AMN Healthcare Services, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
AMN provides healthcare staffing and workforce solutions in the United States through nurse and allied solutions, locum tenens solutions, and other workforce solutions. Services include temporary and permanent placement, managed services programs (MSP), vendor management systems (VMS), leadership staffing, workforce optimization, and mid-revenue-cycle services. About 42% of consolidated revenue flowed through MSP relationships in 2018. Kaiser Foundation Hospitals and affiliates accounted for approximately 13% of consolidated revenue.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2,136.1 million | $1,988.5 million |
| Gross profit / gross margin | $696.4 million / 32.6% | $644.4 million / 32.4% |
| Operating income / margin | $202.8 million / 9.5% | $212.4 million / 10.7% |
| Net income / diluted EPS | $141.7 million / $2.91 | $132.6 million / $2.68 |
| Operating cash flow | $227.0 million | $160.5 million |
| Capital expenditures | $35.2 million | $26.5 million |
| Cash and cash equivalents at year-end | $13.9 million | $15.1 million |
Revenue grew 7%, including $110.8 million from the 2018 acquisitions of Phillips DiPisa, Leaders For Today, and MedPartners; the remainder was attributed to 2% organic growth. Net income increased despite lower operating income, helped in part by lower income tax expense. SG&A rose to $452.3 million, or 21.2% of revenue, from $399.7 million, or 20.1%.
Fourth quarter: Revenue was $528.6 million versus $509.1 million in Q4 2017; gross profit was $172.5 million versus $162.1 million. Net income was $35.6 million, down from $41.2 million, and diluted EPS was $0.74 versus $0.84.
Segments: Nurse and allied revenue increased 5% to $1,306.5 million; locum tenens revenue declined 9% to $393.4 million; other workforce solutions revenue increased 37% to $436.2 million, largely reflecting acquisitions. Segment operating income was $183.4 million, $41.3 million, and $104.5 million, respectively.
Debt and liquidity: Year-end debt principal was $445.0 million, comprising $325.0 million of 5.125% senior notes due 2024 and $120.0 million drawn on the $400 million revolving credit facility. Debt net of unamortized fees was $440.6 million. The company reported $264.7 million of available revolver capacity and stated operating cash flow and available borrowing capacity should fund operations and expected capital expenditures for the next 12 months and beyond. The facility matures in 2023 and bears floating interest; the notes mature in 2024. The company repurchased $67.0 million of shares in 2018 and paid no dividends.
Material changes and management commentary
- Gross margin edged up year over year, but management said underlying margin pressure in nurse and allied and locum tenens partly offset acquisition mix and a $9.9 million reclassification of physician-placement recruiter compensation from cost of revenue to SG&A.
- Locum tenens revenue declined as days filled fell 13%, which management linked to lower producer productivity and disruption from operating-model and technology changes. Management said these changes were intended to support longer-term growth and profitability.
- Nurse and allied revenue benefited from a 3% increase in average clinicians on assignment and approximately $26 million more labor-disruption revenue, partly offset by a 2% decline in average bill rate.
- Management described healthcare job openings, low unemployment, labor shortages, and demand for strategic workforce solutions as favorable trends. It expected acquired mid-revenue-cycle and leadership businesses, along with workforce optimization, to contribute further growth in 2019. The filing provides no specific consolidated revenue or earnings guidance.
- 2018 investing cash outflow was $279.3 million, primarily reflecting $217.4 million of acquisition payments. Operating cash flow improved, though year-end days sales outstanding increased to 64 days from 63.
Risks, contingencies, and unusual items
- Client concentration is material: Kaiser accounted for about 13% of consolidated revenue. Loss or reduction of this business could adversely affect results.
- Competition for qualified clinicians may raise compensation and recruitment costs; the company may not be able to pass those costs to clients. Client consolidation and intermediaries may also pressure pricing.
- Key risks include economic downturns, changes to healthcare policy or reimbursement, worker-classification and employment-law claims, malpractice exposure, cybersecurity and technology disruptions, acquisition integration, and goodwill impairment.
- Two wage-and-hour class-action settlements were agreed in 2018, subject to court approval. The company recorded $12.1 million of additional accruals; it said outstanding contingencies were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
- The company reported $440.6 million of debt net of fees and debt covenants, and noted that covenant breaches could trigger default. It reported compliance with required financial tests at year-end.
- The January 2019 Silversheet acquisition cost $30 million in cash plus a potential earn-out of up to $25 million; $30 million was borrowed under the revolver to fund it.
- Adoption of the new lease standard in January 2019 was expected to add approximately $114.8 million of lease liabilities and $99.5 million of right-of-use assets, with no expected impact on results of operations.
The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. MedPartners’ controls were excluded from the year-end assessment, covering $205.5 million of assets and $91.4 million of reported 2018 revenue.
Important facts for investors to verify
- How much of reported growth reflects organic performance versus acquisitions, and whether acquired businesses meet expected growth and profitability targets.
- Whether locum tenens productivity and revenue recover after the operating-model and technology changes.
- Whether gross-margin pressures, rising SG&A, and higher clinician costs persist, including the effect of the recruiter-compensation reclassification.
- Kaiser concentration, MSP exposure, and the company’s ability to retain large client relationships and maintain pricing.
- Available revolver capacity, variable-rate exposure, debt-covenant headroom, and the effect of further borrowing or share repurchases on leverage.
- Final court approval and resolution of wage-and-hour settlements, and whether insurance, legal, or tax reserves require material adjustment.
- Integration and financial performance of MedPartners, PDA/LFT, and Silversheet, including earn-out obligations and acquired goodwill/intangibles.