ASGN Incorporated (ASGN) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, we do appreciate your patience, and welcome to the On Assignment Q2 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chief Financial Officer, Ed Pierce. Please go ahead, sir.

Thank you. Before we begin, I would like to remind everyone that our presentation contains predictions, estimates and other forward-looking statements, representing our current judgment of what the future holds. Although we believe these statements to be reasonable, they are subject to risk and uncertainties that could cause the actual results to differ materially from the forward-looking statement, and we do not assume the obligation to update statements made on this conference call. We describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. I'm now going to turn the call over to Peter Dameris, our CEO and President, who will provide an overview of our results for the quarter. Peter?

Thank you, Ed. Good afternoon. We'd like to welcome everyone to the On Assignment 2013 Second Quarter Earnings Conference Call. With Ed and me today is Rand Blazer, President of Apex Systems; and Michael McGowan, COO of On Assignment and President of Oxford Global Resources, our high-end IT skill staffing group. During our call today, I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of the operating segments by Rand and Mike. I will then turn the call over to Ed for a more detailed review and discussion of our second quarter financial performance and our estimates for the third quarter of 2013. We will then open the call up for questions. Now on to the second quarter results. All markets we serve remained productive and stable during and exiting the quarter, and all of our divisions showed positive momentum exiting the second quarter. Once again, we saw particularly strong growth and strength in the IT end markets. Our IT group grew 18.4% year-over-year on a pro forma basis. Our Healthcare groups continued to make solid progress in improving their operating performance. And in the second quarter, we saw a stable demand for our services in Physician Staffing and Allied Healthcare groups. During the second quarter, we built on the increased end market demand in Allied Healthcare. Currently, we are seeing a return to a more normal usage of health care services than what we experienced between 2009 and 2011, and that return to normality is driving demand for our services. As we have mentioned many times in the past, we firmly believe that the health care end markets will provide some of the greatest growth opportunities for our company in the future. As for our Life Sciences group, during the second quarter, revenue growth continued to be slightly more challenging, although we did experience a slight sequential growth over Q1 2013, and we continue to expect similar end market trends in that division for the second half of 2013. With that said, we've made adjustments to our operating plans and expect sequential growth in the third quarter and beyond. Consolidated gross margin of 29.8% was down from 30.8% in the second quarter 2012 on a pro forma basis primarily due to the inclusion of Apex's revenues, which carries a lower gross margin and less contribution as a percentage of total revenues from perm placement and conversion fees. With the inclusion of Apex's revenues, permanent placement and conversion fees were 1.5% of our total second quarter revenues. For those of you who are not familiar with the company, Apex generates approximately 1% of its revenues from permanent placement and conversion fees versus the legacy On Assignment divisions, which historically generated about 3% of total revenues. Gross margin came in slightly lower than we expected due to higher growth from lower-margin business lines; higher mix of reimbursable expenses, which are passed along to customers with no markup; and a lower mix of permanent placement revenues. Regarding our operating efficiencies, the percentage of gross profit converted into operating income was 26.4%, up from 21% in the first quarter of 2013 and 25.2% in the second quarter of 2012 on a pro forma basis. The percentage of gross profit converted into adjusted EBITDA was 35.5%, up from 34.4% in the second quarter of 2012 on a pro forma basis. We believe these conversion rates are amongst the highest in the staffing industry. Despite a lower contribution of revenues from perm and conversion fees, our adjusted EBITDA margin was 10.6% in the second quarter, the same as the second quarter of 2012 on a pro forma basis. This was achieved by year-over-year 110-basis-point improvement in our conversion rate of gross profit into adjusted EBITDA. Because of our lack of dependency on perm and conversion fees for profitability, we believe that as we increase our contribution from those services as a percentage of our total revenues, we will expand our profit margins from the levels that exist today. Regarding industry dynamics, during and exiting the second quarter, secular trends continued to permit temporary labor to see greater growth prospects than full-time labor. Currently, we believe the macroeconomic environment in North America, where we derive 95% of our total revenues, has become slightly more stable from the beginning of the second quarter of 2013, and we continue to see a classic cyclical recovery in professional staffing. More specifically, we have seen a slight positive change in demand trends in the markets we serve from those we saw in the end of the second quarter. As for financial services sector, we continue to see higher demand from our clients in that sector than we experienced in the second quarter of 2012. Ed will provide you third quarter financial forecast later in this call, but based on our current weekly revenues and normal seasonal patterns, we do not see any appreciable negative change in demand for our services from our customers. Our operating performance in the second quarter of 2013 and our estimates for the third quarter of this year and for the full year demonstrate that our business model and areas of focus permit us to grow, despite less-than-optimal economic conditions. As for actions we took to sustain our future positive revenue growth rates, we continue to add to the number of recruiters and sales personnel that we employ. Revenues in the second quarter were $417.9 million, up 15.4% year-over-year on a pro forma basis and up 7.4% sequentially. Income from continuing operations, which is excluding the onetime writeoff of loan cost, was $17.4 million or $0.32 per diluted share, up from $10.6 million or $0.23 per diluted share in the second quarter of 2012. Revenue generated outside the United States was $19.1 million or 4.6% of consolidated revenues in the second quarter versus $19 million or 5.2% of second quarter revenue of 2012 on a pro forma basis. Adjusted EBITDA of $44.2 million or 10.6% of revenue, up from pro forma adjusted EBITDA of $38.4 million or 10.6% of revenue in the second quarter of 2012 on a pro forma basis. Exiting the quarter, demand for our services remained stable in all divisions. Our weekly assignment revenues, which exclude conversion, billable expenses and direct placement revenues, averaged $31.5 million for the last 2 weeks, excluding the holiday week for the 4th of July, up 15% over the same period in 2012. Integration, coordination and cash generation related to the Apex acquisition continues to be at or above our expectations. Ed will walk you through specifics later in the call. However, our leverage is now 2.3x trailing 12-month adjusted EBITDA. As for an update on our strategic planning, we are working hard and in the middle of the same. The Parthenon Group has presented preliminary findings to our board and management, and we still expect to complete this planning process by the end of 2013. Finally, we completed the process of refinancing our existing credit facility. The purpose of the refinancing was to lower our cost of debt, increase our financial flexibility for stock repurchases and acquisitions and modify our maintenance covenants to mirror current market conditions. Pricing of this refinancing lowered our cost of debt by approximately 150 basis points on the Term Loan B and 75 to 125 basis points on the Term Loan A. I will now turn the call over to Rand Blazer, President of Apex, who will review the operations of his segment. Rand?

