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Cross Country Healthcare Reports Third Quarter 2012 Results

Cross Country Healthcare Reports Third Quarter 2012 Results

Cross Country Healthcare, Inc. has reported revenue of $129.1 million in the third quarter ended September 30, 2012, a decrease of 2% from the prior year quarter, but a 2% increase sequentially from the second quarter of 2012. The Company incurred a net loss in the third quarter of 2012 of $17.6 million, or $(0.57) per diluted share, which included estimated non-cash goodwill and trademark impairment charges of $17.0 million after-tax, or $(0.55) per diluted share. The impairment charges pertain entirely to the Company's clinical trial services business segment and result from the interim goodwill impairment test performed during the third quarter of 2012. Excluding the impairment charges, the adjusted net loss (a non-GAAP financial measure defined below) was $0.6 million, or $(0.02) per diluted share. In the same quarter of the prior year, the Company reported revenue of $131.2 million and net income of $1.8 million, or $0.06 per diluted share. Cash flow from operations for the third quarter of 2012 was $1.9 million.

For the nine months ended September 30, 2012, the Company generated revenue of $382.1 million and had a net loss of $32.7 million, or $(1.06) per diluted share, which included the aforementioned estimated non-cash impairment charges and a non-cash goodwill impairment charge in the second quarter of 2012 related to the nurse and allied staffing business segment. The combined impact of these impairment charges was $29.0 million after-tax, or $(0.94) per diluted share. Excluding the impairment charges, the adjusted net loss (a non-GAAP financial measure defined below) was $3.7 million, or $(0.12) per diluted share. This compares to revenue of $379.3 million and net income of $3.6 million, or $0.11 per diluted share, in the first nine months of the prior year. Cash flow from operations for the first nine months of 2012 was $5.7 million.

"While revenue was in-line with our expectations, our earnings performance was below expectations as we continue to face unusually severe direct cost pressure — primarily from insurance claims, bill-pay spread compression, and housing costs in our nurse and allied staffing segment — in an operating environment that, until recently, has provided little opportunity to raise bill rates," said Joseph A. Boshart, President and Chief Executive Officer of Cross Country Healthcare, Inc. "Our open orders for travel nurse staffing are nearly twice the level they were in February, and as a result of this improved demand environment, recent discussions with our hospital customers on raising bill rates are beginning to bear more fruit. Over the coming quarters, we believe this will serve to mitigate the higher direct costs we have experienced. In combination with our continued focus on cost reduction, we expect to drive a resumption of more profitable growth in 2013," he added.

Nurse and Allied Staffing

For the third quarter of 2012, the nurse and allied staffing business segment (travel and per diem nurse and allied health staffing) generated revenue of $69.8 million, reflecting a 5% decrease from the prior year quarter, but a 3% increase sequentially from the second quarter of 2012. The year-over-year decrease was due to lower staffing volume. The sequential increase was due to a combination of higher staffing volume and bill rates. Contribution income, defined as (loss)/income from operations before depreciation, amortization, impairment charges and corporate expenses not specifically identified to a reporting segment, was $3.0 million, a decrease of 53% year-over-year, but a 32% increase sequentially. The contribution income margin (defined as a percentage of segment revenue) was 4.2% in the third quarter of 2012, a decrease of 440 basis points year-over-year, but an increase of 90 basis points sequentially. The year-over-year decline was primarily due to higher field insurance expenses, higher housing costs, a decrease in the bill-pay spread associated with a change in geographic mix, and negative operating leverage. The sequential improvement was due to lower SG&A expenses and an improvement in the bill-pay spread partially offset by higher housing costs.

Segment staffing volume decreased 5% from the prior year quarter, but increased 1% sequentially. Travel staffing volume decreased 3% year-over-year, but increased 1% sequentially while per diem staffing volume decreased 12% year-over-year, but increased 2% sequentially. The average revenue per FTE per day for the third quarter of 2012 was $309, a 1% decrease year-over-year, but a 1% increase sequentially. Similarly, the travel nurse staffing average hourly bill rate decreased 1% year-over-year, but increased 1% sequentially.

For the first nine months of 2012, segment revenue decreased 1% to $206.9 million from $208.5 million in the same period a year ago, while contribution income decreased 46% to $9.2 million from $17.0 million in the prior year period.

Physician Staffing

For the third quarter of 2012, the physician staffing business segment generated revenue of $32.7 million, an increase of 6% from both the prior year quarter and sequentially from the second quarter of 2012. The year-over-year and sequential increases were primarily due to higher bill rates, as well as the sequential benefit of seasonality. Contribution income was $3.1 million, a 6% increase year-over-year and a 16% increase sequentially. The contribution income margin was 9.5% in the third quarter of 2012, unchanged from the prior year quarter and an increase of 80 basis points sequentially due to improved operating leverage. Physician staffing days filled for the third quarter of 2012 was 22,647 days, a 1% decrease from the prior year quarter, but a 6% increase sequentially. Revenue per day filled for the third quarter of 2012 was $1,443, up 7% year-over-year and unchanged sequentially.

