Cross Country Healthcare Inc (CCRN) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare conference call for the third quarter of 2015. This call is being simultaneously broadcast live via webcast. A replay of this call will also be available (technical difficulty) and can be accessed either on the Company's website or by dialing 800-395-7443 for domestic calls or 203-369-3271 for international calls and entering the passcode 2015.

I'll now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. With me today is Bill Grubbs, our Chief Executive Officer, and Dennis Ducham, President of our newly acquired Mediscan business. This call will include a discussion of third-quarter results for 2015 as disclosed in our press release and will also include a discussion of our financial outlook for the fourth quarter of 2015. After our prepared remarks, you will have the opportunity to ask questions.

I'd like to remind everyone that the press release is also available on our website at www.crosscountryhealthcare.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the Company's 2014 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. The Company undertakes no obligation to update any of its forward-looking statements.

Also, comments during this teleconference reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered as 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.

In order to facilitate a better understanding of the underlying trends, we will refer to pro forma information on this call, giving effect to acquisitions and divestitures as though the transactions had occurred at the start of the periods impacted.

As a reminder, we divested our education and seminar business during the third quarter, and as such, reported results include two months of the divested business. This business will not be treated as a discontinued operation due to recent changes in accounting standards and, therefore, will continue to be reflected in the prior period reported results.

With that, I will now turn the call over to our CEO Bill Grubbs.

Great. Thank you, Bill, and thank you, everyone, for joining us this morning, and welcome to Dennis. I'm going to start the call in a slightly different way than previous quarters. There are some questions that I anticipate will be asked, so I thought I would address them upfront. Certainly these are the things I would want to know if I was on the other end of the call.

First of all, are there any significant one offer exceptional items that contributed to revenue gross profit or adjusted EBITDA this quarter? The answer is no. We had the normal puts and takes associated with the quarter close, but they offset each other for the most part.

Secondly, what were the main contributing factors to this quarter's results? This quarter just happened to have a number of the initiatives we had previously identified come together all at once. We had slightly higher revenue than we had guided to, and that was a contributor. The pricing increases that we did not see in the first and second quarter but we stated we would start to see in the third and fourth quarter came in earlier than anticipated and at a higher rate than what we guided to.

Physician staffing stabilized its revenues somewhat and expanded its gross profit margin, resulting in a higher contribution. And lastly, the cost optimization program that we announced at the end of the first quarter, targeting an annual run rate of $4 million to $5 million in savings that we stated would be completed before the end of the third quarter ended up being completed sooner than expected, and we achieved higher savings than originally targeted. Basically, we executed extremely well on all of our initiatives.

And the last question I would want to know, is this the new baseline performance, and should we grow and improve on this going forward? The answer is yes but with a caveat. This is definitely a new level of performance for us, but there are some factors that could mean we won't have a straight line trajectory from the 6.3% adjusted EBITDA this quarter to our 8% goal. Although we expect to remain at a much higher adjusted EBITDA level, there could be some slight variations each quarter. Let me explain what I mean.

We continue to invest in new recruiters in our Nurse and Allied business, as many as 20 per quarter, and there is a ramp-up time of three to six months before they are fully productive.

We are also starting to upgrade some of our technology systems, but because we are mostly investing in cloud-based systems, we will not be capitalizing the majority of these costs. And we have the normal seasonality in the fourth quarter with the holiday season and in the first quarter with the payroll reset. We will give visibility to these factors when we provide guidance each quarter.

And, of course, the sale of Cross Country Education and the acquisition of Mediscan changed the quarterly trends as well. Mediscan in particular has seasonality around its education business related to the school year. But as I stated, strong execution has certainly driven us to a new higher level of performance.

Okay, let me review the quarter. Overall, I'm very pleased with our performance. We exceeded our own expectations, and we are hitting our financial goals earlier than forecasted because of the strong execution. Our revenue was up 4% or 5% on a pro forma basis, taking Cross Country Education out of the picture. Our gross profit percentage improved to 26.3%, which was up 120 basis points from 25.1% last quarter and 130 basis points year over year. We generated $12.3 million of adjusted EBITDA at 6.3% of revenue, which is actually $12.9 million or 6.7% on a pro forma basis, again taking Cross Country Education out of the picture.

In addition, as you would expect with higher profitability, we generated $12.9 million in operating cash flow.

Nurse and Allied continued to lead the way with revenue growth of 6% year over year and 3% sequentially. I'm pleased to see that our bill rates increased 3%, and our bill pay spreads have expanded again after contracting last quarter following nine consecutive quarters of bill pay expansion.