Great. Thank you, Peter. I'm pleased to report that Apex has had another very solid quarter. First, we saw continued good requisition flow from the marketplace into Apex, with requisitions received in Q2 up on a year-over-year and sequential basis. We turned that flow of requisitions into year-over-year and sequential revenue and earnings growth and posted revenues of $233.4 million, representing a 19.8% growth over the same period in 2012 and sequential growth over Q1 of 9.7%. Growth continues to be paced for us by positive performance across our top 142 accounts, which we refer to as our top accounts program, in all 7 industry verticals. Our top accounts program continues to represent slightly more than 2/3 of our business, with retail accounts making up the other 1/3. Our largest growth came from our top accounts in the health care, telecommunications and media and consumer industrial Verticals. We also continued to see positive growth in 2 other important verticals, with our financial services and government services verticals growing soundly in Q2 on both a year-over-year and sequential basis. Gross margins for the quarter were down slightly from a year ago, 27.4% versus 27.7% a year ago. Continued growth in our revenue from our top accounts and the mix of skill sets required in those accounts impacted our gross margin performance. Notwithstanding, we indicated that the pricing environment would remain steady in the second quarter, and we would expect to see some increase in our gross margin from quarter 1, and we did. Our conversion of revenue and gross margin to operating margins remains very strong in the quarter as we continue to increase the percent of revenue and gross margin that falls to our operating margin. These increases in operating margins resulted from a continued increase in the productivity of our sales, recruiting and back-office teams. We continue to see a solid market environment for our business in the coming quarter and fully expect that our revenues and operating performance will continue to grow, both on a sequential and year-over-year basis. I will now turn the call over to Mike McGowan to discuss Oxford's results and performance over our other legacy On Assignment divisions. Mike?