For the first nine months of 2012, segment revenue increased 2% to $92.9 million from $90.9 million in the same period a year ago, while contribution income decreased 5% to $8.2 million from $8.6 million in the prior year period.

Clinical Trial Services

For the third quarter of 2012, the clinical trial services segment generated revenue of $16.9 million, a 1% increase from the prior year quarter, but a 3% decrease sequentially from the second quarter of 2012. The year-over-year improvement was due to higher placement fees and staffing volume partially offset by lower average bill rates and one less billable day in the current quarter. The sequential decline was due to a combination of lower staffing volume, average bill rates and placement fees, as well as one less billable day in the current quarter partially offset by higher drug safety activity. Staffing services accounted for 93% of segment revenue. Contribution income was $1.6 million, a decline of 30% year-over-year, but a 1% increase sequentially. The contribution income margin was 9.3% in the third quarter, a decline of 410 basis points from the prior year quarter due primarily to higher wage rates and payroll taxes for field employees, as well as significantly higher health insurance costs. Sequentially, the contribution income margin improved 30 basis points due to lower SG&A expenses partially offset by higher field employee health insurance costs.

For the first nine months of 2012, segment revenue increased 5% to $51.2 million from $48.9 million in the same period a year ago, while contribution income declined 12% to $4.5 million from $5.1 million in the prior year period.

Other Human Capital Management Services

For the third quarter of 2012, the other human capital management services business segment (education and training and retained search) generated revenue of $9.8 million, a 4% decrease from the prior year quarter and a 5% decrease sequentially from the prior quarter. The year-over-year decrease was primarily due to lower seminar attendance in the education and training business and a decrease in retainer revenue in the search business. The sequential decrease was primarily related to lower seminar attendance and fewer seminars in the education and training business. Contribution income was $25,000, a 97% decrease year-over-year and a 91% decrease sequentially. The year-over-year decrease was primarily due to higher direct mail expenses in the education and training business and negative operating leverage in both businesses in this segment. Sequentially, the education and training business experienced a significant decline that was partially offset by improvement in the retained search business.

For the first nine months of 2012, segment revenue increased slightly to $31.1 million from $31.0 million in the same period a year ago, while contribution income declined 39% to $1.4 million from $2.3 million in the prior year period.

Debt Outstanding and Credit Facility

Effective September 28, 2012, the Company entered into a First Modification Agreement to its Credit Agreement, which, for the third quarter ending September 30, 2012, modified the maximum Consolidated Total Leverage Ratio to 2.75 to 1.00 and modified the minimum Consolidated Fixed Charge Coverage Ratio to 1.25 to 1.00. In addition, the aggregate amount of new revolving credit loans and swingline loans made to the Company may not exceed $3.0 million and new Letters of Credit issued on behalf of the Company may not exceed $1.0 million during the modification period, which is anticipated to end on or about March 12, 2013. During the modification period, the Company is also prohibited from making investments and purchasing, redeeming, retiring or otherwise acquiring any shares of its capital stock as otherwise permitted under the credit agreement. The terms and provisions of the Company's current credit agreement and its First Modification were filed with the Securities and Exchange Commission on Form 8-K on July 13, 2012 and October 3, 2012, respectively.

On October 18, 2012, the Company executed a proposal letter with one of its existing lenders to secure an asset-based lending facility with pricing terms that are comparable and, in certain respects, favorable to its current credit agreement. Due diligence is currently ongoing and the Company anticipates closing the new financing before December 31, 2012. There can be no assurance that a new financing will be completed by this time and, in such event, the Company would seek another modification to its current Credit Agreement.

At September 30, 2012, the Company had $34.5 million of total debt on its balance sheet, and a debt, net of $4.8 million in cash and cash equivalents, to total capitalization ratio of 11.7%. At the end of the third quarter of 2012, the Company's debt leverage ratio (as defined in its credit agreement) was 2.55 to 1, and its fixed charge coverage ratio was 1.51 to 1.

Guidance for Fourth Quarter 2012

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, any impairment charges or valuation allowances, write-off of debt issuance costs or significant legal proceedings. For the fourth quarter of 2012, the Company expects:

Revenue to be in the $126.0 million to $129.0 million range.

Gross profit margin to be in the 24.5% to 25.0% range.

Adjusted EBITDA margin to be in the 1.0% to 2.0% range. Adjusted EBITDA, a non-GAAP financial measure, is defined in the accompanying financial statement tables.

Loss per diluted share to be in the range of $(0.01) to $(0.03).

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