AMN Healthcare Services, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. AMN provides healthcare staffing and workforce solutions, including managed services, technology, and temporary and permanent placements. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $489.8 | $473.7 | $985.0 | $941.7 |
| Gross profit / margin | $161.0 / 32.9% | $154.8 / 32.7% | $322.8 / 32.8% | $306.7 / 32.6% |
| Operating income / margin | $56.4 / 11.5% | $47.9 / 10.1% | $108.4 / 11.0% | $95.2 / 10.1% |
| Net income / margin | $31.3 / 6.4% | $26.3 / 5.6% | $63.3 / 6.4% | $52.2 / 5.5% |
| Diluted earnings per share | $0.63 | $0.53 | $1.28 | $1.06 |
- Q2 revenue increased 3%; six-month revenue increased 5%. Net income rose about 19% in Q2 and 21% for the six months.
- For the six months, operating cash flow was $70.8 versus $55.3. Investing used $19.6 versus $233.2, reflecting no acquisitions in 2017 compared with $216.4 of acquisition spending in 2016. Financing used $38.9, mainly for $25.9 of term-loan repayments, $3.7 of earn-outs, and $9.0 of payroll-tax payments on withheld shares. Cash ended at $22.9.
- At June 30, current assets were $441.0 and current liabilities $266.3. Notes payable, net of fees, totaled $337.5 on the balance sheet. The company separately reported $325.0 principal outstanding on 5.125% senior notes due 2024 and $18.1 of term loans, all classified as current; no revolver borrowings were outstanding and $264.2 was available. DSO was 62 days, compared with 64 days at both December 31, 2016 and June 30, 2016.
Material changes and segment results
- Nurse and allied revenue rose 3% in Q2 and 4% for the six months. Higher assignment levels and bill rates contributed, but labor-disruption revenue was lower by approximately $18 million in Q2 and $29 million for the six months.
- Locum tenens revenue was down slightly in both periods; filled days declined 4%, partly offset by higher revenue per day. Management cited weaker hospitalist demand, partly offset by emergency medicine and advanced practice.
- Other workforce solutions revenue increased 12% in Q2 and 14% for the six months, with growth in VMS, interim leadership, and workforce optimization. Peak acquisition revenue contributed $5.0 million in Q2 and $12.4 million for the six months; permanent placement businesses declined.
- Consolidated gross margin improved modestly, with stronger nurse and allied margins offset in part by lower locum tenens spreads and unfavorable other-workforce sales mix. SG&A as a share of revenue declined in Q2 and the six-month period. Interest expense increased to $4.9 in Q2 and $10.1 for six months, primarily reflecting higher interest-bearing notes compared with the prior-year debt mix.
Outlook, risks, and unusual items
- No revenue or earnings guidance is provided. Management estimated a 2017 annual effective tax rate of approximately 38% and said operating cash generation and revolver availability should fund operations for at least the next year.
- The lower reported tax rate reflected adoption of share-based compensation guidance, including $5.3 of tax benefits in the first half; management cautioned this accounting change may make the effective tax rate more volatile. Adoption also changed cash-flow classification of excess tax benefits.
- Management cited uncertainty around potential Affordable Care Act changes and reimbursement, which may affect healthcare utilization and staffing demand. Other disclosed risks include client pricing and concentration, recruiting and retaining healthcare professionals, independent-contractor classification, regulation, cybersecurity and technology disruptions, acquisitions, insurance accruals, and significant indebtedness.
- Wage-and-hour class-action claims remain among the notable legal contingencies; management considered the probable loss and accrued amount immaterial, while warning actual losses could differ. The IRS Appeals process for 2011–2012 tax examinations remained open, with resolution anticipated within 12 months. Management considered its tax reserves adequate.
- The company terminated its remaining interest-rate swap on May 3, 2017. It reported no goodwill or other specified asset impairment indicators in the first half. The 2018 revenue-recognition standard was under assessment; AMN planned modified-retrospective adoption.
Important facts for investors to verify
- Whether organic growth and nurse/allied staffing gains can offset lower labor-disruption revenue and ongoing weakness in locum tenens and permanent placement.
- Debt repayment capacity, interest costs, and continued access to the undrawn revolver, given the $325 million senior notes and remaining term-loan balance.
- Whether the estimated 2017 tax rate and first-half share-award tax benefits are sustainable, and the outcome of the IRS Appeals matter.
- Potential exposure from wage-and-hour and other legal claims, insurance reserves, and the effects of healthcare policy or reimbursement changes.