Thanks, Rand. Oxford had another strong quarter, with second quarter revenue of $101.5 million, which was 15.2% over the comparable period in 2012 and a 6.5% sequential growth over the first quarter of 2013. Demand for our services remained strong in all of our operating units, and we continue to reach all-time highs in terms of consultants on assignment. Oxford's health care IT business unit continues to be our fastest-growing division and represents 18.6% of total revenues for the first 6 months of 2013 compared to 10.5% in the first 6 months of 2012. The current run rate for this division is approximately $80 million. Our second quarter gross margin decreased compared with the second quarter of 2012. The compression was primarily related to a change in our overall mix of business. The gross margin for our health care IT division is about 500 basis points less than the other divisions and as I just stated, is our fastest-growing division. The lower margin is due to the fact that we have significantly more competition within this segment from small private competitors and a higher mix of revenues related to reimbursable expenses, as Peter mentioned earlier, which are billed to the customers with no markup. We continue to believe that our gross margins within all of our high-end IT skill segments are at or near the highest in the industry. Regarding the third quarter, consultants on assignments have continued to grow. Our Oxford Index, the forward-looking quarterly survey, suggests that consultant demand will be about the same level in the third quarter as it was in the second. Turning now to our Life Sciences segment. Despite the continued challenges in Europe, this division reported sequential increase of 3.5% and a year-over-year increase of 3.4% in revenues to $41.9 million. U.S. operations, which comprise 77% of total sales, grew 5.9% sequentially and 7% year-over-year. As for gross margin, we realized a sequential decrease of 3 basis points in gross margin, attributable to a decrease in permanent placement fees that were offset by a reduction in contractor-related benefit costs. The year-over-year decrease in gross margin of 105 basis points is a result of a decrease in European Retained Search fees and a shift in overall business mix. As we look forward to the third quarter of 2013, we continue to see signs that the macroeconomic environment in which this segment operates is stable and growing. We expect, however, greater growth from our U.S.-based operations, specifically the clinical research business units as pharmaceutical and biotech clients increase their investments in R&D and outsourcing. As for our traditional laboratory staffing business, we believe this group should outpace GDP growth in the U.S., assuming the economy continues to improve. Early in the third quarter, we are encouraged with a level of contract and permanent orders, number of weekly contract assignments and permanent placement activities. Revenue for our Physician segment grew 1% sequentially and 5.7% year-over-year. The slower growth rate in the second quarter was a result of a slowdown in new orders for physician coverage and a stall in activity in 2 of our key clients. However, we're seeing early demand in the third quarter, which has improved to first quarter levels. We experienced an increase in bill rates compared for the first year -- or prior year, which was successful as a result of pricing efforts with clients and new contracts. Physician gross margins are down year-over-year as a result of an increase in our medical malpractice reserves and a higher mix of slightly lower-margin specialties, wherein we generate less call and overtime billings. Heading into the third quarter, we expect the early improvement in sold days activity to continue to strengthen. And finally, within the legacy divisions of On Assignment, our smallest division, Allied Healthcare, reported 1.6% sequential and 7% year-over-year increases in revenue to $14.7 million. Gross margins for the Allied group decreased 18 basis points sequentially, which is primarily related to an increase in billable expenses and travel and housing costs and was flat year-over-year. As we enter the third quarter, the pricing environment continues to be highly competitive, and demand has improved, however, at a slightly slower pace. As we go forward, as with the other divisions of On Assignment, we remain committed to new business development, productivity improvements and a continual focus on our gross margins. I'll now turn the call over to Ed Pierce. Ed?

