Cross Country Healthcare, Inc. (CCRN) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Cross Country Healthcare Third Quarter 2012 Earnings Conference Call. [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 Statement 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 in this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements. 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 U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. And now, I’ll turn the call over to Joe.

Thank you, Howard, and thank you to 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 a year ago quarter. Cash flow from operations for the third quarter was $9 -- $1.9 million. While our revenue was in line with our expectations, our earnings performance was below expectation 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 business. And then -- 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 combine basis nearly of our field professionals are W-2 employees of the company. In our travel nurse and allied staffing segment, third quarter cost on a combined hourly basis where health and workers compensation insurance were up 87% from a year ago. In our clinical trial services segment, health insurance expenses 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. Overtime, we expect the extraordinary -- extraordinary unfavorable run of large claims to revert to a 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 focus campaign to give our hospital clients greater transparency to our cost. 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 average 108% throughout the third quarter, unlike last year where demand seemed to falter as hospitals got deeper into their yearend 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 and 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 competitive 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 base 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 in to the quarter with a weak pipeline of searches but saw renewed momentum in sale 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 normal level of profitability to our company. These efforts are ongoing and I have every confidence in our experience team’s ability to executive effectively, especially as the market environment continues to move in a more positive direction. And with that, I’d like to turn the call over to Emil who will update you in more detail on the 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 segment, 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 cost 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 segment, 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 delevered our balance sheet. During the third quarter, we entered into an agreement to modify the maximum leverage ratio to 2.75:1 and the minimum fixed charge ratio to 1.25:1, 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 pre-tax 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 was 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 two 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 include federal net operating loss carry-forwards of approximately $22.5 million, which is 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 1.6:1. Day 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 2.55:1, and our fixed charge coverage ratio was 1.51:1. 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 4 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, the 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. Related to next 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 the 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 of 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, 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 repayment revenue in our search business. On a sequential basis, segment revenue was down 5% due to lower seminar attendance. Contribution income margin was essentially break-even 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 for any material legal proceedings. We project the average Nurse and Allied Staffing field FTE count to be in 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, the 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 the lines to answer any questions that you may have. Amy?

[Operator Instruction] Our first question comes from Mr. Sommer with SunTrust.

I was wondering if you can 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?

It’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 market is up across the country. It’s a much tighter rental market. When I listen to our competitors, 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 it doesn’t -- not really a lot of room. I mean, that’s 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 a very high utilization even on a historical look back. So I’m a little puzzled by that. 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. And health insurance, probably deserve little discussion. Both companies, almost every company in America did apply for a waiver of the implications, the immediate impact that healthcare reform, after it was passed, both companies had almost identical health insurance offerings. The key component of those offering was $100,000 cap. I mean, we’re bringing our nurses often times for more than 3 months. And we certainly never looked to have unlimited health expense exposure for those professionals. The differences in our plan were really pretty [indiscernible] in the context of the current impact that we’re feeling just seems almost preposterous. And 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 $1 million -- $1.25 million. So we have -- as a self-insured provider of healthcare, we went out and brought -- bought a cap on our healthcare exposure of $300,000. Historically, when we -- over a very long period, we had very few claims that approach that level. So, we actually didn’t expect to pierce it, but just a relatively low cost way to cap our exposure to healthcare. In the current environment, we have roughly 25 claims that are in access of $25,000 in a month. Many are in the -- are actually that we have several that have already pierced our $300,000 cap. So it just an unprecedented run of healthcare claims for the company. And unfortunately, our situation vis-à-vis our competitor, are not comparable. They have 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 costs of healthcare in excess of $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 2, that also is up very significantly year-over-year. And that’s given -- that’s just our experience. I mean, it’s the experience of claims of our population vis-à-vis their population. And the other major area that we are seeing is payroll taxes, which are running much higher for this point in the year typically payroll tax rates declined. 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 replenished their unemployment funds. I would expect any employer, a national employers experiencing similar dynamics and obviously it also varies by state, but it is not limited to anyone specific state that we are --that’s driving this year-over-year cost for us. And 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% to 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 it’s a little bit of 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 began occurring in the third quarter and frankly it didn’t. It actually got worse than the terrible experience we saw in the second quarter on claims. It doesn’t mean it’s going to be like that forever. We can’t -- certainly can’t say with assurance that it will be better, but it’s 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 to that.

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. And we’re continuing to experience pressure on that side as well.

That’s helpful. I had a 2 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 will start to revert to the mid?

Two questions, I will answer the first part, Tobey. We have brought on a couple of more fairly significant MSP clients in the $5 million to $10 million range of utilization in the third quarter. We have very attractive contracts. They are not high margin but they are certainly what we would consider average margins for our book of MSP business. And 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 to just to get them to understand -- layout 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’s 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 inside into that. We do expect to return to a more attractive level of margins in beginning in the first quarter of 2013. Every month, we expect our situation to improve. Given the actions that we are taking, but it’s just going to be a process to get from here to there. Emil?

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 kind of normal claims pattern. We have number of claims of high severity that are behind us at this point. So, I don’t really expect workers 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 deductibles. 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. And in the housing area, we do expect continued effects of the inflation that we are seeing in our rental markets and that’s built into our guidance.

Tobey, just one more thing and it’s much further out. But now that the elections has been decided and it looks like healthcare reform is here to stay. What we do have to 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 to state exchanges. We think it will be a very attractive option, particularly vis-à-vis our current experience.

Our next question comes from A.J. Rice with UBS.

