AMN Healthcare Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the same 2019 periods. AMN provides healthcare staffing, workforce management, interpretation, and related technology services. COVID-19 materially affected demand patterns during the period.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $551.6 million | $567.6 million | $1,762.4 million | $1,635.2 million |
| Gross profit / margin | $184.6 million / 33.5% | $190.0 million / 33.5% | $584.2 million / 33.1% | $546.3 million / 33.4% |
| Operating income | $46.5 million | $39.7 million | $120.6 million | $129.9 million |
| Net income | $26.1 million | $23.5 million | $61.4 million | $86.5 million |
| Diluted EPS | $0.55 | $0.49 | $1.29 | $1.82 |
- Q3 revenue fell 3%; net income rose about 11%. Lower SG&A helped operating income rise despite lower revenue. SG&A was $111.2 million versus $133.2 million.
- Nine-month revenue rose 8%, but fell 2% excluding acquisition-related revenue. Net income declined about 29% and operating income about 7% year over year.
- Q3 segment revenue: nurse and allied $382.7 million (down 4%); physician and leadership $109.1 million (down 24%); technology and workforce $59.8 million (up 136%, largely reflecting acquisitions). For the nine months, these segments generated $1,251.5 million, $355.6 million, and $155.4 million, respectively.
- Q3 consolidated gross margin was unchanged at 33.5%; nine-month margin decreased from 33.4% to 33.1%. Higher workers’ compensation and health insurance costs pressured nurse and allied margins. Acquired businesses changed segment mix.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $217.0 million, up from $146.2 million. Investing cash outflow was $528.5 million, including $476.5 million net cash paid for acquisitions; financing cash inflow was $266.6 million.
- At September 30, cash and cash equivalents were $58.4 million; total cash, cash equivalents, and restricted cash were $108.9 million. Current assets were $513.7 million and current liabilities $386.2 million.
- Quarter-end debt included $325 million of 5.125% notes due 2024, $500 million of 4.625% notes due 2027, approximately $46.9 million outstanding on the additional term loan, and $40 million drawn on the revolving facility. The company reported $338.1 million of revolver availability. Credit facilities mature February 2025 and are secured by substantially all company assets.
- Management said operating cash flow and available revolver borrowings should fund operations and expected capital expenditures for the next 12 months and beyond. Variable-rate debt creates interest-rate exposure; management said a 100-basis-point increase would not have had a material effect in the reported periods.
Material changes, outlook, and risks
- AMN acquired Stratus Video in February 2020 for an initial cash purchase price of approximately $485.6 million. The acquisition contributed $35.3 million of Q3 revenue and $78.1 million for the nine-month period. Acquisition spending and financing increased assets, goodwill, intangible assets, and debt. Goodwill was $869.9 million at September 30; the company reported no impairment charge.
- COVID-19 produced uneven demand: nursing needs rose to historically high levels and were at record levels at the time of filing, while physician/leadership placement and some other services remained below prior-year levels or recovered inconsistently. Nurse supply constraints, burnout, and elevated bill rates and wages limited the company’s ability to meet demand. The company also reported higher workers’ compensation costs.
- Cost reductions introduced during Q2 included workforce reductions, lower variable compensation and discretionary spending, and suspension of certain benefit-plan contributions. AMN had selectively resumed hiring, spending, and benefits as business recovered.
- The company gave no specific revenue or earnings guidance in the provided filing text. Management emphasized uncertainty around the pandemic’s duration, healthcare utilization, client finances, collections, and demand. The filing says COVID-19 had not materially affected estimates as of September 30, but estimates could change.
- On October 20, after quarter-end, AMN issued $350 million of 4.000% notes due 2029. It subsequently redeemed all $325 million of 2024 notes, paid the redemption premium and accrued interest, repaid $40 million on the revolver, and paid transaction expenses. These subsequent transactions were not reflected in September 30 balances.
- Allowance for credit losses on accounts receivable was $8.5 million at September 30 versus $3.3 million at year-end 2019. Days sales outstanding were 59, compared with 55 at December 31, 2019.
- Legal matters include wage-and-hour class actions and other ordinary-course claims. Loss contingencies accrued were $7.3 million; management said accrued matters were not expected to have a material adverse effect, while noting litigation uncertainty and inability to estimate certain additional potential losses.
- Other notable items: the nine-month effective tax rate was 28%, and the company estimated an approximately 29% annual rate for 2020. Q3 tax included a $1.6 million discrete benefit related to company-owned life insurance value changes. The 2020 adoption of the credit-loss accounting standard reduced opening retained earnings by $1.2 million, net of tax.
Important facts for investors to verify
- Whether elevated nursing demand and associated bill rates can be sustained, and whether nurse recruitment capacity, burnout, and insurance costs affect margins.
- How quickly physician and leadership services and other COVID-affected business lines recover, and how much reported growth depends on acquisitions.
- Customer payment trends, receivable collectability, and the adequacy of credit-loss and self-insurance reserves.
- Post-refinancing debt, interest expense, covenant capacity, and liquidity, including the effects of the 2029-note issuance and 2024-note redemption.
- Integration and performance of acquisitions, including final purchase-price allocations, goodwill/intangible valuations, and contingent earn-out obligations.
- Developments in wage-and-hour litigation and other legal contingencies, as well as the duration and financial effects of the COVID-19 pandemic.