Thanks, Mike. Before reviewing our financial results, please note that I'll be making comparisons of our results for the quarter with pro forma results for the second quarter of 2012. The pro forma results are included in the table in the earnings release and assumes the acquisition of Apex Systems occurred at the beginning of 2012. I'd also like to draw your attention to the reconciliation of income from continuing operations on a GAAP basis to the corresponding non-GAAP amounts, which is also included in the table in the earnings release. Virtually, all the difference between these 2 measurements is the writeoff of loan costs related to our debt refinancing, which I'll discuss presently. In the ensuing review, references to income from continuing operations are to the non-GAAP amount. Now on to the review of the results for the quarter. As Peter mentioned, revenues for the quarter were $417.9 million, up 15.4% year-over-year on a pro forma basis and up 7.4% sequentially. All business segments reported year-over-year and sequential revenue growth in the quarter. Our Technology segments, Apex Systems and Oxford, which comprised 80% of our total revenues, accounted for approximately 93% of the revenue growth in the quarter. These segments grew 18.4% year-over-year on a pro forma basis and 8.7% sequentially. Our non-technology segments, which account for approximately 20% of our total revenues, grew 4.7% year-over-year and 2.2% sequentially. Conversion and direct hire revenues for the quarter were $6.4 million or 1.5% of total revenues compared with $7 million or 1.9% of total revenues in the second quarter of 2012 on a pro forma basis. Gross margin for the quarter was 29.8%, up 71 basis points sequentially, and down approximately 100 basis points year-over-year on a pro forma basis. The year-over-year compression in margin related to the decrease in permanent placement revenues; a shift in mix towards Apex Systems' gross margin, which is lower than the other segments; higher growth in low-margin account; a higher mix of reimbursable expenses; and higher non-payroll consultant costs on accounts that have all-inclusive bill rates. SG&A expenses for the quarter were $86.5 million or 20.7% of revenues, up from $84.2 million or 21.6% of revenues in the first quarter of 2013. These expenses were in line with our estimates for the quarter. Amortization of intangible assets was $5.3 million, down slightly from the preceding quarter. Interest expense for the quarter was $4.2 million, down from $5.3 million in the first quarter. The effective interest rate, which includes the amortization of loan costs associated with the new credit facility was 3.7% at the end of the quarter. As a result of the refinancing of our credit facility in May, we wrote off $15 million in loan costs associated with the old credit facility. For accounting purposes, this refinancing was treated as an early extinguishment of debt. Non-GAAP income from continuing operations was $17.4 million or $0.32 per share compared with $12.7 million or $0.24 per diluted share for the second quarter of 2012 on a pro forma basis. Net income, excluding the writeoff of loan costs, acquisition-related costs and strategic planning expenses, was $16.9 million or $0.31 per diluted share. Net income is comprised of income from continuing operations of $17.4 million and the loss on discontinued operations of $0.5 million. Adjusted EBITDA for the quarter was $44.2 million or 10.6% of revenues, up from $38.4 million or 10.6% of revenues in the second quarter of 2012 on a pro forma basis, after excluding $0.5 million earn-out obligation reduction. Despite the compression in gross margin, the adjusted EBITDA margin was flat year-over-year due to a 110-basis-point increase in the percentage of gross profit converted into adjusted EBITDA. Our conversion rates, which are measured by our operating efficiency, are among the highest in the industry. For the third quarter of 2013, we estimated revenues of $429 million to $433 million, gross margin of 29.8% to 30.1%, income from continuing operations of $17.8 million to $18.9 million, income per diluted share of $0.33 to $0.35, adjusted EBITDA of $46 million to $48 million, adjusted income from continuing operations of $25.8 million to $27 million and adjusted income per diluted share of $0.47 to $0.49. These estimates do not include any acquisition-related expenses or fees and expenses of the consulting firm assisting us in our strategic planning efforts. For the full year, we are trending to the high end of our previously announced full year estimates. I'll now turn it back to Peter for some closing comments. Peter?

Thank you, Edward. We believe that we are well positioned to take advantage of what we believe is still a historic secular and cyclical growth opportunity for the staffing industry. While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business. I would like to, once again, thank our many loyal, dedicated and talented employees, whose efforts have allowed us to progress to where we are today. We'd like to now open the call to participants for questions. Operator?

[Operator Instructions] And our first question will come from the line of A.J. Rice.

In the press release, you guys mentioned on the front page, this phenomenon of a shift toward IT staffing and away from other models, consulting and offshoring. Can you just sort of maybe expand a little bit on what you're seeing there? And how that -- is that translating into more orders and longer assignments? How is that impacting the business?

Right. I'll start off, A.J., and then if -- Rand or Mike, if you want to add anything, please do. But A.J., our divisions grew on a consolidated basis, 18.4%. You saw, I think, if I'm correct, Robert Half report, basically, 9% growth on a same billing day basis, and I think Manpower shrunk. So the industry -- the IT staffing industry is very healthy. But if you look at the percentage growth of IT services, it's not 19 -- dollar spend, it's not 19% -- 18%. And what we're seeing is a shift in spend within the 4 kind of classic deliverable alternatives. A customer can implement technology by either self-execution, i.e. using internal personnel, a kind of offshore -- Indian-centric offshore model, project consulting through somebody like an IBM, Accenture or HP or staff augmentation. And what we've seen, because of accountability, control of the project, cost and also, uncertainty with immigration reform that more of every IT dollar spend in 2013 -- IT services dollar spend in 2013 is being performed by staff aug versus offshoring or project consulting. So we think that our growth is -- goes beyond just taking market share. We think the industry is growing because of this shift in how IT service spend is being split amongst the deliverable alternatives. Rand, do you want to add anything to that?

No, I think that hit it pretty well.

Yes, it did. I noticed in the stats that you provided, it looks like Oxford's revenue contribution from its top 10 customers jumped sequentially a bit about almost 400 basis points. Is there anything interesting behind that to talk about?

Mike?

No, A.J. Actually, it's just a couple of customers we have had over the last 6 months that have added a significant number of projects. And as you know, we usually play that onesie-twosie game, and we've actually had a couple of clients where we've had 20 to 30 consultants on multiple projects within the client. So nothing really beyond that, and that's really the reason you saw the jump.

Okay. And I'll maybe ask one more, and I'll let some others ask. But I know one of the objectives -- obviously, the IT staffing businesses are doing very well. But I know one of the long-term opportunities is to improve that permanent placement mix. Any progress this quarter? Or is it just you got to sort of wait for the market to come to you on that?

