Aug 1, 2013
Executives
Amy Chang - Vice President, Investor Relations Susan Salka - President and Chief Executive Officer Brian Scott - Chief Financial Officer Ralph Henderson - President, Healthcare Staffing Bob Livonius - President, Strategic Workforce Solutions
Analysts
Josh Vogel - Sidoti & Company Tobey Sommer - SunTrust Jeff Silber – BMO Capital Markets Vishnu Lekraj - Morning Equity Gary Taylor - Citigroup Mark Marcon – Robert W. Baird & Company
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Second Quarter 2013 Earnings Call.
At this time, all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded.
And I would now like to turn the conference over to our host the Vice President of Investor Relations for AMN Healthcare, Ms. Amy Chang.
Please go ahead.
Amy Chang - Vice President, Investor Relations
Thank you, Laurie. Good afternoon, everyone.
Welcome to AMN Healthcare’s second quarter 2013 earnings call. A replay of this webcast will be available until August 15, 2013 at amnhealthcare.investorroom.com.
Details for the audio replay of the conference call can be found in our earnings press release. Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events or circumstances constitute forward-looking statements.
Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words and other similar expressions. It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2012, and our other filings with the SEC, which are publicly available.
The results reported in this call may not be indicative of results for future quarters. These statements reflect the company’s current beliefs and are based upon information currently available to it.
Developments subsequent to this call may cause these statements to become outdated. The company does not intend, however, to update the guidance provided today prior to its next earnings release.
This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the company’s website.
On the call today are Susan Salka, our President and Chief Executive Officer as well as Brian Scott, our Chief Financial Officer. Joining us during the Q&A session will be Ralph Henderson, our President of Healthcare Staffing and Bob Livonius, our President of Strategic Workforce Solutions.
I will now turn the call over to Susan.
Susan Salka - President and Chief Executive Officer
Thank you so much, Amy. Good afternoon everyone, and welcome to AMN Healthcare’s second quarter 2013 earnings conference call.
Our leadership position and differentiation in the industry continues to provide benefits for AMN and our clients. In particular, our strength in providing MSP services and other workforce solutions is enabling our clients to better meet their patient care and financial goals.
Our strong second quarter results were the outcome of the continued benefit of our workforce solutions leadership, some mixed market conditions, and solid execution by our team. All of our business segments delivered year-over-year increases in revenue and gross margins.
Second quarter consolidated revenue grew by 8% and adjusted EBITDA by 17%. Gross margin increased by 90 basis points to 29.3%.
Our adjusted EBITDA margin for the quarter was 8.4%, a 70 basis point improvement over prior year and a notable step towards our goal of 10%. We continued to make progress in expanding our position as the nation’s innovator in healthcare workforce solutions increasing AMN’s mix of revenue that is coming from MSP clients is a key part of our strategy as the higher fill rates enable us to grow faster during periods of market expansion and provide some protection during periods of demand softness.
In other industries, MSP usage typically reaches 50% to 60% penetration at maturity. And we anticipate runway for us to continue to grow this competitive advantage.
In the second quarter, we won several new MSP contracts. We also made significant progress in implementing the new Locums MSP contracts we mentioned last call.
For the remainder of 2013, our MSP pipeline remains robust and we anticipate further penetration across all of our staffing businesses through out the year. Now let’s review the results of our three business segments.
I will start first with our largest segment of nurse and allied staffing. Second quarter revenue for this segment was up 7% year-over-year and down 4% sequentially.
The largest contributor was the travel nurse business where volume was up 10% year-over-year and down 5% sequentially. Part of the decline was the slightly lower EMR revenue and the normal follow-up of flu and winter seasonal demand.
But this year we also had the affect of sequestration, lower hospital census and a generally more cautious client mindset due to budgetary concerns. We mentioned this on our last earnings call and the same environment persisted until just recently when demand for travel nurses began to increase again throughout July.
Second quarter new nurse applications were up year-over-year which was partially aided by the early returns on the investments we have been making in Canada sourcing technologies. Going into the third quarter we expect to travel nurse revenue to be up in the mid-single digits year-over-year and flat sequentially.
Normally, we would expect to be up slightly in the third quarter, but since the orders were down throughout most of Q2, it’s unlikely the sequential impact will be overcome by recent up-tick in orders and the higher anticipated EMR business. We began to see a slight shift in the mindset of our clients which should continue to strengthen as their visibility into patient volume the second half of the year improves.
Turning now to local staffing, second quarter revenue was up 1% compared to the prior year and down 4% sequentially. We continued to rationalize our geographic footprint and consolidated five lower performing branches in two nearby locations.
We now have a total of 42 local staffing branches to support markets with existing and potential MSP contracts. Going into the third quarter local staffing revenue is expected to be down slightly both year-over-year and sequentially.
Now turning to allied staffing, second quarter allied revenue was down 4% year-over-year and 3% sequentially driven primarily by the decline in therapy volume offset by a slight increase in the imaging and lab specialties. To address the current market challenges in therapy, we have realigned our resources and the team is concentrating on increasing our fill rates at MSP clients as well as targeting the less impacted acute care outpatient and home health client settings.
Going into the third quarter allied staffing revenue is expected to be down in the low-teens year-over-year and in the low-single digit sequentially due primarily to the continued market declines in therapy With our increasing penetration into MSP clients, we believe that we can weather the storm better than other allied staffing companies and we will emerge in a stronger position as the market adjust to reimbursement changes and eventually resumes growth. A bright sport has been the recent turnaround in AMN’s Locums tenens segment where we see the changes that have been made over the past year beginning to pay off.