We have recovered from our slow start to adjusting prices to market conditions, and actually the 3% rate increase is a little bit deceiving because we had a mixed change in our Allied business and our Allied bill rates actually went down. If you look at the underlying numbers, travel nursing was actually up 5% year over year, and per diem nursing was up 4% year over year. And we can talk about that more in the Q&A section.

We believe that demand will remain strong for all the reasons it's remained strong over the past 15 months and boosted somewhat by an expected increase in enrollees to the Affordable Care Act during this year's open enrollment peeping and the possibility of several additional states opting into the Medicaid expansion program. In fact, I just saw a report this morning, the CBO has stated they believe an extra 6 million people will come into healthcare this year alone -- I'm sorry, in 2016 through those two programs.

As expected, we are starting to see stability in physician staffing, although not quite where we need it to be yet. Revenue was down 3% year over year compared to the comparable pro forma decline of 10% in the first quarter and 7% in the second quarter. Revenue was up 4% sequentially, reflecting the normal seasonally strong third quarter.

Gross profit percentage increased again from improved pricing and resulted in an increase in contribution. Our goal, as we have previously stated, is to see further improvement in the fourth quarter in order to target year-over-year growth in 2016.

In the meantime, Physician Staffing's performance, although not contributing to our revenue growth, continues to support our goals of growing our gross profit and adjusted EBITDA percentages for Cross Country Healthcare overall.

For our Other Human Capital Management Services segment, I'll leave out any comments regarding Cross Country Education since it is no longer a part of our portfolio. Our Physician and Executive Search business, the only business remaining in the Other Human Capital segment, had revenue of $4.3 million, up 30% year over year, the fourth quarter in a row at or above 30%. Contribution was $967,000 or 23% of revenue, a very strong performance. But we will need to make additional investments into this business to maintain a double digit growth trend. So we would expect the contribution to fall below the 20% mark as we hire additional staff.

There continues to be strong interest in our workforce solution services. We're still on track to win approximately 2 MSPs per quarter this year with the goal of increasing that to 4 per quarter in 2016. We are working on several electronic medical records projects currently and have signed two new agreements for business starting in the fourth quarter of this year and the first quarter of 2016.

We are also seeing an increase in interest for several of our other services as well, in particular recruitment process outsourcing. We signed two deals in RPO, and we have a third one that is pending, predictive analytics and optimal workforce solutions.

Now although these are not large revenue contributors today, we expect them to be bigger contributor starting in 2016 as we implement our recent wins and ramp up our services with additional wins.

Let me end by talking about the divestiture of Cross Country Education and the acquisition of Mediscan. We closed the sale of Cross Country Education in August for $8 million. There is some confusion around what we sold versus what we acquired because we refer to Education in both businesses. So let me try to clarify as I comment on the divestiture and then the acquisition.

Cross Country Education, the business we sold in the third quarter, provided in-person seminars to healthcare professionals, mostly for their continuing education credits. It was not a staffing business and did not sell to healthcare facilities, only to healthcare professionals. It was not a core or strategic business for Cross Country Healthcare.

After the end of the third quarter, we announced the acquisition of Mediscan. Bill Burns will talk about the deal itself and how it impacts our numbers going forward, but let me tell you a little about the business and the rationale for the acquisition.

Mediscan has three divisions. The first one is a business that provides mostly Allied professionals, although there are some other skill sets involved, but predominantly rad techs to healthcare facilities. This business is very much like our branch-based operations and accounts for about 50% of the total Mediscan revenue.

The second division is our public school business that provides nurses and other Allied professionals, although predominantly nurses, to public schools in 11 states, although mostly California. This is also very similar to a local branch operation but specifically focused on schools. This accounts for about 25% of Mediscan's revenue.

And the third division is direct ed, a business that provides workforce solutions to charter schools in California. They provide consulting and outsourcing for special education needs, predominantly speech language pathologists. We believe all three of these divisions have great growth opportunities, healthcare and charter schools predominantly in California and public schools around the country utilizing our branch operations infrastructure.

In particular, the education staffing industry is growing at double-digit rates and gives Cross Country Healthcare a new customer base outside of our traditional customers in the acute care and ambulatory healthcare facilities. The education businesses also have longer-term assignments, quite often for the entire school year or nine plus months on assignment, and a higher retention rate for the healthcare professionals from year to year, making it more productive and more profitable than our normal staffing businesses.

The education businesses also utilize a different type of candidate that prefers not to work at standard healthcare facilities, so there was no cannibalization of our existing businesses and gives us new avenues to deploy candidates that otherwise we would not normally have opportunities for.

We also believe that the education businesses will prove to be less cyclical than our regular healthcare staffing businesses. Overall, the Mediscan acquisition is a great addition to Cross Country and comes with strong management and a very similar culture. We expect it to be a significant contributor to our growth going forward.