Well, I'm not being facetious, but I don't think we made much progress in the second quarter. I mean, as a percentage of total revenue, it was 1.5% of our total revenue versus 1.9% in the second quarter. We're still focused on it. But we're not the leader in that space, and we view that as an enormous opportunity. And as I said in my prepared remarks because we're not dependent on permanent placement for profitability or for being able to expand our profit margins, when we finally do crack the code on that, A.J., we feel that our margins will expand. But that is still work in progress, and as we say in the state of Texas, meat on the bone.

And next, we'll go on the line of Randy Reece.

We had heard some news from Computer Task Group talking about some disruption in demand for HCIT people and also saying that they saw some staffing firms letting health information management people go because of excess capacity. Are there any issues such as that, that you've seen in the marketplace?

A couple of comments. I don't know if those comments truly are appropriate to represent the marketplace. That may be company-specific. And I'm not familiar with their health care IT, but maybe it's because of the type of work they do. Maybe they had some training, maybe they had some very large kind of projects. But as we pointed out, we've seen an acceleration. We have not seen a deceleration. And we're -- and almost 100% of our revenues in that space, Randy, are implementation services, not training or data conversion or anything like that. So if you know who they're laying off, please tell us because we'll hire them.

I'll pass it on. In terms of just, let's say, the ongoing balance between clients' expectations for wages that they expect to pay and the wages that you need to get talent, how is -- what are the trends looking like recently?

It's the same. As we've told you, we think -- as Rand made a comment to and as we made comment to on a consolidated basis, the gross margin environment is stable. We haven't seen that inflection point where the markets have gotten so tight that the customers have gotten more constructive and productive about pricing increases. But it's still a reasonable pricing environment. What I will tell you is we have taken this opportunity of kind of less-than-optimal GDP economic activity in the U.S. to continue to grow. And we have taken some business that we might have priced slightly lower than in a tighter labor market because we're building some very, very important new relationships. And you may criticize us, but we were able to do it, not really compress our gross margins, and still deliver it to the EBITDA line and have the highest EBITDA margin in the industry. So we've established some very new -- very important new customers, and we're a little more flexible on pricing because it was an investment and hopefully, a long-term billing relationship.

When you're sitting there with those margins, you're in a different position than somebody at the other end of the spectrum.

And next, we'll go to the line of Mark Marcon. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: You mentioned in the release that you might make some adjustments within Life Sciences and Healthcare. I was wondering if you could expand a little bit upon that. And it looks like we're expecting a little bit of a pickup with regards to the revenue growth rate in Life Sciences. I was wondering if you could also talk a little bit about what's going to drive that.

Well, just to start off, the third quarter is always the strongest quarter of the year for the Life Sciences group, just ebb and flow of the business. So we expect that historical seasonal pickup. With regard -- we made -- they're smaller divisions compared to our IT groups, but we made investments in those groups. We really haven't seen the return on investment, and we're going to expect higher level of intensity to sustain that investment level. The team is working very hard. As you know, Mark, from following the business, that business is -- got the highest percentage of revenue for the division outside of North America, so that's a little bit tougher marketplace for them to fight in. And they're more correlated to GDP growth than they're -- in their food -- the personal care, food and beverage, agricultural, petrochemical verticals that they serve versus just the clinical research in the large pharma and biotech. So it's -- we don't think we have necessarily a business model issue. We think that we're just going to have to -- nothing's being given to us, and we're just going to have to expect even higher performance than the high performance we're already trying to deliver. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And would you expect to keep the headcount levels there relatively stable? Do you need to make any more additions? Or would -- at this point, given the way things are going, would we expect to see most of the investments, at least the organic investments, be really concentrated in the IT area?

They had a budget, and in a very prudent way, they did their hiring early in the year. They'll hopefully get the full impact of those new personnel for the full year. They weren't under-invested in. Absent a couple of vacancies because of medical leaves for pregnancies and stuff like that, they weren't understaffed. And we've hired people, and we got to get them to quicker productivity. But if we can't -- we can do 4% growth with a little less investment and give that -- those investment dollars to somebody that can grow 10%, 15%. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: How do you feel like you're staffed on the IT side?

We're still very aggressive in the hiring. So our gun is loaded, and that's why we delivered 18.4% growth, and we're starting to see some gains in productivity from those people. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then last question for me. At a couple of conferences, you've talked a little bit about areas for potential expansion through acquisitions. I'm wondering what are you seeing within the Life Sciences and Physician perm area in terms of potential targets.