Second quarter Locums revenue was up 8% year-over-year and 11% sequentially. This was the largest sequential growth that we have seen since 2007.
The improvement was driven mainly by growth in our hospitals and primary care businesses as well as advanced practice specialties. We also began generating some incremental revenue from the new Locums MSPs that were being implemented in the first quarter.
Gross margin increased by 110 basis points both year-over-year and sequentially due primarily to the improvements in bill pay spread. Going into the third quarter we expect Locums revenue to be up in the mid to high-single digit in year-over-year and up slightly sequentially.
Our best performing segment this quarter was physician permanent placement with second quarter revenue was up 16% year-over-year and 12% sequentially. The continued growth was driven by increases in new searches, placements and sourcing revenues.
A team of fill achieved improvements in pricing and average recruited productivity. The growth in searches has been broad based across specialties and settings with some of the strongest growth coming from family practice.
Based on the new search activity in the second quarter we anticipate third quarter physician perm revenue to be up in the mid-teens year-over-year and up slightly sequentially. As many of you may know this high performing segment is led by Mark Smith.
What you may not know is today is Mark Smith’s 25th anniversary with Merritt Hawkins. Congratulations Mark and we would like to thank you for your superb leadership.
Our strategy of providing innovative workforce solutions and diversified staffing services to the healthcare community continues to differentiate AMN in the marketplace. We are engaging in strategic sea level dialogue beyond what we have seen previously in the industry.
Healthcare providers continued to gain interest in adopting workforce solutions to address the influx of the additional 30 million insured citizens, the ageing and growing population and the emerging workforce shortages. Our clients also include other types of healthcare services organization that are also seeking more efficient and effective ways to deliver on their growth expectations for the future.
They are particularly motivated to take action and partnering new ways. Despite the softer than expected hospital admissions this year it is skill generally anticipated that volumes will expand in 2014 and beyond as the impact Obama care begins to take hold.
To ensure we are best positioned to be the partner of choice for clients we have continued to invest in three key areas. This first is the expansion of our suite of workforce solutions and our differentiation as healthcare’s workforce innovator.
The second is our leading edge recruitment technologies such as job distribution platforms and mobile applications to aggressively attract more candidate supply and to create a better candidate experience. And a third is the streamlining of our systems and infrastructure for greater efficiency, scalability and agility.
These investments will enable us to continue delivering revenue growth and improved operating leverage in the future. A final element and a key to our success are our passionate and dedicated team members who deliver excellent and differentiated value to our clients and our clinicians every day.
It is their strong execution that sets AMN apart in the marketplace and enables us to company to deliver shareholder value. I will come back to you in our Q&A section along with Ralph and Bob to help answer your questions but for now.
I will turn the call over to Brian.
Brian Scott - Chief Financial Officer
Thank you, Susan. Good afternoon everyone.
Second quarter revenue was $253.9 million, up 7.7% from last year and 0.7% from last quarter. Our gross margin for the quarter was 29.3%, up 90 basis points from last year and 30 basis points from last quarter.
The year-over-year increase was due to margin improvements across all three of our reportable segments, sequentially the increase was driven by the gross margin improvement in Locums Tenens segment along with faster growth in our higher gross margin physician perm placement segment. SG&A in the quarter totaled $54.6 million or 21.5% of revenue compared to 21.3% in the prior year and prior quarter.
The year-over-year SG&A increase was due to a $1.7 million actuarial based increase in our professional liability reserve in our Locums Tenens segment as well as higher headcount commissions and other expenses related to the increased revenue and our strategic initiatives. Partially offsetting these increases was a $3 million credit to SG&A recorded in conjunction with the settlement of the Medfinders acquisition hold back.
This hold back settlement was recorded through unallocated corporate overhead. The sequential SG&A increase was due to the same factors in addition to higher bad debt expense as the prior quarter included a credit from favorable collections on previously reserved accounts.
Our second quarter nurse and allied segment revenue increased 7.3% from the prior year, but decreased sequentially by 3.7% to $170.1 million. Volume of 5,924 average clinicians on assignment grew 5.9% year-over-year and was lower by 4.7% sequentially.
Revenue per day was up 1.3% year-over-year and down 0.1% sequentially with our year-over-year average bill rates higher by 1%. Nurse and allied gross margin of 27.2% was higher year-over-year by 50 basis points with improved bill pay spreads and lower health insurance costs more than offsetting higher housing costs.
Gross margin was lower by 30 basis points sequentially due to the prior quarter workers compensation reserve benefit of $1.2 million. Second quarter nurse and allied operating margin of 11.8% was higher by 20 basis points year-over-year and down 90 basis points from the prior quarter.
The sequential decline was due in part to the prior quarter workers compensation reserve adjustment which added 70 basis points to the margin. Second quarter Locum Tenens segment revenue of $72.7 million was up 7.6% from the prior year and 11.1% sequentially.
Gross margin of 29% was 110 basis points higher from the prior year due primarily to improved bill pay spreads and was also up sequentially by 110 basis points due to improved bill pay spreads and higher perm conversion fees. Second quarter Locum Tenens operating margin of 6.8% was lower by 220 basis points year-over-year and down 70 basis points in the prior quarter.
