AMN Healthcare Services, Inc. — Q3 2018 Form 10-Q
Business context and period: Healthcare staffing and workforce-solutions provider reporting for the quarter and nine months ended September 30, 2018. Results cover nurse and allied solutions, locum tenens solutions, and other workforce solutions. Two acquisitions completed in April—MedPartners and Phillips DiPisa/Leaders For Today (PDA/LFT)—affect year-over-year comparability.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $526.8m | $494.4m | $1,607.4m | $1,479.4m |
| Gross profit / margin | $175.1m / 33.2% | $159.5m / 32.3% | $523.9m / 32.6% | $482.3m / 32.6% |
| Operating income / margin | $42.6m / 8.1% | $50.8m / 10.3% | $152.7m / 9.5% | $159.2m / 10.8% |
| Net income | $27.9m | $28.1m | $106.1m | $91.4m |
| Diluted EPS | $0.58 | $0.57 | $2.17 | $1.85 |
| Operating cash flow | Not separately presented for the quarter | $168.0m | $102.1m |
- Quarterly revenue rose 7%, but excluding $38.2m from the acquisitions, declined 1%. Nine-month revenue rose 9%, including $73.8m from acquisitions and 4% organic growth.
- Q3 gross margin improved year over year, aided by acquired businesses and a $3.3m reclassification of recruiter compensation from cost of revenue to SG&A. Management said underlying year-over-year margin was pressured mainly by locum tenens.
- SG&A was $121.2m in Q3, or 23.0% of revenue, versus $100.6m, or 20.3%. Operating income fell despite higher revenue; the increase in SG&A included a $12.1m accrual for two probable legal settlements and acquisition costs.
- For the nine months, gross margin was flat at 32.6%; operating margin declined from 10.8% to 9.5%. Net income increased, mainly reflecting lower income tax expense.
Liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $18.6m; cash, cash equivalents, and restricted cash totaled $77.3m for cash-flow reporting purposes. Current assets were $479.8m and current liabilities $303.1m.
- Cash flow from operations was $168.0m; investing cash use was $271.6m, including $217.4m for acquisitions and $23.9m in capital expenditures. Financing provided $81.8m, including $195.0m in revolver borrowings, partly offset by repayments and $52.8m of share repurchases.
- Debt included $150.0m drawn on the new $400m secured revolving facility and $325.0m principal of 5.125% senior notes due 2024 (balance-sheet notes payable, net of fees, was $320.4m). The revolver had $239.8m of availability; it matures February 9, 2023, and bears floating rates tied to LIBOR or a base rate.
- Management said operating cash generation and available revolver borrowings should be sufficient to fund operations, including expected capital expenditures, for the next 12 months and beyond.
Segments, developments, and outlook
- Q3 nurse and allied revenue was $306.3m (+1%); locum tenens was $101.1m (-9%); other workforce solutions was $119.4m (+49%), with most of the latter increase attributable to acquisitions.
- Management cited near-record healthcare job openings and quits, low unemployment, wage growth, and increasing client demand for strategic workforce solutions as supportive industry trends. Nurse orders were trending above prior-year levels, though lower use of premium-rate placements reduced average bill rates.
- Locum tenens revenue remained pressured by a 15% decline in days filled in Q3. Management said 2017–2018 operating-model and technology changes continued to disrupt sales productivity and revenue, while expecting longer-term benefits.
- Management estimated a 24% full-year 2018 effective tax rate. It said final Tax Act adjustments, expected in Q4, were not expected to be material. The filing provides no specific revenue or earnings guidance.
- The company adopted the new revenue-recognition standard in 2018; management said its impact was not material. It expected adoption of the new lease standard in Q1 2019 to significantly increase reported lease liabilities and right-of-use assets.
Risks, contingencies, and unusual items
- Two wage-and-hour class-action settlements were reached in September and October 2018, subject to court approval, which management considered probable. The company recorded $12.1m of additional Q3 accruals; total loss-contingency accruals were $25.0m at quarter-end.
- The company recorded a $2.5m first-quarter tax benefit to correct an immaterial prior-period COLI tax error, and reported other discrete tax benefits affecting the nine-month effective tax rate.
- Risks highlighted include healthcare staffing demand and pricing, recruiting and retention costs, regulation and worker classification, litigation and insurance accruals, cybersecurity and technology execution, acquisition integration, goodwill impairment, and substantial indebtedness. Management reported no material change to the risk factors in its 2017 Form 10-K.
Most important facts for investors to verify
- How much future growth and profitability from MedPartners and PDA/LFT is organic, and whether acquisition integration and earn-out assumptions are being achieved.
- Whether locum tenens days filled and sales productivity recover, and whether nurse staffing demand and bill rates sustain improvement.
- The cash and earnings impact of the wage-and-hour settlements, including final court approval and any further accruals.
- Revolver utilization, borrowing costs, covenant headroom, and the capacity to fund acquisitions, repurchases, and capital needs while servicing debt.
- Whether reported margin trends are sustainable after the compensation reclassification, acquisition mix, legal accruals, and discrete tax benefits.