AMN Healthcare Services, Inc. — Q2 2018 Form 10-Q
Business and period: Healthcare staffing and workforce-solutions provider with nurse and allied, locum tenens, and other workforce solutions segments. This unaudited filing covers the three and six months ended June 30, 2018; financial amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $558.1 | $489.8 | $1,080.6 | $985.0 |
| Gross profit / margin | $181.0 / 32.4% | $161.0 / 32.9% | $348.8 / 32.3% | $322.8 / 32.8% |
| Operating income / margin | $54.8 / 9.8% | $56.4 / 11.5% | $110.0 / 10.2% | $108.4 / 11.0% |
| Net income | $35.5 | $31.3 | $78.2 | $63.3 |
| Diluted EPS | $0.73 | $0.63 | $1.60 | $1.28 |
Q2 revenue rose 14% year over year, including $35.6 million from the April acquisitions and 7% organic growth. First-half revenue increased 10%, including the same $35.6 million acquisition contribution and 6% organic growth. Net income increased 14% in Q2 and 24% for the first half. Operating income declined 3% in Q2 despite higher revenue; SG&A and depreciation and amortization grew faster than sales. The lower 2018 tax rate materially supported net income growth.
Segments: Q2 revenue was $332.7 million in nurse and allied (+11%), $107.3 million in locum tenens (-1%), and $118.1 million in other workforce solutions (+46%). First-half revenue was $670.9 million (+9%), $210.4 million (slightly lower), and $199.3 million (+25%), respectively. Other workforce growth primarily reflected acquisitions.
Cash flow and liquidity: First-half operating cash flow was $125.9 million versus $70.0 million a year earlier; investing cash outflow was $239.0 million, including $218.0 million net cash paid for acquisitions and $16.5 million of capital expenditures. Financing cash inflow was $118.7 million, including $195.0 million of revolver borrowings, partly offset by repayments and $20.9 million of share repurchases. Cash, cash equivalents and restricted cash totaled $104.6 million at period-end, including $22.9 million unrestricted cash. DSO was 58 days, compared with 63 days at year-end 2017.
Debt: At June 30, the company had $155 million drawn on its $400 million secured revolving facility and $325 million principal outstanding on 5.125% senior notes due 2024. The filing reports $234.8 million of available revolver credit. The new facility matures in February 2023 and has floating-rate borrowings; substantially all company assets secure it.
Material changes, outlook and risks
- Completed acquisitions of MedPartners HIM and Phillips DiPisa/Leaders For Today in April for $218.0 million net cash; these expanded mid-revenue-cycle and healthcare leadership services.
- Q2 gross margin fell 50 basis points. Management cited lower segment margins, partly offset by acquired-company margins and a $3.2 million reclassification of physician-placement recruiter compensation from cost of revenue to SG&A. Approximately $25 million of labor-disruption revenue boosted nurse and allied sales, but carried below-average gross margins.
- Management described near-record healthcare openings and quits, low unemployment and economic growth as supportive industry trends, while noting wage pressure. Travel nurse orders were relatively flat, and clients used fewer premium-rate placements, contributing to lower average bill rates.
- Locum tenens revenue and filled days declined. Management said late-2017 and first-half 2018 operating-model and technology changes disrupted productivity and revenue, with effects expected to continue through 2018. Other workforce growth in mid-revenue-cycle and consulting was partly offset by a soft VMS demand environment.
- Management expected an approximately 24% effective tax rate for 2018 and stated operating cash flow and available revolver borrowings should fund operations and expected capital expenditures for the next 12 months and beyond. No revenue or earnings guidance was provided in the filing.
- First-half effective tax rate was 20%, versus 36% in 2017, reflecting the Tax Act’s lower federal rate and discrete benefits, including a $5.1 million stock-compensation tax benefit and a COLI-related prior-period tax correction. Management said the COLI correction was immaterial to prior periods.
- California and federal wage-and-hour class actions are among the significant contingencies. The company said accrued loss contingencies were not expected to have a material adverse effect, but litigation outcomes remain uncertain. Other stated risks include staffing supply and wage costs, client pricing and demand, acquisition integration, technology and cybersecurity, regulation, insurance accruals, and substantial indebtedness.
Most important facts to verify
- How much revenue and earnings growth is organic and sustainable versus acquisition-related and labor-disruption work, and whether travel nurse demand and bill rates stabilize.
- Whether operating margins recover as acquisition costs, technology changes and higher SG&A affect results; assess the effect of the $3.2 million expense reclassification on comparability.
- Cash conversion and working-capital trends, including whether the first-half operating cash flow improvement persists.
- Integration and performance of MedPartners and PDA/LFT, including contingent earn-outs and the acquired businesses’ margins.
- Debt capacity, floating-rate exposure and covenant headroom; monitor the secured revolver and senior notes alongside planned acquisitions and repurchases.
- Resolution and potential financial exposure from wage-and-hour litigation, tax matters, and the forthcoming lease-accounting adoption, which management expected to significantly increase reported assets and liabilities but had not quantified.