The year-over-year decline was due to the previously noted professional liability adjustment and high employee related cost associated with the revenue growth. The sequential decline was due to the higher professional liability cost and high bad debt expense due to the prior quarter bad debt recovery.
Our second quarter Physician Permanent Placement segment revenue of $11.1 million was up year-over-year by 15.8% and sequentially by 12.1%. Gross margin improved by 280 basis points in the prior year and 10 basis points in the prior quarter from improved recruiter productivity.
Adjusted EBITDA for the quarter was $21.3 million representing 8.4% of revenue. This compares to $18.2 million, or 7.7% of revenue in the prior year quarter.
Interest expense in the quarter was $3.1 million, which compares to $13.6 million last year and $2.9 million last quarter. Interest expense in the quarter included $1 million of charges associated to the re-pricing of our credit agreement in early April.
The amendment reduced our interest rate and provided for other favorable changes to our credit agreement. Our tax rate in the quarter was 38%, which included favorable adjustments related to the permanent tax difference on the Medfinders holdback settlement.
We expect our tax rate for the second half and full year 2013 to be between 40% and 41%. We reported net income of $8.4 million in the second quarter.
Diluted earnings per share was $0.18 for the second quarter. Operating cash flow for the quarter was $19.2 million and capital expenditures were $3.1 million.
Days sales outstanding were 54 days compared to 56 days in the last quarter and 53 days last year. As of June 30, our cash and equivalents totaled $10.5 million and our total debt outstanding was $154 million.
Our quarter end leverage ratio as calculated for our credit agreement was 2.1 times as compared to 3.1 times last year. Subsequent to quarter end, we made an additional voluntary debt payment of $5 million.
Now, let’s turn to our guidance for the third quarter. We expect consolidated revenue to be between $253 million and $257 million representing year-over-year revenue growth of 4% to 5%.
Gross margin is expected to be 29% to 29.5%. SG&A expenses as a percentage of revenue are expected to be approximately 21.5%.
Adjusted EBITDA margin is expected to be approximately 8%. Third quarter interest expense will be $2 million and capital expenditures are projected to be $3 million.
Diluted share count is expected to be $47.8 million for the third quarter and the full year. And with that, we would like to open up the call for questions.
Operator
Thank you. (Operator Instructions) Our question is from the line of Josh Vogel with Sidoti & Company.
Please go ahead.
Josh Vogel - Sidoti & Company
Thank you. Hi, Susan and Brian.
Susan Salka
Hi, Josh.
Brian Scott
Hi, Josh.
Josh Vogel - Sidoti & Company
Susan, you mentioned that I know one month doesn’t make a trend here, but you mentioned that dialogue with clients, especially on the travel nurse front improved in July. I was curious as we look into Q3 and potentially Q4 with hospitals talking about budget cuts, do you think that the nurse and allied business can be up Q4 versus Q3 kind of like we saw last year?
Susan Salka
Sure. Well, first regarding the trends that we have seen more recently, we would typically expect to see orders going up in July, because now with when we begin to get in our winter seasonal needs.
And so the good news is those are coming in and they are happening. They are a bit different in some cases in last year and that some of the star gates are a little bit later maybe November and December maybe versus October, but we are seeing needs continue to increase.
And in fact we have had more orders at more facilities kind of growing over the last month. And I’ll have Ralph give a little more color on that in a minute.
Regarding your Q4 question, I’ll remember that Q4 for allied is typically seasonally down. And then you have on top of that the fact that therapy right now is under tremendous pressure due to the reimbursement cut.
So, I certainly wouldn’t expect the allied business to be up in the fourth quarter that could change, but it would take a pretty strong turnaround immediately. The nursing business would be more typically flat to up in the fourth quarter and it probably remains to be seen how much of these new orders are going to continue to grow and when the star dates will kick in to make that happen.
The other factor that we have in the nursing business is our EMR implementation business which has been exceptionally strong for us this year really well beyond our expectation. The team there is done an extraordinarily great job.
The third quarter for us in EMR is expected to be our highest quarter of the year and the fourth quarter would be expected to be seasonally down in EMR implementation. So for that reason, you might have more of an offset in the nursing business because you – even if you had volumes that were flat or up in the traditional travel nurse business, you might have the headwinds of an EMR revenue that’s dropping.
So, might be a little more than you are asking, but there are a lot of moving parts in there which could ultimately contribute to the segment performance. Ralph I might ask you to give a little more on the orders and sales.
Ralph Henderson
I mean we did see from Q1 to Q2 the normal seasonal pullback the flu season ends and as well the winter volumes that occur when populations kind of migrate to the Western states kind of go back home and soon we start to see that spike decrease in that certainly is in our Q2 results. Right now, we are about flat to prior year and we are seeing some increases just the last few weeks which have been good news.
These types of temporary reductions to manage to lower patient volume or budget constraints and things like that we’ve been seeing those for years. It typically lasts one to two quarters declines tend to put them on the shelf after that as burnout increases over time starts to go up.
So, predicting the actual data that’s going to come out is very, very difficult.
Josh Vogel - Sidoti & Company
Understood, that’s helpful. What percent of revenue is EMR?
