today's conference. You may disconnect at this time.