Business context and reporting period
AMN Healthcare Services, Inc. provides healthcare staffing and workforce solutions through nurse and allied healthcare staffing, locum tenens staffing, and physician permanent placement services. This unaudited Form 10-Q covers the three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014 unless stated otherwise. Results include acquisitions completed in late 2014 and January 2015.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $327.5 million | $240.9 million | +36% |
| Gross profit / margin | $101.4 million / 31.0% | $74.0 million / 30.7% | +37%; +0.3 percentage points |
| Operating income / margin | $24.8 million / 7.6% | $15.5 million / 6.4% | +60%; +1.2 percentage points |
| Net income | $12.2 million | $7.6 million | +60% |
| Diluted EPS | $0.25 | $0.16 | +$0.09 |
| Operating cash flow | $8.7 million | $0.9 million | Increased |
Gross margin improvement reflected acquired and growing higher-margin workforce solutions and physician placement; locum tenens margin declined. SG&A was $71.6 million, or 21.8% of revenue, versus $54.7 million, or 22.7%. The effective tax rate was 47%, compared with 44%.
Segments
- Nurse and allied healthcare staffing: revenue $229.0 million, up 40%; segment operating income $31.9 million versus $20.0 million. Revenue growth reflected acquisitions, a 7% increase in average bill rate, and a 12% increase in average professionals on assignment.
- Locum tenens staffing: revenue $86.7 million, up 30%; segment operating income $9.1 million versus $6.9 million. Growth included a 6% increase in revenue per day filled and 12% more days filled; segment gross margin declined to 29.4% from 29.9%.
- Physician permanent placement: revenue $11.8 million, up 11%; segment operating income $3.3 million versus $2.1 million. Higher search and placement activity contributed to growth.
Liquidity, debt and financial position
At March 31, 2015, cash and cash equivalents were $11.6 million, total assets $800.1 million, and stockholders’ equity $270.8 million. Total debt was approximately $238.0 million: $142.5 million of term loans and $95.5 million drawn on the revolving facility. Revolver availability was $120.1 million. The company reported $30.0 million of revolver debt as current based on its intention to repay it within 12 months. The interest rate on outstanding term and revolver borrowings was 1.93% on a LIBOR basis.
Operating cash flow was $8.7 million; investing cash outflow was $85.4 million, principally including $76.9 million paid for Onward Healthcare. Financing cash inflow was $75.2 million, primarily from revolver borrowings. Cash declined by $1.4 million during the quarter. Days sales outstanding were 61 days, unchanged from year-end 2014. Management said operating cash generation and available revolver borrowings should fund operations for the next 12 months and beyond.
Material changes, outlook and risks
- Acquisitions: On January 7, 2015, AMN acquired Onward Healthcare, Locum Leaders and Medefis for approximately $76.9 million in cash. The businesses contributed approximately $31.2 million of revenue from the acquisition date; management cited approximately $33.5 million of combined revenue from Onward Healthcare and Avantas. Purchase price allocations remained preliminary. AMN also acquired Avantas in December 2014; its contingent earn-out may reach $8.5 million, subject to performance through June 2016.
- Operating outlook: Management described staffing demand as strong and significantly above prior-year levels, with increased assignment levels and future bookings. It expects workforce-solutions revenue to continue growing and contribute to margins. No specific revenue or earnings guidance was provided. Management noted that higher nurse pay rates have compressed pay-to-bill spreads, partly offset by negotiated bill-rate increases.
- Interest-rate exposure: In April 2015, AMN entered an interest-rate swap covering $100 million of variable-rate debt, paying a fixed 0.983% and receiving one-month LIBOR through March 30, 2018. Management said a 100-basis-point rate increase would not have had a material effect for the quarter.
- Tax matters: The IRS issued proposed income and employment tax adjustments for 2007–2010 and 2011–2012 involving per diems and travel benefits. AMN protested the proposed positions, which it says are mutually exclusive, and intends to defend its position. It expects the earlier audits to be settled within 12 months and believes reserves are adequate; the IRS also notified AMN of an audit of 2013.
- Other risks and contingencies: AMN reported no material change to previously disclosed risk factors and said ordinary-course legal matters were not expected to have a material adverse effect. Key disclosed risks include recruiting and retaining healthcare professionals, pricing and client concentration, regulation and worker classification, privacy and technology execution, insurance and tax accruals, and debt service. A new 10-year Dallas-area office lease has estimated base rent payments of approximately $24.0 million.
Important facts for investors to verify
- How much of reported growth and margin improvement is organic versus attributable to Onward Healthcare and Avantas, and how acquisition integration is progressing.
- Whether higher staffing demand and bill rates continue to offset rising clinician pay costs and supply constraints.
- Collection trends and working-capital needs, given increased receivables and the quarter’s relatively modest operating cash flow.
- Final acquisition purchase price allocations and the performance-based Avantas earn-out exposure.
- Outcomes of IRS audits, related reserves, and the company’s estimated 2015 effective tax rate of approximately 45%.
- Debt repayment plans, revolver availability, and the impact of variable interest rates after the debt swap.