Susan Salka
We don’t report the active revenues or the percentage within EMR because it is still relatively small, but it is going to be up pretty considerably versus prior year both due to certainly demand increases more client implementation the fact that we have such strong positions in our MSP clients, we think it’s a nice advantage for us because typically as an MSP client is going to do anymore implementation we are very likely partner for them to do the EMR implementation. So, we think that benefited us and then we’ve added resources as we saw the momentum and then the revenue opportunity going into this year, but it’s not material enough to breakout as a segment, so I’m sorry, we are not really reporting it.
Josh Vogel - Sidoti & Company
That’s okay. Shifting gears a little bit definitely surprised to see the strong performance in Locum Tenens and Physician Perm and I know you have the rollout of the Lucums and MSP, but I was curious if the pickup was broad-based from a geographical prospective as well or are you just seeing pockets of strength in certain regions or hospital systems?
Ralph Henderson
Yeah, this is Ralph. I know that one as well, yeah, when the year-over-year growth was 7.6% and our sequential increase 11.1% was stronger than we had seen in quite some time.
I think it was our strongest organic quarter since 2007. The demand was up and we use a definition of days available to fill right the number of shifts we have and it was up about 5% may be 6% year-over-year and it was pretty much across the board there were some specialty driven demand things I will talk about those in a second.
I think important to note was our internal performance against those demand levels improved, right. We seem to have our resources in the right place, our process improvement efforts are paying off and the team is performing very well both at our Staff Care and our Linde brands.
In the past, we talked our Linde performing well and Staff Care not performing as well, but this quarter we saw strong performance from both groups. The specialties did advance for (indiscernible) our advanced practice which we made an investment in last year, dentistry primary care was up, several of those were up in the double-digits had a little bit of drag from radiology still continuing it’s downward trend, but it’s such a small segment now it has less impact on the overall business.
And then our government business was down as well just a little bit and but at about the level that we had anticipated getting our government to a one point we are over weighted on government it was close to 20% of our total revenue, now we are running closer to 13%.
Josh Vogel – Sidoti & Company
Okay, great. And one last one if I may, Brian I may have missed it in your commentary, but what goes into the unallocated corporate overhead line and what drove that down about $2.5 million sequentially and should $6 million be the quarterly run-rate we should be looking for going forward?
Brian Scott
No, it’s running more on that kind of $8.5 million to $9 million and that would be what you look at going forward. I mentioned earlier that we did have a credit related to the settlement of the holdback related to Medfinders.
Josh Vogel - Sidoti & Company
Alright, okay.
Brian Scott
So, that’s where that credit got recorded, that’s why the numbers are lower. What goes into that is really – is primarily from our back office overhead cost.
So, HR, legal, finance, those costs we don’t allocate out to the different segments, so any of our back office costs like payroll and housing and those areas we do allocate, but certainly one that are more true kind of corporate overhead, we are leaving that corporate unallocated.
Josh Vogel - Sidoti & Company
Okay. Are there any other potential credits out there that could hit up in the future?
Brian Scott
Nothing I know, I was looking for them, but…
Josh Vogel - Sidoti & Company
Right.
Brian Scott
Nothing expected as we look ahead right now.
Josh Vogel - Sidoti & Company
Okay, great. Thanks a lot.
Susan Salka
Thanks, Josh.
Operator
Our next question is from the line of Tobey Sommer with SunTrust. Please go ahead.
Tobey Sommer - SunTrust
Thank you. I can start with the EBIT margins in Locums, you have already discussed so many prepared remarks, but I just don’t think I jotted it down, aside from the puts and takes that occurred within the quarter, what do you think the underlying or ongoing trend in profitability is?
Brian Scott
Well, we talked about the professional liability adjustment in the quarter, which has an impact of little over 200 basis points. So, if you add that back in, you are back up in the kind of more in the 9% range at this point.
So, I think that’s where we are today. Obviously, our expectations are to still move that higher.
We have our nurse and allied segment is more in the 12% range and we know that Locums business has the opportunity both through continued gross margin improvement and more SG&A leverage as we grow the top-line to get into that double-digit range as well.
Tobey Sommer – SunTrust
In the professional liability adjustment, is that a relatively infrequent occurrence or was it just a bigger magnitude this quarter?
Brian Scott
Really have them. We do our actual reviews twice a year in June and December.
This is Brian again. And the amount if it was largest, so we nearly have some type of adjustment and sometimes they are not material and I first mentioned it could be just a few 100,000 either way this particular quarter, the nurse and allied segment for example was not material, but on the Locums, it was of a larger magnitude.
Tobey Sommer – SunTrust
Okay, okay.
Brian Scott
That one particularly I mean, we’ve had some negative claim trending there. We obviously review all the open claims and the actuary has all that data.
For the reserve, we have to now we think is appropriate. Overall, our malpractice claims in Locums are it had been below the industry.
And so that’s even with these adjustments, first of all, are doing a really great job. Our risk department is excellent parting with sales team to put the right doctors to work.
And so even with these adjustments, we are still feeling very good about our overall risk program.
Tobey Sommer – SunTrust
And then Susan on the MSP, you made a reference of kind of more mature MSP markets maybe reaching a 50% or 60% threshold. Could you flush that out for me because and how it applies and how you are thinking it may apply to healthcare staffing?
Susan Salka
Sure Tobey. And our reference there is really pointing more towards the larger commercial and global staffing companies, where MSP programs have been in place for decades.
And so actually above answer more the kind of the evolution of MSP within our segments, because it is different across nursing and allied and Locums and we still feel we are very early on in the penetration across the overall market.