So to wrap things up, this was a great quarter for Cross Country Healthcare and has propelled us to new levels of performance that we believe are sustainable. We are well ahead on the timing of achieving our 5% adjusted EBITDA goal, which has been set for the fourth quarter. We believe this earlier achievement puts us on track for our 8% target set for the fourth quarter of 2017, although based on this quarter's performance, we may be able to achieve that earlier.

Let me turn the call over to Bill Burns to go into the numbers in a little bit more detail.

Thanks, Bill. As Bill mentioned, we are very pleased with our performance this quarter across multiple fronts. All of our core businesses performed in line or better than we anticipated. We saw pricing come back, supporting margin expansion. We successfully completed the cost optimization effort announced at the end the first quarter, and we completed the sale of our non-core business. I'll touch on some of these in more detail a little later in the call.

But before turning to the results for the quarter, I wanted to spend a few minutes on the Mediscan acquisition that we completed late last week. As we share in the press release, we acquired the Mediscan business for a total purchase price of $33 million comprised of $28 million in cash and $5 million in shares of the Company's common stock. Additionally the sellers have a potential earnout of $7 million based on performance for 2016 and 2017.

The Mediscan business employs approximately 1300 healthcare professionals per year across more than 70 specialties at more than 300 clients. Revenue for all of 2015 is projected to be approximately $40 million with a gross profit margin of 24% and an EBITDA margin of 10%. We finance the cash portion of the purchase price predominantly using available cash and through borrowings under our ABL. Given the relatively small amount borrowed under the ABL, we don't expect that this will result in a change to our interest rate under the subordinated term debt. We expect this deal will be approximately $0.01 accretive for the fourth quarter as we recorded most of the deal-related expenses in the third quarter and $0.06 to $0.07 accretive in 2016.

Going forward, we anticipate that most of the Mediscan business will be included in our Nurse and Allied segment, and a smaller percentage, less than 10%, will be included within the Physician Staffing segment.

Now let me discuss the consolidated results for the quarter. Total revenue for the quarter was $195.7 million, up 4% from the prior year and 2% sequentially. The year-over-year and sequential increases were driven primarily by continued strong demand in both Nurse and Allied Staffing, as well as our physician and executive search business. Excluding our Education business, revenue for the quarter would have been $192.6 million, representing a 5% year-over-year improvement and 3% sequentially. Gross profit margin for the quarter was 26.3%, up 130 basis points from the prior year and 120 basis points sequentially.

Both the year-over-year and sequential improvements were mainly driven by improved pricing in both Nurse and Allied Staffing, as well as with Physician Staffing. While we were pleased to see an improvement in pricing, it does remain a key area of focus for us, especially given the continued strong demand for our services.

Excluding our Education business, gross profit margin would have been 26.1% or about 20 basis points lower than reported.

Moving down the income statement, SG&A for the quarter was $39.2 million, down 4% both year over year and sequentially. The declines were primarily due to the sale of our Education business. Excluding the impact of the Education business, we continue to manage costs well with savings from cost optimization projects offsetting other SG&A investments.

As a percent of revenue, SG&A was 20%, down nearly 160 basis points year over year and 120 basis points sequentially, representing the improved operating leverage within our business. Adjusted EBITDA was $12.3 million, representing a 6.3% margin, which was our strongest single quarter for profitability since the downturn in 2008. Excluding the results of our Education business, the adjusted EBITDA margin would have been 40 basis points higher or about 6.7%. We were pleased to have exceeded our goal for an adjusted EBITDA margin of 5% a full quarter earlier than we anticipated.

For the quarter, we recorded acquisition integration charges of approximately $600,000, representing costs associated with the purchase of the Mediscan business. We also recorded restructuring charges of approximately $100,000 for actions taken under our cost optimization project. The goal under the cost optimization project was to reduce operating expenses by approximately $4 million to $5 million. As of the end of the third quarter, the actions we have taken are expected to yield approximately $6 million on an annualized basis.

Interest expense was $1.7 million, down approximately $100,000 from the prior year and prior quarter. The lower interest expense was due to the lower rates on our subordinated term debt, which we refinanced at the end of the second quarter, as well as lower average borrowings during the quarter.

We recorded a $2.9 million non-cash loss on the change in the fair value of the embedded derivative from our convertible notes, which was predominantly due to an increase in our share price.

The sale of our Education business resulted in an after-tax gain of approximately $1.3 million. The gain was comprised of a pretax loss of approximately $2.2 million, which was completely offset by a $3.5 million tax benefit. Income tax expense for the quarter was a benefit of $2.7 million, and excluding the tax benefit associated with the sale of the Education business, tax expense would have been $800,000, primarily related to the continued amortization of indefinite lived intangible assets for tax purposes, as well as some lesser state and international taxes.