We're looking, Mark. There's -- it's not as target-rich environment as IT staffing is because, as you know, those are smaller end markets. And we have very good divisions, and we're just very selective about what we're going to add to those groups so that it's additive and not dilutive to their efforts to make forward progress. That grew, I think, what was it, 4.4%. That's 20% of our business, and then if you compare that to any other flavor of staffing outside of IT, I think you're going to see that, although they're not taking market share, they're clearly, probably, in the top quartile. So we're pushing to improve that growth rate.

And next, we'll go to the line of Ed Caso.

I was curious, on the IT side, whether you're seeing more aggressive hiring behavior by the traditionally offshore-centric firms as they've try to reposition, for at least the threat of visa and immigration reform, and whether that's putting in an upward pressure on wage levels.

Right. So Rand's probably the best to address that because of the number of people they would be hiring versus Mike. As you know, he does more of the onesie-twosies that the Indian-centric people wouldn't be hiring except for project managers. So Rand, why don't you address that one?

Yes, and I would say, no. We don't see any particular trend there. I can't -- I'd only be guessing as to what the reason may be. We're not seeing it. Maybe they're just waiting for some uncertainty to go away, and maybe they're not growing enough. But no, we haven't seen any of that. And I think Randy or somebody asked earlier, I mean, our bill rates are going up slightly higher than pay rate. So we think our balance between bill and pay rates or impact on our wages is just normal seasonal kind of thing, not anything coming from that kind of a trend.

Great. Pete, can you talk a little bit about constraints on repurchase activity, whether you've done any recently and what would be the triggers that would get you to do it in the future?

So we have not -- we tell you in every quarterly conference call, but we did not purchase any shares. And most -- we still have restraints on the use of our credit facility, but the buckets have substantially been increased. That was one of the reasons we did the refi. And really, it's just an analysis on management and the board's part as to what's the best use of our shareholders' capital.

The former CapEx guidance for the year, I believe, was $15 million to $16 million. Is there any change in that?

No, there's not.

Okay. And the last question is DSOs in the second quarter.

DSOs for the second quarter were 58 days. About 1.9 fewer days than the preceding quarter.

And do you have, on the top of your head, what was the free cash flow generation in the quarter?

It's in the press release. We generated roughly $27 million of operating cash flow, and so we've reduced that by $4.5 million CapEx.

And next, we'll go to the line of Sara Gubins.

I'm wondering if there's anything that makes you think that fourth quarter revenue growth would fall off versus what you've seen earlier in the year. Or if you're mostly just being conservative to suggest that guidance for the full year will be at the high end.

No. I mean, Sara, we just -- we gave full year guidance, and we only adjust guidance 1 quarter out. So you shouldn't assume that we see something that's why we didn't adjust the full year guidance. I think that we've given targets, and they're appropriate. And as we've said, on the second quarter -- on the first quarter conference call and today, on our second quarter conference call, we're still trending towards the high end of the full year guidance.

Okay, great. And then, separately, could you talk about the type of work where you're seeing greater pickup for Apex and Oxford?

Okay, Mike, you want to go first and then hand it off to Rand?

Sure, I'd be glad to. As I mentioned, the biggest area that we're seeing growth and continue to see growth, and we've seen it for many quarters now, is in the whole health care IT arena. With the projects that are going on there and then the government stimulus, it's paying a lot of the bills. So a lot of it in the health care IT. And then some in our -- actually, some of the classical engineering activity and the electrical, mechanical type of arena is actually still doing well and picking up a little bit even into this year. So those are the 2 primary skill areas that we're seeing continued investment. Rand?

Rand?

Yes, Sara, I'd say we look at growth in a number of different ways, geographically, by industry or by skill area. By industry, we reported health care, clearly, telecom and media and consumer industrial companies, and those accounts have given us the biggest growth. But all 7 of our industry sets of accounts are growing. From a skill point of view, it's number of skills. Tech support is still a big area for us. Java, Microsoft apps, mobile apps, big area of database and business intelligence and program management are the ones that we probably see the most growth in by skill area.

Sara, I would just add, if -- just trying to be in real time, not saying that's a longer-term trend. But we did see a little bit slower demand in ERP -- classic ERP implementation work, but it's too early to say if that's a permanent slowdown. And implementation services demand, but it was slightly slower than the second quarter -- than the first quarter, I apologize.

Next, we'll go to the line of Tobey Sommer.

You discussed your conversion from gross profit to EBITDA is improving. I was wondering if you could just talk about the main couple of drivers of that. And it looks like you're saying you have opportunity for more.