Bob Livonius
Yes, I think there is lot of, this is Bob. The growth on the commercial side or the non-healthcare side as Susan said, it gets as high as 50%, 60% of large clients and many, most large clients, but 50% to 60% of the total use some form of an MSP or VMS and they are about a decade ahead of what’s happening in healthcare, but in the segments of healthcare of course nursing is by far the most penetrated.
We still think that’s still in the low 20%, 30% area, but then in the allied sector, it’s really even smaller. And then Locums is brand new.
So, there is still a lot of runway for the healthcare sector to even catch up with what’s already happened in the rest of the temporary help market.
Tobey Sommer - SunTrust
Okay, thanks. That’s helpful.
I had a, Brian, numbers question for you, the interest expense in the quarter is a way to present in the press release with a net number?
Brian Scott
Interest expense what’s, it’s $3 million sorry and $1 million of that was related to the re-pricing. So, if you take that out, it was $2 million or $2.1 million actually.
Tobey Sommer - SunTrust
Okay. And…
Brian Scott
And that’s why we give guidance for the third quarter that seems bright about the $2 million level as well.
Tobey Sommer - SunTrust
And I wanted to ask Susan a question kind of a little bit longer term in just the next couple of quarters, maybe next couple of years, are you having conversations with hospitals in which they are discussing with you the kind of an aspiration to materially increase the percentage of their labor that is flexible?
Susan Salka
I would say, the most frequent conversation that we have is around how can they put in programs to get their arms around their overall workforce spending, including both temporary and permanent and then specifically better manage their temporary staff, and that’s where the workforce solutions like MSP and RPO and other types of solutions come into play. Anecdotally, there have been a few comments and discussions around how they might create a more flexible workforce and have a slightly lower core staff and more flexible staffing, but that’s also just driven around always trying to find the right mix of staffing to make sure that you have access to clinicians when you need them, but don’t have excess labor cost and staff when you don’t.
So, I think it probably has been accelerated slightly, just minimal discussions that are occurring have been accelerated slightly by the fact that they know they are going to have to come up with more flexible cost structures, but I wouldn’t say it’s a trend yet. It’s still pretty early on, but the focus on workforce solutions in general has definitely been increasing.
Tobey Sommer - SunTrust
Okay. In my last question was you mentioned a new MSP win, was that a sale that you made in the quarter or is that an MSP relationship that started to ramp in the quarter?
Bob Livonius
I think what Susan, this is Bob again, what Susan referred to is that we have seen every quarter we have consistently closed a few new MSPs and we had another good quarter and the second quarter, we closed quite a few new MSPs, we don’t usually report on how many, but we do close quite a few every quarter. Then I think we are proud of the couple of them that are larger, we didn’t miss anything in particular, but also she mentioned the fact that we are starting to ramp up on our Locums MSPs for business not only new ones we closed this quarter, but some of the ones we closed in past quarters.
Tobey Sommer - SunTrust
Okay. So, it’s a reference to momentum in the newest division on the Locums side?
Susan Salka
Correct.
Tobey Sommer - SunTrust
Okay, perfect. I’ll get back in the queue.
Thank you.
Susan Salka
Thanks, Tobey.
Brian Scott
Thanks, Tobey.
Operator
And our next question from the line of Jeff Silber with BMO Capital Markets. Please go ahead.
Jeff Silber – BMO Capital Markets
Thanks so much. I wanted to focus on the gross margin line a bit.
Forgive me, if you can just remind us the professional liabilities in the Locums events are booked as SG&A, but in the nurse and allied segment, is that booked on the gross margin line?
Brian Scott
It’s all in SG&A.
Jeff Silber – BMO Capital Markets
It’s all in SG&A. Okay, great.
And just speaking of that if I remember correctly also one of your competitors a couple of quarters ago mentioned that they were unable to get a waiver of some impact of Obamacare, but you would – you did that get waiver and it could have an adverse impact on your gross margins for next year. Can you discuss that a bit of what the impact might be?
Ralph Henderson
Yes, this is Ralph. We continue to study that issue.
It’s – we did get the waiver for 2013, that’s last year that the government is going to be giving waivers. So, in 2014, we got to make some adjustments to our plan to be compliant with the new regulations.
And we have talked about it before, but we expect that whatever increasing cost we have there which isn’t that material would be offset by increases in pricing passed along to customers, so not a big event for us.
Jeff Silber – BMO Capital Markets
Okay. And that will occur in the beginning of next year?
Ralph Henderson
Yes, January 2014.
Jeff Silber – BMO Capital Markets
Okay, alright, great. And then speaking about Obamacare that fact is the important mandate being delayed a couple of months ago until next year or until 2015.
Did that have any impact on your business either positive or negative?
Susan Salka
We don’t think so Jeff. I think the general consensus has been that delay well necessarily impact the number of newly insured since there is still an individual mandate.
It might cause for trajectory to be slightly slower, but so far it hasn’t caused most of our hospitals to talk about any lower volume expectations and certainly analysts that cover the healthcare industry are referring to increased volumes next year. So, we are not the expert in predicting what that impact is growing to be.
But I think the general thinking is it won’t have much of an impact on what hospital volumes would have been anyway.
Jeff Silber – BMO Capital Markets
Okay great and just the quick numbers question. In trying to model sequentially, it looks like you are looking for a decent up-tick in SG&A expense as a percentage of revenue, is there anything specifically going on in the quarter that we should be aware of?