Net income attributable to common shareholders was $5 million or $0.16 per diluted share as compared to a net loss in the prior year period of $7.6 million or $0.24 per share. Adjusted EPS, which excludes items such as acquisition integration charges, restructuring and changes in the value of the derivative, was $0.23 compared with $0.07 in the prior year and $0.10 in the prior quarter.

Let me next review the results for our three business segments. Revenue during the quarter for Nurse and Allied Staffing was $157.3 million, up 6% year over year and 3% sequentially. We saw growth across all lines of business with particular strength in our branch business. Generally about half the growth came from volume and about half from price. Average bill rates were up approximately 3% year over year led by travel nursing bill's rates, which were up nearly 5% for the quarter.

We averaged 6,646 field FTEs, up 4% from the prior year and up 1% sequentially. Revenue per FTE per day was $257, up 2% year over year and up 1% sequentially. Segment contribution income for the quarter was $16.3 million, representing a 10.3% contribution margin, which was up about 170 basis points year over year and 210 basis points sequentially.

Turning next to our Physician Staffing segment, revenue was $31 million, down 3% from the prior year and up 4% sequentially. The year-over-year decline was entirely due to lower volume of days filled, which were down 7% year over year but was partly offset by a 5% increase in prices. The sequential improvement was driven by a 1% increase in volume and a 2.5% increase in price. We continued to see signs of increasing stability in this business with improved profitability.

Segment contribution income for the quarter was $3.2 million, representing a 10.3% contribution margin, up 570 basis points from the prior year and 280 basis points sequentially. The year-over-year improvement was primarily attributable to improved pricing and lower operating costs. But also impacting or contributing to the year-over-year improvement was the impact from higher professional liability charges recorded in the prior year associated with specific claims.

Finally, revenue for the Other Human Capital Management Services segment was $7.4 million, representing a decline of 19% over the prior year and 27% sequentially. The year-over-year and sequential declines were entirely due to the divestiture of our Education business.

Revenue in our search business was $4.3 million, up nearly 30% on a year-over-year basis on continued strong demand, and going forward only the search business will be reported in this segment. However, the results for our education business will continue to be included in the prior periods. So we will continue to discuss pro forma results for this segment going forward.

Segment contribution income was approximately $400,000 or 5% of revenue as compared with a loss of $100,000 in the prior year and income of $750,000 in the prior quarter. For the third quarter, contribution margin for the search business was 23%.

Turning to cash, we ended the quarter with $24.6 million of cash and $55 million in outstanding debt at par. The increase in cash was partly driven by the proceeds from the sale of our Education business, as well as cash flow from operations of $12.9 million. That's actually the highest we generated in more than four years in a single quarter.

Day sales outstanding was 59 days, which was two days higher than the prior quarter, driven in part by the divestiture of our Education business. Capital expenditures totaled $757,000, in line with our expectations. During the quarter, we repaid $3 million under our ABL and had approximately $47 million of availability at September 30.

This brings me to our guidance. For the fourth quarter of 2015, we expect consolidated revenue to be in the $193 million to $198 million range, which assumes a year-over-year growth rate of 3% to 5% on a pro forma basis.

As a reminder, the guidance includes approximately two months of results for the Mediscan business and does not include any results for our Education business.

While we don't provide specific guidance for segments, we expect the year-over-year growth will come from organic growth in both Nurse and Allied and our search businesses, as well as the impact from the Mediscan acquisition.

Turning to margins, consolidated gross profit margin is expected to be between 25.5% and 26%. The sequential decline is primarily driven by the sale of our Education business, which had historically higher gross margins above 50%.

Adjusted EBITDA margin is expected to be between 5.5% and 6% for the quarter. While this margin still exceeds our previously stated goal of 5% for the quarter, we're expecting a sequential decline from the 6.3% margin we saw in the third quarter. The decline is primarily attributable to the normal impact from holidays on revenue and gross profit, leading to slightly lower operating leverage, as well as a result of the continued investment planned for the fourth quarter.

And finally, we expect adjusted EPS to be between $0.18 and $0.20, assuming a diluted share count of 32.5 million shares.

This concludes our prepared remarks, and at this point I'd like to open up the lines for questions. Operator?

(Operator Instructions) A.J. Rice, UBS.

In the prepared remarks, you mentioned that there is particular strength on the nursing side and the branch network, so I'm assuming that's the per diem side. Can you just comment on any disparity between per diem and travel? Is one particularly stronger than the other? Maybe a little bit of the dynamics there?