Yes. Well, I mean, I think it's just how we deliver the services at some of these larger accounts. We have a different pricing model for the customer, which means we have a different cost delivery model to be able to deliver that services without it being compressing to our reported adjusted EBITDA. Ed, you want to add anything to that?

Yes, I think there's another factor that is important. One is you're just going to leverage your fixed costs as you scale your business, so that's a component as well.

Peter, can I jump in for a minute? This is Rand.

Yes, please do.

Tobey, you know that -- listen, you have to see productivity in all 3 groups, your sales team, your recruiting team or your delivery teams and your back office. And we have ways of measuring that, and we're seeing productivity improvement in all 3 of those areas, which contributes to great conversion.

And then a question about the HIT space. Is that an area that you think will have legs beyond the time frame for government subsidies?

Yes. So as I've -- as we and I said publicly, Tobey, what we've seen in the marketplace of work that's been performed by customers and by others is that there's been such a rush to get to self-attest meaningful use so that you can get the stimulus dollars. But there has not been thoughtful mapping of business processes to the systems that are being implemented. So we still passionately believe, once we're through the implementation phase, that there's going to be an enormous amount of work performed to optimize the systems that have been implemented so that you can get the benefits and automation of the implemented software. And optimization lends itself more to staff augmentation than offshoring or outsourcing. So we don't think that this is going to be a "fall off the cliff" phenomenon. Now if you have huge client concentration and you're doing a huge rollout for one of the major hospitals and that represents 80% of your growth in that division, then you might have a problem. But that's not our phenomenon. I mean, we're well diversified, and we think that we'll be in those accounts for a long time, helping them optimize the systems that have been implemented.

That's helpful. Peter, do you have any parameters that you think about for the M&A program that you could share kind of in the context of the appetite that you might have for leverage, given the cash flow that you've been generating, where we are in the cycle, in your strategic review? Any color you could share about how you're thinking of the world would be helpful.

Yes. So look, as far as maximum leverage, we're very mindful of the fact that we're a publicly-traded company and that our public shareholders don't tolerate as much leverage as a private equity shop may, in that we don't want to put any leverage on a business that's going to cause the stock not to perform to its natural ability. And I think if you try to put leverage above 4x on a staffing company, you're going to cause a lot of angst in the public shareholder community. And we've never done that. With regard to -- but as you pointed out, we do have an ability to delever. As it relates to return on capital and return on investment and things like that, that -- the deal has to be accretive. And we have to -- we debate how we deploy our capital every day, and it needs to be accretive and more accretive than organic growth or repurchasing our shares. So I think you can figure out. I don't want to state targeted levels at this time, but we've never done a dilutive deal, and we've done highly accretive deals even with managing low leverage ratios.

Great. And then I had a kind of a longer-term numbers question. Ed, how should we think about the tax rate over time, not just in the third quarter because you obviously gave us an articulated figure for that? But is there an opportunity to lower that a little bit?

I think if you look out, Tobey, you should see some improvement, and I'm talking about out year. You should see some improvement just by virtue of the growth in your income, your pretax income, relative to the growth in your permanent differences. So that is going to create some improvement. But in the near term, I think we're pretty much going to operate at the levels we are today. I mean, we're very focused on trying to employ some tax-planning strategies potentially to drive down the rate. But unfortunately, the rate is primarily -- our state income taxes and -- are above the statutory federal income taxes, and the tax effects of the disallowance of meals and entertainment. So until those become a smaller piece of pretax, it's just not going to move very much.

We'll go directly to the line of Tim McHugh. Timothy McHugh - William Blair & Company L.L.C., Research Division: One question just on Oxford. The high-teens growth rate for Q3 is a little bit of an improvement from the 15% for Q2. Is there anything that you're seeing differently, I guess, moving from 2Q into Q3?

Mike, you want to address that?

Yes. Nothing much more than what I answered, really, in a previous question in terms of the growth we're seeing in the health care IT is continuing to improve, as well as, as I said, some of the engineering areas that we're doing. We've got some pretty decent projects that are coming on board and consultants starting in the third quarter. So nothing much more beyond that to be honest with you, Tim. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. And then for Apex, if I look at the number of customers, it's not really growing or I think it was flattish year-over-year. But obviously, the revenue growth is great. You talked about kind of your larger customers. I guess, is there still a -- or I guess you feel comfortable there's still a long runway to just grow with existing customers? And then second part of that, maybe for Rand is just, is the right way to think about the improved growth that you've seen in financial services and government step-up relative to what it was during the last year?

So Rand, why don't you start then I'll follow up.