Brian Scott
No I should – the second quarter had a few puts and takes it’s Brain again so that if you take out the settlement in the PL adjustment in you would have some more back closer to the – not too far off from what our second quarter SG&A was which was 21.5% of revenue. The guidance we gave was 21.5% and if you take that on to the mid-point of our revenue guidance that will put you just slightly under $55 million of SG&A, so that.
Jeff Silber – BMO Capital Markets
Okay
Brian Scott
It’s not moving that much really when you take out some of a couple of items that occurred in the second quarter.
Jeff Silber – BMO Capital Markets
I appreciate the call Brian thanks so much.
Operator
And our next question is from the line of Vishnu Lekraj with Morning Equity. Please go ahead.
Vishnu Lekraj - Morning Equity
Hey, good afternoon everybody.
Susan Salka
Hi
Vishnu Lekraj - Morning Equity
Couple of questions here one short-term on your guidance for next quarter what are your assumptions as far as demand or census from your clients as far as trend and how that’s going about?
Susan Salka
For the third quarter that we are already almost half way into the third quarter, a lot of bookings have already been made certainly what’s already transpired that we also booked most of our assignments weeks in advance and so we have pretty good visibility on what volumes are to be for the third quarter. And the demand that drove that was really from the second quarter and maybe a little bit of early third quarter.
So, I would say we have pretty darn good visibility on what that’s going to be. It’s really how it impacts into the fourth quarter and what continues to happen with census.
Vishnu Lekraj - Morning Equity
Great. And then your expectation there is for a little bit of an uptick then I guess over the second half this year?
Susan Salka
Well that’s what we’ve been hearing from analysts and some of the speculation is around why were they down more than expected in the first quarter and a lot of the discussion is pointed towards the growing demand for higher deductible health plans and the fact that many patients might be putting off care and hospitalization. And once they hit their deductible maybe there would be an up-tick towards the second half of the year even some of the hospitals that have reported already this quarter have referred to slightly improving I mean the year-over-year comps, improving census in the second half of the year.
I think the full year is still going to be below what original expectations were, but the second half is expected to be better than the first.
Vishnu Lekraj - Morning Equity
Got you. Looking here a little longer in term beyond 2014 maybe into 2015 some of the talk with some of the managed care companies has been within their own networks and some of the ACO models that are coming into online, how do you view especially with your MSP business, how do you view that affecting your demand or affecting your staffing levels moving forward?
Bob Livonius
Well, we are – this is bob again. I think we view positively the changes that are going on in healthcare more broadly.
So, any time that clients are looking to find ways to serve patients better by consolidating either systems coming together or ACO formation that generally speaks to high level strategic thinking around how they can improve their overall efficiency and 50% of the cost of running these hospitals is labor. So, when we can get the attention of the sea levels to talk about how we can address the workforce which is 50% of their costs, we think that there is lot of traction that’s actually happening that way or that is happening as a result of you know the kind of consulting work that we do and some of our partners do like we have a very strong partnership with Novation and they are working directly with our clients on identifying ways in which these new organizational structures that our servicing clients need to be more cost efficient.
So, it really is a great lead for us to get in and help our clients to satisfy those needs. So, all of that, we view as positive to our MSP program.
And frankly, just comment on more than just MSP, it’s the workforce solutions, it’s the MSP plus the RPO and the consulting, it kind of come together is a very powerful story to tell clients.
Vishnu Lekraj - Morning Equity
Great, thanks.
Susan Salka
Thank you.
Operator
And our next question from the line of Gary Taylor with Citigroup. Please go ahead.
Gary Taylor - Citigroup
Hi, good afternoon.
Susan Salka
Hi, Gary.
Gary Taylor - Citigroup
Few questions. One I guess, Brian you were talking a little faster than my fingers, so I think I would put this together, but I just want to make sure as you look at this quarter, the items that you I guess would consider perhaps non-recurring are this $3 million credit, I think $1.7 million negative insurance development both in the G&A line and then the $1 million amendment fee down in the interest line?
Brian Scott
Sure.
Gary Taylor - Citigroup
And effectively that all kind of nets each other out of the EPS line?
Brian Scott
Yes, I think that’s fair.
Gary Taylor - Citigroup
Okay. And then I think I guess I was looking at the 8.4% adjusted EBITDA margin this quarter guidance for 8% and wondering why that was lower, but actually if you make those adjustments, it looks like you are guiding for sequentially the same EBITDA margin?
Brian Scott
Yes, if you – yes, the interest wouldn’t impact that, but if you were to take just those other two items, you would end up right around 7.9%. And so it would be actually the guidance would be right around that same number, it’s not slightly up.
Gary Taylor - Citigroup
Got it. Tax rate was lower than you had guided for and thought and I know there is this dynamic as net income goes up kind of your effective tax rate decline.
So, when you think about third quarter, second half, and full year, is that 43% number in the ballpark or could it end up being lower than that?
Brian Scott
Yes, this is Brian. So, we do expect to be lower.
The guidance is more in that 40% to 41% range now.
Gary Taylor - Citigroup
Okay.
Brian Scott
And so as we looked and that’s why our rate in the second quarter is also a little bit lower, is it from that 43% that we are anticipating in the first quarter. Now, our full year forecast is more in that 40% to 41% range.