I'll try to give you a big picture. Bill may have a little bit more detail. But we've kind of internally stopped calling it per diem because we call it our branch base nursing because we are seeing a lot more contract business in the branches where we are getting eight-, 10-, 12-week assignments. So it's not as typical per diem as you've historically seen where it's one shift or three days and so on and so forth. But generally yes, our branches and what we have historically called per diem did very well.

Our branch businesses grew, I think, 9% year over year. So we are seeing that strategy of having a bigger footprint and targeting some of the nonacute care healthcare facilities. Ambulatory and outpatient facilities is paying off for us. So we were very pleased with that overall that our branch businesses are doing very well.

I guess since you guys last reported, there has been some independent update and some of the groups that follow the industry and project what the underlying revenue growth trend is. And they seem to suggest that maybe we are seeing something that is sort of in the midteens this year and maybe even high teens growth. Can you give us your perspective? I know you're still making a lot of investments, and that's why we're seeing the improvement in margin. But how do you guys rationalize what sounds like faster topline in the overall industry versus what you are showing, and when would you assume that you would be more like the industry overall?

That's a good question, and obviously one of the factors that drags down our overall growth is the still underperformance of our Physician Staffing business. Although we are seeing improvements there, it's still obviously dragging our overall growth down.

There's a couple of things on our Nurse and Allied that are a little bit of a drag on our growth as well. First of all, we are up against a very tough comp. Last year we had 12% year-over-year growth in our Nurse and Allied in the third quarter of last year, and so there's a little bit of a tough comp that we are up against.

We also had two other factors. One is we still have a little bit of drag from EMR projects. We had about a $2 million difference in what we did last year in EMR versus what we did this year in EMR, and we had about $1 million of other businesses that we had acquired from MSN that were in the third quarter last year that we really were not strategic for us. And we've kind of let them run off somewhat since then. One of them has actually gone altogether. It was a clinical trials business, and the other one has reduced quite a bit. So that would be another $1 million. So there is about a $3 million swing on Nurse and Allied, which really would have probably given us a couple of hundred basis points of growth.

We think that 7% or 8% year-over-year growth number is probably where we expect to be based on our turnaround program and our growth from the third quarter last year.

So there are a few things that are going on in our business. But generally I'm okay with where we are from a growth perspective in the Nurse and Allied side.

Okay. And maybe my last question would be just to maybe get you to flesh out a little bit more what the Mediscan opportunity looks like. How do you size that market, maybe any thoughts on the competitive landscape, and your perception of how that will grow either organically or inorganically as part of your overall portfolio?

Yes, well, I'm going to turn it over, we have Dennis Ducham here who was the CEO of Mediscan will be the president of Mediscan in our organization here, and he can give you a little bit of color as to the market and the industry certainly from an organic standpoint. You know, we like this business. We like diversifying into some non-clinical users of healthcare, and so that's a big driver for us. So potentially we might look at other acquisitions. But from an organic standpoint and a market perspective, let me turn it over to Dennis.

Thank you, Bill. In terms of the long-term potential or even the short-term outlook for the business, if you look at the special education sector, there hasn't been a lot of analysis done yet on the staffing component of it because it's an emerging market. But as we look at it, we look at a couple of different characteristics. One is that it's a mandated area, which is with the Individual Disability Act, which was put in place in 1974 and there's been several amendments that create more stickiness to the legislation, it's mandated with schools that kids with disability have to be provided free and appropriate education. So with that, in our opinion it's very -- it's not a cyclical market.

At the same time, if you look at the US Department of Education, about $77 billion is being spent on special education right now. And we've seen a dramatic increase of what portion of the overall school budgets are being spent on special education. It is tracking right around 15%, 16% right now. Almost 14% of children in our school systems need special education services, and autism over the last seven years has grown at 125%.

So while we don't have a lot of specific tracking in terms of the staffing industry, we think with the mandates and the demographics, this is a tremendous emerging market that we can continue to see the double digit growth that we've had over the last four years.

And A.J. as we looked around in the market and certainly we had conversations, we did as much research, we hired a consultant to educate us on the marketplace before we closed on the acquisition. It seems that it's a very fragmented staffing marketplace. So we think there's a great opportunity to take some market share here and be a leader in this segment of the market.

Okay. Great. Thanks a lot.

Tobey Sommer, SunTrust.

Thank you. A question for you about what you're hearing from hospitals about admission trends, and if they are seeing slowing growth, what they are conveying to you about demand over time for your services. Thank you.

It's interesting. We obviously saw the public results of HCA and Community Health and then kind of came out afterwards. I was a little bit surprised. Although HCA did have growth in their patient volumes, it had slowed a little bit from the growth they had seen in previous quarters. And I think that Community Health showed a little bit of a decline in some of their patient growth. We're not seeing that in most of our other customers. We are still seeing an increase in the census at the acute care hospitals and a significant increase in the ambulatory and outpatient visits for most of our customers.