So Tim, first of all, the 142 top accounts we talked about is a program. We set that number every year. Every year that number goes up. So it's a specific set of accounts which we put a lot of focus and national attention on. So that's why you don't see that number change in each of our quarterly statements until next year, and you'll see the 142 go up to something higher. So our total number of accounts and the number of accounts we're pursuing is certainly a larger population. And there is more runway, yes. If you looked at our penetration to Fortune, say, 100 -- 500 accounts, we've penetrated and worked with about 200 of those, so there's still 300 that we can be penetrating. And we certainly have an active program and a plan to kind of work our way toward that. But that top accounts program is a set program for a year, so we really kind of bear down on that for a year. And the second part of your question was, I think a lot of people on the call have been focused on our financial services and government services sector mostly because of sequestration on the government side and mostly because financial services, for us, was down, if you remember, last year, a little bit. I wouldn't say down, but just not growing as robustly. But we have said all along, financial services has historically been our greatest sector. It's definitely on the way back up. And the government services sector is holding very well, even given sequestration. So that's -- we see growth -- good growth in both of those 2, not the same growth in some of the other industries, but certainly, very positive and increasing growth.

And Tim, I would just add with regard to the ability to get further business from existing customers, that's just a case-by-case basis. But as I made reference to earlier, we've established some new meaningful relationships with some very large organizations that we are just now starting to derive revenue from. So if they grow to levels of other important customer basis, there's a lot of growth within those accounts. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay, great. And one last one, just Oxford, Mike, I get your comments about the impact of health care IT work with the gross margin. But if we strip that out, would gross margin -- what would gross margins be doing, I guess, for Oxford, excluding the health care IT?

If we stripped out the health care IT? Timothy McHugh - William Blair & Company L.L.C., Research Division: Yes.

Ed -- that analysis is internal. Have you got some of the numbers in front of you, Ed, that we can share?

No, I do not.

We'll try to do that for you, Tim. But if you tried to back of the envelope it, we've said that it was 18% of Oxford's revenue in the quarter, and it was 500 basis points less -- about 500 basis points less gross margin.

And next, we'll go to the line of Paul Condra.

You guys do health care IT in the Apex segment as well, right? It's not just Oxford?

That's correct.

So I wondered how big is it in that for Apex. And I wondered if you could talk about is there a difference in service offerings or clients served, that kind of anything?

It's a similar offering. It's implementation technology services, and it's similar to maybe $5 million, $10 million larger in size than Oxford.

So is there any overlap or cannibalization or anything like that there?

No, there's not. There's no cannibalization. We control the entry points and try to decide who should perform the work.

Okay, great. And then I just wanted to ask another question about the guidance. Given your annual goals, it looks like fourth quarter could potentially be down sequentially. And I'm just wondering is that a possibility.

That's just because we didn't raise the fourth -- the full year. So at the -- when we report third quarter, we will give you guidance for the fourth, and it may cause the full year number to go up. So we're not adjusting it at this point. Ed, do you want to add anything to that?

Yes, I think a couple of things. I think one thing, it's pretty clear that we are focused on is how we're trending as it relates to our adjusted EBITDA targets. And so when we speak about how we're trending relative to the full year estimate, that's the estimate that we're really focused on. And so we are trending very well relative to the $170 million target that we have. And as far as -- to get there, you can draw your own conclusions in terms of what's going to happen at the top line.

And our final question that we have in queue at this time will come from the line of Ato Garrett.

I just have 2 quick ones. One, now that you've seen some of the preliminary recommendations from the Parthenon project that you guys have been working with, can you give us a sense whether or not that -- how significant that's looking like or how transformative it's going to be? And also, looking at some of the actions you mentioned regarding the Life Sciences plan, some of the changes for the Life Sciences group and some of the changes you might make there in the third quarter. Can you give us more details on that?

No, I really can't give you more details other than what we've previously provided. I can tell you that what we're talking about is not disruptive. And it's not Star Wars, and anything that we implement will be in a controlled environment and executable. But we do not think we have a business model issue, and this really has to do with efficiency and focus and execution. And also looking forward, as to what are the next areas for growth for our business, as well as are we pricing our business too high, too low and what are the long-term drivers of shareholder value, what should be the right operating leverage and areas of integration and things like that. But I don't want to get into that on a financial earnings conference call.

Okay. And then regarding the changes to the Life Sciences group that you mentioned?

We've previously addressed that in the call.

And speakers, currently, we have no additional questions in queue at this time. Please do continue.

Well, we appreciate your time and attention, and look forward to speaking with you to report our third quarter. Thank you very much.

And that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.