So, that’s why in the second quarter the rate was 38 to kind of true up to that projected full year rate. For the third and fourth quarter and the full year, it will be somewhere in that 40% to 41% range.
And you are right, it does. We get a little bit of range only because that the pre-tax income to firm differences will affect that slightly.
Gary Taylor - Citigroup
And then I guess more specifically a question was asked about consolidation, but more specifically Tenans acquiring Vanguard community potentially acquiring HMA, are there any obvious loss of contract risk, I guess for lack of better term out of those announced acquisitions?
Susan Salka
Gary, I don’t think we typically comment on specific clients and the impact of consolidations such as that, but since you asked, I will mention that we work with hospitals throughout all of those systems today. And so when these consolidations happen, sometimes they are already existing MSP clients of ours and that’s great, because if they are just adding on additional facilities, then we can just tuck those in.
Sometimes, it does create a risk for us. We have been fortunate in having to have that make much of an impact in the past.
In this case, those bigger clients, we either work with more directly or they are utilizing vendor neutral types of services of which we are a subcontractor with. In fact, we are very strong subcontractor with them.
And so, at this point we don’t see any particular change, but you never know what might happen with those clients. It could become MSP clients of ours down the road, but for now, we don’t see any particular impact.
Gary Taylor - Citigroup
Okay. And then last question, are you seeing any evidence or having conversations about hospitals thinking about ‘14?
I mean, if you are a hospital in an expansion state that’s expanding Medicaid and is going to have healthcare exchange in that state, you are looking at potentially millions of people with added coverage and most of us has followed Massachusetts and saw a pretty sharp uptick on the in-patient side as coverage rolled out there? So, are any of the hospitals saying, hey, obviously we haven’t seen any of it yet, that’s very clear, but as coverage expansion starts to rollout in ‘14, we maybe faced with some material demand growth and we want to talk about contingency planning for how to staff that or is it entirely too premature to be having that type of conversation?
Susan Salka
I think the short answer is yes, there is some mention of the looking towards the future and what their volumes might be and how they might create a more efficient can flexible labor and work for situation, that’s what’s driving a lot of the discussion around MSP. Certainly for nursing and allied, but also for Locums and it’s not just the hospital systems in sales, but sometimes it is the services companies that work with those hospital such as contract management firms you see tremendous opportunity going forward and they want to make sure they have access to test as they see their opportunities increase.
May be I’ll ask Bob and Ralph to jump in as well because there are also certainly having direct conversations with those clients.
Bob Livonius
I think it gets back to today, I think they are looking at what they can do to reduce costs because of the impact of the Medicare cost cuts so they’re trying to right size the work force to get the right blend of both temporary and permanent labor so, that when they get to a higher volume and there is a more influx is labor that they are prepared for – either prepared because they have a better ability to hire their own people and we help them with that or the ability to bring on additional staff and they need to, I think it’s I wouldn’t draw a thesis that people are going to start using more contract labor proportionately because there is more so than they absolute growth will be good for both permanent and contract labor.
Ralph Henderson
Yes, to some of the things and we are in the low period right now, right so they are hit by the sequestration the decrease in prices and haven’t increases in volume yet. So, they are mostly focused on that.
Where those that are focused on that are starting to put together their game plans for how they are going to staff, and we would think we would be a great solution for them, because we are very flexible right, as I know it can be shorter, they can react quicker to that demand. So, I think a lot of them are going to count on us for that.
Recently, we have seen increases I mentioned advanced practice being up in some double-digits year-over-year. That’s certainly healthcare systems and physician practices adding nurse practitioners and physician assistance to help them manage care the lower cost, but more efficiently so, big increases there, and in case managers which help direct the patient to the right type of care, big increases in that – in that segment as well.
So, couple of things short-term, but I think most of big benefits really come later 2014-2015.
Gary Taylor - Citigroup
Okay, thanks for your thoughts.
Susan Salka
Thanks, Gary.
Operator
And our next question from the line of Mark Marcon with Robert W. Baird & Company.
Please go ahead.
Mark Marcon – Robert W. Baird & Company
Good afternoon. I apologize if this was discussed as conference calls at the same time this afternoon.
Can you talk a little bit about the guidance which regards to nurse and allied and specifically in the third – for the third quarter how much of an impact is EMR versus a drop off because the flu season was so strong. How should we think about that and how should we think about the outlook beyond this quarter for those two segments.
Ralph Henderson
This is Ralph. I’ll start I’m sure everyone here probably wants to jump in on it.
The flu season really impacts our Q1 to Q2 trend and really basically we started seeing orders drop kind of mid February and they declined from that high point for several months and only recently began they are ticking up again I think it probably discuss that part of the call in the last five or six weeks. Our Q3 trend, we have a positive EMR impact in Q3, but it’s going to take us a while the last lower demand levels in Q2 so, short-term travel nurse business is likely to be off just slightly from Q2 to Q3 and then the EMR business will hopefully makeup for that.
I say that with a little bit of caution because it is an enterprise wide technology implantation they started to move, sometimes they move about as they tend to move back and so and then and sometimes the volume is a little bit different or greater than we anticipated or more often. So I think that on the allied side, we’d certainly still kind of see a downward trend on demand and our local probably falls pretty close to travel nurse business.