So generally, we are not seeing that, and certainly it hasn't affected demand for us. Our demand for Nurse and Allied in particular is still at an all-time historic high and has been for the past 15 or 16 months. So certainly if it is a trend in the marketplace, it's certainly not affecting demand at this point, and we don't expect it to especially with another 6 million potential people coming into healthcare in 2016.

Thanks. In terms of your pricing, are you getting any pushback from hospital customers that are kind of I don't know unwilling to accept those kind of price increases or not understanding what's going on in the labor market?

We always get a lot of pushback from our customers on pricing. They have pressures on trying to save money. They have issues with lower reimbursement costs and payer mixes and so on and so forth. Patient mixes and so on and so forth. So but in the end the labor market, the contingent labor market is what it is, and we do think we had our 5% increase in our travel nursing year over year this quarter and 4% in our branch-based nursing, and we think that is probably what the market bears at this point, maybe even a little bit higher than that going forward.

So what we're doing with our workforce solutions is we are trying to find other ways to help our customers to save money. So that's part of our recruitment process outsourcing is to try and help them build out their internal core teams to be a little bit less dependent. On contingent labor, more importantly to reduce their own internal premium labor by having to not pay as much overtime and doubletime and so on and so forth.

We also do have our predictive analytics where we are trying to help them manage how they manage the scheduling of their existing employees, and we have this optimal workforce solution where we can outsource some of the non-core or power professional skill set.

So our goal at this point is there's not a lot we can do to save them money on the contingent labor side, and yes, we are getting some pushback. But in the end, if they need to -- if they want to get the people by the bedside, they're just going to have to pay market rates, and we are trying to find other ways to provide them savings.

Thank you. That's helpful. You had mentioned that a couple of items impacted the optics of growth in the quarter, EMR, etc. What would growth have been kind of absent those impacts that won't exist going forward?

As I look at it, Tobey -- this is Bill Burns -- for the Nurse and Allied business, it would have been about high single digits like 9% growth if you were to take out the impact of the headwinds from the EMRs and from the businesses and the branch that we have wound down.

Thank you. And how would pro forma organic growth -- what would it look like in the guidance? Since you had the acquisition there and the divestitures, I want to make sure I'm thinking about that the right way.

Yes, so the acquisition is in for two months, and if you just kind of do a ratable approach to the $40 million that we expect for revenue for the year, you can kind of get close to the impact we have coming in. Largely on the numbers we've given, it replaces the Education business. It's about the same level as what's coming away from Education for the whole quarter to what we're gaining back for the Mediscan business for the two months.

It's about -- the number you see there is about the number it would be on a pro forma basis.

And then my last question, the mix that you saw in Allied, was that just some lower margin specialty seeing higher demand?

Not lower margin, just lower bill rates.

Lower bill rates, okay.

And that's because our branch-based business grew at 9% year over year, and the branch-based business obviously doesn't have the travel premium built into it and its different kind of skill sets. It's central technicians and pharmacists and other roles that aren't necessarily the same bill rates as we see in the travel side of the business. So I try to just take that out because the mix of business is changing significantly as we grow our branch-based business. That's a good thing.

The gross profit margins have been pretty strong in our branch-based business. So I'm not worried about that mix changing the overall pricing. So we try to look at it, what's the underlying pricing, and both the travel nursing and per diem nursing had prices in line with about what we expected after we got back on track again after kind of missing the boat in the first and second quarter.

Thank you. If I could sneak one more in, Bill. Should we really be watching your strategic moves in terms of acquisitions, etc., as in part a focus to buy businesses that can be leveraged and expanded throughout the branch network going forward?

That's part of it, yes. I think that there's a couple of things. When I go on the road shows and I ask about acquisitions, I think there's a lot of industries that spend a lot of money on healthcare that are outside of acute care and ambulatory facilities, correctional facilities, insurance companies and educational facilities.

And so this is one way for us to diversify outside of the kind of clinical customer base, and I think that's a good thing for us. Because we believe it is less cyclical, and it does lend itself for expansion, utilizing the infrastructure that we have in place today. That's not the only criteria, but you're right. That is part of the criteria when we look at acquisitions.

Thank you very much.

Randy Reece, Avondale Partners.

I wanted to get an understanding of the seasonality, the quarterly seasonality of the revenue from Mediscan. I would think that it looks a lot different than the rest of your business?

Yes, Randy. This is Bill Burns, and Dennis, feel free to fill in if I miss anything. But typically about half the business is in the Education space. So there's a seasonality component to where half the business in Mediscan is in the Education space, and so by the third quarter tends to be their seasonally weakest quarter as the professionals are not providing services during that quarter.