Hi, everybody. I had a couple of questions if I can ask. Joe, you just first of all following up on the previous line of questioning. So you have got couple of $5 million or $10 million MSP contracts, that are starting to ramp up in the third quarter. I’m just 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 happened to that?

A.J., let me clarify that the new accounts aren’t going to ramp up in the third quarter. They are really going to be first quarter 2013 opportunities for us. I just -- you get the contract and then you go through a process of on boarding them. So, that we wouldn’t expect it get revenue from those. The $60 million that we talked about, all those contracts are in place of the largest of the contracts of the MSPs in that $60 million number has taken -- it’s a very large system that is taken far longer than we anticipated. It was not a system that had MSP in place. So we are doing a lot of the heavy lifting. It’s a client that we are kind of teaching how to do this and it’s a process. I mean it’s a more onerous process. They had a sense of urgency when we began talking to them in a really -- we’re informed, we have won the engagement in the second quarter of ‘12, 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 new 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 ‘13. But it’s still a very attractive account. We’ve had a very constructive dialogue with them. I think we are in a very good place and 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 the client. There’s six regions, four have been implemented. Within the last several months, they are beginning to deliver volume for us in the fourth quarter. One of the 2 that have not been implemented, one of those 2 regions is the largest, historically the largest user of contingent labor within the system. So it is taking 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 of months ago. So there a number of things that concerned me. I actually think, we are in a better place today than we have been in quite sometime and the rest are continuing to ramp up. So, in a kind of net-net, A.J., we do anticipate volume growth in 2013, driven in part by 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 are up well over double the low point in February. A lot of the recent additions have been seasonal orders, but seasonal orders are orders. And 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 are seeing that show up in the fourth quarter. So the third quarter was really the nadir for our Nurse and Allied business in 2012.

Okay. I know from time to time, we’ve talked about the fact that this EMR implementation that you referenced, this one account is having a sort of positive tailwind to the business. Can you just sort of comment on where we are on that? Is that still the case and as you sort of look in futures orders, is that diminishing in anyway or is it about the same or is it maybe picking up?

I would describe it as -- ‘12 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 ‘13 will be a better year for EMR activity for us than 2012 was.

Okay. Maybe, just I could ask here a little bit of 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. I was just curious, that’s going to end on March 12, 2013, what happens after that?

Well, well before that, A.J., we expect to replace this facility with our asset base lending, new asset base lending credit facility. We believe it’s 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. 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 for quarter. And so 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 are well along in the process. The field audit at this point is done. They were no surprises. We expect to receive a commitment within a week, maybe as earlier as the end of this week and after that the only open items -- significant open items is completing the legal work.

Okay.

Long before year end, we should have in place.

All right. On the -- of your $34.5 million of total debt, how much is sort of wrapped up on this that you are hoping to, when you go away with this facility that will flip over into an asset-base 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.

Right. And 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 re-negotiate again and hope for that another modification?

Yes. We would have a number of options. Obviously one of them is to re-negotiate an extension of the covenant relief. The other option would be to engage discussions with another bank, another financial institution. Out of the 5 members in our banking syndicate, 4 out of the 5 gave up attractive proposals. So we have other options.

Okay. And just, any sense of how big the asset-base lending, how much you are thinking about there or what you may go for?

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

[Operator Instructions] Our next question is from 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?

Well, we have a lot of options. The housing inflation, Jeff, we believe is here to stay for the foreseeable future. So we are taking a number of steps. And we are aware, our competition is taking steps that maybe 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 are experiencing. But we do have some levers we can pull and we are pulling them.

In terms of the pressure on the bill-pay spreads?

Jeff, the pressure in our Nurse and Allied segment was really the bill-pay spread contraction was really driven by geographic mix and the fundamental driver of the compression was the housing. Because what happens is, as your geographic mix shifts to lower housing costs market, you have a -- we price our contacts 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. And when you look at our spread, we really need to look at it in terms of bill-pay and housing combined. And the fact that the housing cost have risen, offset the expected benefits that we should have realized on housing expenses due to changes in geographic mix.

And just to add to that, the first half of this year, we came into the year anticipating we’ll be able to drive 2% to 3% bill-rate improvement. Given the pretty favorable dynamics in 2011, which faded as we got through the end of the year. I’ve talked about that, the decline in demand that we saw. It seemed to correspond to the budget cycle, demand troughs in February of 2012. But since then, we have seen pretty dramatic increases. So, in the first half, I would describe our experience in getting our clients to understand the need for bill rate increases to keep their packets that we can offer at their facilities competitive has been pretty disappointing. But I would describe, particularly in the last 4 to 6 weeks, a much more encouraging tone to these conversations. The clients seem to get it. We’ve 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. So, the only other lever to pull in addition to some of the actions we can take to mitigate housing cost 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. So, we think it’s -- the dialog has been constructive. But something has to happen and as you have more demand and as you have more options to place nurses, generally that the conversations do become more constructive and the outcome gets improved for us. So, I would actually anticipate our bill-pay spreads to expand as we go over the next several quarters given the actions that we’ve taken over the last several months.

Okay. Great. That’s helpful. And just a couple of quick numbers questions. For capital spending for the fourth quarter what should we expect?

In the neighborhood of $0.5 million.

Okay. Great. And I know you are not looking -- you are not giving any guidance in 2013, but in terms of what I guess would be a normalized tax rate, what should we be modeling?

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

[Operator Instructions]

/> Okay. Amy, there is no further questions?

Not at this time.

Okay. And thank you very much. Thank 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.