Mark Marcon – Robert W. Baird & Company
And then how are you thinking about it not into the next year to that, I think everybody kind of expect things to pickup next year with the ACA, but how would you think about it trending towards the fourth quarter, just what are you hearing from clients. And in terms of some of the MSP wins that you have gotten, can you talk a little bit about how those are rolling out?
Brian Scott
Yes. I think as it relates to fourth quarter, we do and we saw something in the second quarter we start to see the implementation takes place using in the third and beginning of the fourth.
And so we are not seeing a whole lot of impact probably for the ones we sold in second quarter. Mostly, our impact starts in those we sold in the first quarter for a fourth quarter, but we have already seen some of that impact.
Locums, I think as we have pointed out was impacted by one of our new wins in the Locums MSP space our Locums business. So, for fourth quarter, we do have some wins that we made in the second quarter that will have some impact and that will help us offset for any drag there might be from other declines either less CMR or just the overall space.
I think that’s one of the beauties of the MSP program. It’s rough-and-tumble as they can be in the rest of the marketplace.
You definitely feel a sense of stability around the MSP side of the business simply because it allows you to control the orders that are there. It allows you to be the – when there is a slower demand, you are not forced to cut down your orders you actually just fill more of your own business and give less of it to the subcontractors.
Mark Marcon – Robert W. Baird & Company
And in terms of the fluctuations in the patient’s census, does that had any impact with regards to the progress that you have been seeing with regards to nurses been willing to travel and to go back to that sort of work style?
Ralph Henderson
This is Ralph. That’s a really good question.
In the past, you are right, we are doing kind of recessionary times nurses were reluctant to take travel assignments and they often move into permanent jobs, and actually we have seen that in the allied segment of our business. That’s why we are redirecting our sales efforts a little bit out of rehab and into other acute care and other areas, where we think there is still good growth opportunity in therapy.
But so far in travel nurse, we haven’t seen that trend. I think this is really just – it really is just a budget, short-term, gets into the numbers for a couple of quarters strategy by their healthcare systems, and they are just trying to get themselves through to higher patient volumes.
They do want to say because we talked about MSP, our MSP strategy helps of a lot when this happened. So, if you take a look at our booking trends in Q2, despite the volume being flat we actually booked more that we did same quarter last year.
So, our fill rates on MSP orders for travel nurse were up 400 basis points Q2 last year to Q2 this year and up 1800 basis points in our allied from Q2 last year to Q2 this year. So, that strategy really helps us drive better results with lower demand levels.
And then on top of that, we are executing very well keeping our SG&A low and we expect our segment margins to hold up far better than they did when we have seen demand decreases in the past.
Mark Marcon - Robert W. Baird & Company
Great, thank you. One last question, then I will follow up offline.
Can you talk a little bit about rents? What you are seeing there?
Brian Scott
Sure, this is Brian. Yes, in the external environment, they were hearing about rents has not changed.
It’s still a very challenging market. Vacancy rates are still at the kind of historic lows, particularly in the share market, the share is as lows as 3%.
And projections are still what I am hearing is more enough 4% to 5% year-over-year increases in rents. For us, how we perform is then much better than that.
The housing department has done a really great job of identifying properties, where we can address that and keep your rental a bit lower. So, our performance has been more in the low single-digit year-over-year increases.
So, it’s still the pressure, we have been feeling for the last couple of years. We expect to feel that more – continue to feel that for the next year or two until there is more units come online, but overall, it’s come in even better than we had hoped just the team has done a really good job.
And also the sales team really working with nurses to negotiate the right packages and the housing is just one part of the overall compensation package we offer. And so we really try to educate them on the market and on the overall compensation.
Mark Marcon - Robert W. Baird & Company
Great, thank you very much.
Brian Scott
Sure.
Susan Salka
Thanks Mart.
Operator
And we have a question from Tobey Sommer with SunTrust. Please go ahead.
Tobey Sommer - SunTrust
Thank you. I wanted to ask you a trend of for your perspective on physician mobility and your thoughts about whether it’s improving and why and what your expectation maybe for that theme over the next couple quarters?
Susan Salka
Tobey, this is Susan I guess I said the obvious, it’s a great question because we do think it contributed to some of the momentum that we seen in our physician permanent placement business which is obviously had great performance year-over-year and sequentially. We’ve been able to secure more searches, searches are at one of highest point we’ve seen in several years.
And that’s been combination of increased demand in the market. I think the question was asked earlier have we seen any regional differences and I would say in this business in particular we have one of the most diverse client basis that we have seen in many years and across many types of settings and geographies.
So, you have to have candidates that are willing to go to those areas and we’ve also been able to really see a significant increase in our candidate responses in fact I just saw metric get data our candidate responses were up about 12% in first half of ’13 versus the first half of ’12. And so that’s a really good indicator that people are willing to make a move but also with via our placements.
I’ve been at such a high point our recruiter productivity in placements are the highest that we’ve seen in many years and that attributes certainly to the recruiters in the talent. But it’s also an indicator that you have more physicians that are willing to make move.
So, we do think it’s making a different and will be a continue driver for this business and Locums as well.
Tobey Sommer - SunTrust
Thank you.
Operator
Thank you. I’ll turn it back to our speakers for any closing remarks.
Susan Salka - President and Chief Executive Officer
Great. Well, thank you so much for joining us today.
We do appreciate your continued support of AMN and we look forward to updating you on our progress next quarter.
Operator
Thank you. Ladies and gentlemen, this will conclude our conference call for today.
Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.