Basically what you do is you see the same cyclicality as you would with the school system, which is they go out for summer break. So beginning in the middle of August, depending on the area of the country on when schools start, that's when the ramp up is for the new school year, and generally it begins to wind down in the middle June.

And you probably get a little break during the holidays for time off.

We get a little break during the holidays. Again, it follows the same cycle that the school would. Now we do begin to see, especially because of special education, we are seeing more and more summer needs because children with special needs oftentimes still need to continue to be supported over the summer time.

So how much below 25% of annual revenue is the third quarter?

Just doing -- the question is the mathematics trend down. If I were doing it, I would say $40 million, half is in the Education space. That's recognized predominantly over a 10-month period, so you're losing two months in the third quarter of revenue. So it's probably about a (multiple speakers) $3 million to $4 million impact in the third quarter.

Yes.

Just for the $20 million of the Education business or whatever growth this year, the other $20 million is regular healthcare staffing.

Very good. Thank you.

Bill Sutherland, EG Equities.

Bill Grubbs, I'm wondering about the couple of initiatives you had in place, and given the acceleration in the margin in the quarter, maybe they're farther along than I was thinking. One is retiring loan margin business. Another is the negotiations, the protracted negotiations on the MSP bill rates. Maybe they got accelerated. And then I guess there was some pressure on the travel nurse pay bill rate that was an issue prior to this quarter?

Yes, it's -- we didn't set out to guide overly conservative. We had started to see acceptance of some of the pricing changes we had requested in the second quarter. They just didn't show up numbers in the second quarter. And so we were little worried that as these 13-week assignments get renewed and get changed out and pricing gets implemented, the new pricing gets implemented, that it might take a little bit longer through the third quarter than we had anticipated. It actually came together a lot faster.

So the customers are paying attention. They are seeing the trends in the marketplace, and we have great relationships obviously with our MSPs. So the hesitancy on having a higher guidance was more about the timing of when those prices would come in, not whether we'd get them or not. And they just came in little bit faster than we had anticipated. So it's worked out very well.

And we had talked about probably with you and others as well about how much we keep and how much we give to the nurse whether you can tell our gross margin went up. So we're obviously keeping a decent portion of it. But in essence of the bill rate increases we had for this quarter in Nurse and Allied, we kept about half of it, and we gave about half of it to the nurse.

Okay. That's helpful. And then in locum, it sounds like they reorg the sales group or the territories. It is largely in place and leading to productivity?

Yes, we have a new leader of our account management, the customer facing people, and we have a new leader for our recruiting, the fulfillment people. I was up there last week, and now that we're seeing some stability, what we've actually looked at is we are actually understaffed on the recruiting side. So we are adding 10 to 20 more recruiters on the recruiting side that we believe is where the shortfall is today.

I think the activity looks good. The operation seems to be running well. We seem to have the right management team in place. I was pleased with my visit up there last week. I think now it's about investing to get us back to growth. And then we have a new higher class next week, and I think we have somewhere between eight and 10 people starting in that, and we'll have an probably another five or 10 that will hire after that.

I think right now we're kind of in the, okay, we've seen things starting to work; now we need to invest to get back to growth next year.

Great. And then on your line of sight chart to the 8% adjusted EBITDA margin, you know when you go through the five categories where you get the uplift, which ones going forward are going to require -- is where you're going to get the most lift at this point? Thanks.

I think -- by the way, we are going through the analysis now of how much sooner we think we might be able to get to that 8% in the fourth quarter of 2017. You would assume, since we were at 6.3% this quarter, well above the 5% we had set for the fourth quarter, that we would have a path to it. But we are going through that analysis now what levers we need to pull and what will drive that. But generally I think it will be revenue growth and pricing that will probably be there.

There's a little bit more cost optimization or efficiencies to be built into the business, which is some of the technology investments that we had talked about a little bit earlier. So probably those are the three things. The efficiencies on cost from the technology, volume and price is probably going to get us there.

That's right and the volume and price as we've seen will play off one another. If volume doesn't come in as expected, we typically will see it come back in price. If the model that we had originally built assumed a two-third volume, one-third price, we could see that be as much as half-and-half as we saw in this quarter, which was 50% price, 50% volume.

Matt Blazei, Lake Street Capital Markets.

Most of my questions have been answered, but I had a quick question on Mediscan again. Relative to what you think is a potential growth rate of that business given the opportunity set out there, maybe historically and also going forward?

Go ahead, Dennis.

Yes, if you look at the last three years, we've been averaging a compounded annual rate of growth of about 35%. So, again, we are still a relatively small business. So, as we begin to plan, we are very comfortable as we look at double-digit growth within the space.

