AMN Healthcare Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results; comparisons are with Q1 2015 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures below are in millions except per-share data.
Business context and reporting period
AMN provides healthcare staffing and workforce solutions, including temporary and permanent placement, managed services programs (MSP), vendor management systems (VMS), and recruitment process outsourcing. Effective January 1, 2016, it reported three segments: nurse and allied solutions, locum tenens solutions, and other workforce solutions; prior-period segment figures were reclassified.
AMN acquired B.E. Smith, a healthcare leadership placement and executive search firm, on January 4, 2016, and HealthSource Global Staffing, a labor-disruption and rapid-response staffing provider, on January 11, 2016. The acquisitions were funded in part with new borrowings. The filing says BES and HSG together contributed $39.3 million of quarterly revenue and $7.6 million of pretax income.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $468.0 million | $327.5 million |
| Gross profit / margin | $151.9 million / 32.5% | $101.4 million / 31.0% |
| Operating income / margin | $47.3 million / 10.2% | $24.8 million / 7.6% |
| Net income / net margin | $25.9 million / 5.6% | $12.2 million / 3.7% |
| Diluted EPS | $0.53 | $0.25 |
| Cash provided by operating activities | $35.2 million | $8.7 million |
| Capital expenditures | $6.6 million | $6.4 million |
Revenue rose 43%; management attributed approximately $49 million of the increase to acquisitions and the remainder primarily to 28% organic growth. Segment revenue was $297.7 million for nurse and allied, $102.7 million for locum tenens, and $67.5 million for other workforce solutions. Segment gross margins were 26.6%, 31.0%, and 60.3%, respectively.
Cash and cash equivalents were $23.1 million at March 31, 2016, versus $9.6 million at December 31, 2015; restricted cash was an additional $27.2 million. Total assets were $1.095 billion and total liabilities were $720.7 million. Cash used in investing was $174.7 million, including $165.2 million for acquisitions; financing activities provided $153.0 million.
Debt at quarter-end included $167.5 million drawn on the revolving facility and $208.0 million of term loans, net of unamortized fees, according to management. The revolver had $97.3 million of available capacity. The credit agreement was amended to increase the revolver to $275 million and add a $75 million term loan; debt is secured by substantially all company assets and subject to financial and other covenants. AMN had $15.8 million of outstanding standby letters of credit.
Material changes versus the prior period
- Gross margin increased 1.5 percentage points, reflecting a larger contribution from higher-margin other workforce solutions and improved bill-to-pay spreads in nurse and allied and locum tenens, partly offset by higher health insurance costs.
- Operating margin improved to 10.2% from 7.6%; SG&A rose in dollars with acquisitions and growth but declined as a share of revenue to 20.9% from 21.8%.
- Interest expense and other increased to $3.2 million from $1.8 million, primarily due to higher average debt used mainly to finance BES.
- Other workforce solutions revenue increased 183%, substantially reflecting BES, Millican, TFS and acquisition-related comparison effects. Nurse and allied revenue rose 37%, and locum tenens revenue rose 19%.
- Operating cash flow increased to $35.2 million, which management attributed to improved operating results, collections, and changes in accrued compensation and other liabilities, partly offset by payment timing.
Outlook, commentary, risks and contingencies
AMN gave no specific revenue or earnings guidance. Management described healthcare staffing demand as strong and near all-time highs, cited robust MSP demand, and said MSP represented approximately 50% of nurse and allied revenue. It reported increased bill rates in nurse and allied, while noting that higher health insurance and other direct costs pressured that segment’s gross margin. Management said higher demand and profitability in locum tenens and other workforce solutions supported consolidated margins. It believes operating cash flow and available revolver borrowings will fund operations for the next 12 months and beyond.
AMN estimated a 41% effective tax rate for 2016. The IRS’s 2011–2012 tax examination was expected to proceed to Appeals in 2016, and the IRS had begun an audit of 2013; management stated it believed reserves were adequate. The 2007–2010 IRS audits were settled in 2015. The company reported no legal proceedings in Part II and said outstanding ordinary-course loss contingencies were not expected to have a material adverse effect.
Key disclosed risks include healthcare staffing demand and pricing, client concentration and consolidation, recruiting and retaining qualified professionals, regulatory and worker-classification matters, malpractice and employment claims, cybersecurity and technology disruptions, acquisition integration, insurance accruals, and the company’s indebtedness. A $100 million interest-rate swap hedged variable-rate debt through March 30, 2018; management said a 100-basis-point rate increase would not have had a material effect for the quarter. The swap’s fair value was a $0.6 million liability at March 31.
Important facts for investors to verify
- How much reported growth and margin improvement is sustainable organically versus attributable to acquisitions and changed segment mix.
- Integration and performance of BES and HSG, including the preliminary purchase-price allocations, goodwill, and contingent earn-out obligations.
- Debt levels, revolver availability, covenant headroom, interest costs, and the effect of variable rates beyond the swap coverage.
- Whether nurse and allied health insurance and other direct-cost pressures persist, and whether staffing demand, bill rates, and fulfillment levels remain strong.
- Progress and potential exposure from the IRS 2011–2012 Appeals process and 2013 audit, along with changes in tax reserves.
- Cash conversion and working-capital trends, including accounts receivable and days sales outstanding, which were 59 days at quarter-end versus 61 days a year earlier.