We also think we're going to see some improvement in terms of our mix of business on our gross profit margin. As mentioned by Bill is, our gross profit margin was at 24%, but we are still a legacy company to a degree from the hospital market in the Allied health area where it's been a little bit of a laggard within the hospital sector. But even within that space, we've seen about a 2 percentage point click up as we go into the third and fourth quarter.

If you look at the special education business, especially with direct ed, the mix of business for us now is beginning to push our margins at a very strong and aggressive rate. We think we are going to see a good 1 percentage point, 1.5 percentage point increase over the next calendar year. So we continue to be very bullish, and again we are only a $40 million company. So if we continue to invest in the business, we think we can keep that the same type of pace that we had in the past.

So, Matt, the first two acquisitions we made in December of 2013 in the middle of 2014 were about part of our program to get the Company back on track and position ourselves in the marketplace. This acquisition is a bit more strategic, and it is about growth and diversification into new markets.

So the deal structure we think lends itself to certainly giving Dennis and team an incentive. It was $5 million of the upfront purchase price in Cross Country Healthcare shares, so there's certainly a goal to help the Company perform overall. And then there's a $7 million earnout if they can hit the numbers that they had told us they believe they can hit. So there's a lot of motivation there to grow.

This business was acquired so that we would have a new growth engine within the organization.

Thanks, guys. I appreciate it.

Mitra Ramgopal, Sidoti.

Just wanted to follow-up first on the Mediscan. You mentioned it's a little different from deals you've done in the past, a little more strategic. I was just wondering as you look in terms of future acquisitions if this is sort of more the new template going forward focusing more on diversification, for example?

Somewhat. There's still three areas that I would look at from a strategic standpoint. We are still a little bit undersized on our Allied business overall. We do get $20 million of Allied business with the Mediscan acquisitions, and that will help a little bit. But I like our local Allied business that currently runs at 31% gross profit and 10% on the bottom line, but it's only in 23 of my branch locations. So if I could supplement that, I would look at the local Allied business.

I would look now that we're seeing stabilization and better management team in locum tenens. I wouldn't mind adding to my locum tenens capabilities. And then the third one is in new customer segments. So correctional facilities, insurance companies or more education. I think that diversification into big users of healthcare services, but outside of the clinical arena, it's a good area for us to focus on as well. So that's kind of where I would focus strategic acquisitions going forward.

I know you have the revolver available in terms of getting deals done, but do you see any issues in terms of delaying potential acquisitions as you try to integrate Mediscan?

Well, I'll let Bill talk about what financial power we still have out there in the balance sheet. But no, we are going to leave Mediscan pretty much stand-alone. We are obviously going to try to get cooperation between all of our businesses sharing candidates and job openings and try to get some revenue synergies out of this. But there's not a lot of integration to be done here, not like the MSN deal, which was a full-court press for three quarters in a row to try to get everything back together and get the synergies out of it. This is a pretty much stand-alone business for -- and we don't have a lot of integration. So that's not going to distract us.

So I'm not worried about looking at other acquisitions, and Bill can talk about the balance sheet and how we might fund them going forward. Certainly our leverage ratio was not very high.

No, it's not. And as we reported, we ended the quarter with a very strong cash position and relatively high borrowing availability under our ABL of about $47 million. We did use a little bit of that, and we obviously use our cash for the Mediscan acquisition without getting into the fourth quarter. We still have a good amount of availability under the ABL that was not a significant level of borrowing, and we're not tapping into the full capacity of the feature -- sorry, the full capacity of the facility. It's an $85 million ABL, and today we only really get about $70 million of that.

So we have room to expand as we put out more receivables through acquisitions and through the availability, and we also have a very supportive lending group. We've talked about this before. We are in a very different position now, and we have a lot more opportunities and options for additional financing should we need to.

With this level of profitability in the third quarter and what our guidance is for the fourth quarter, our leverage ratio is under 1 to 1 at this point from a debt to EBITDA basis. And certainly we've always stated that we would be willing to go as high as 3.5 to 1. So we certainly have some room to look at other deals.

Okay. Thanks. And then quickly I know on the cost optimization initiative, you certainly achieved your goals earlier than expected. I was just wondering if you sense you have some more room still on that side?

Yes, we've historically said that we think that there's $8 million to $10 million of cost in the business that we need to get at. This effort was aimed at reducing what we could do today without technology. So the $4 million to $5 million, as I commented to my speech, or the script, we got about $6 million just about of annualized savings. There's a few more million dollars to possibly bring out of the business, but it's going to rely on us doing some technology investments over the next one to two years.

Okay. Thanks, again.

Okay. Well, thank you, everybody, for joining us, and we look forward to updating you with our fourth-quarter and full-year results in March. Thank you very much.

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