AMN Healthcare Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The unaudited results include three segments: nurse and allied healthcare staffing, locum tenens staffing, and physician permanent placement.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $250.9 | $253.9 | $491.8 | $506.1 |
| Gross profit / margin | $77.2 / 30.8% | $74.4 / 29.3% | $151.1 / 30.7% | $147.4 / 29.1% |
| Operating income | $17.6 | $16.6 | $33.1 | $32.7 |
| Net income | $7.2 | $8.4 | $14.8 | $16.0 |
| Diluted EPS | $0.15 | $0.18 | $0.31 | $0.33 |
- Q2 operating margin was 7.1% versus 6.5%; six-month operating margin was 6.7% versus 6.4%. Net margin was 3.0% for Q2 and for the first half, versus 3.3% and 3.1%, respectively.
- Six-month cash from operations was $7.2 million, compared with $17.3 million. Investing cash outflow was $5.8 million; financing cash outflow was $11.4 million. Cash declined $10.1 million to $5.5 million.
- At June 30, cash was $5.5 million, current assets $235.2 million, and current liabilities $139.3 million. Term-loan principal was $148.1 million and revolver borrowings were $6.5 million. Available revolver capacity was $209.7 million, after letters of credit collateralized by the revolver.
Changes and operating trends
- Revenue declined 1% in Q2 and 3% in the first half year over year. Nurse and allied staffing revenue fell 2% in Q2 and 5% in the first half, primarily reflecting fewer clinicians on assignment, including reduced electronic medical record engagements. Locum tenens revenue rose 2% in both periods; physician permanent placement revenue fell 3% in Q2 but rose 1% for the first half.
- Gross profit increased despite lower revenue, with consolidated gross margin up 1.5 percentage points in Q2 and 1.6 points in the first half. Management cited improved bill-to-pay spreads, lower insurance costs in Q2, and the higher-margin ShiftWise business acquired in November 2013.
- Net income was lower despite improved operating income, in part because Q2 and first-half results included a $3.1 million loss on extinguishment of debt from the April refinancing. First-half SG&A and depreciation and amortization also increased year over year.
- Operating cash flow fell year over year, mainly due to working-capital movements, including receivables and payments, and increased restricted funds for the captive insurance entity. Days sales outstanding were 55 days, unchanged from December 2013.
Outlook, risks and notable items
- Management reported improving staffing demand in Q2: travel nurse and allied demand was above prior-year levels and grew sequentially; locum tenens demand and booking levels also increased. It gave no specific revenue or earnings forecast, but expected workforce-solutions revenue to continue growing. Management said operating cash flow and revolver availability should fund operations for the next 12 months and beyond.
- Managed-services contracts represented approximately 34% of consolidated revenue in the first half, versus 29% a year earlier. The company also made a $3.0 million equity-method investment in Pipeline Health Holdings, owning approximately 12% after a milestone investment.
- On April 18, 2014, the company refinanced its credit facilities with a $225 million secured revolver and $150 million secured term loan, both maturing in 2019. The facilities carry floating rates and include leverage and interest-coverage covenants; substantially all company assets secure the debt. The company reported $3.5 million of new financing costs and wrote off $3.1 million of old financing costs and discount.
- The San Diego headquarters lease was extended through July 2027; disclosed future minimum lease payments under the amendment totaled $124.1 million. The company estimated a 2014 annual effective tax rate of approximately 43.5%.
- Tax authorities were pursuing income- and employment-tax adjustments concerning clinician and locum tenens per diems and travel benefits for earlier years. The company had filed protests, intended to defend its positions, and said it could not predict resolution timing; it considered its reserves adequate. The filing also cites ordinary-course professional liability, employment, wage, contract, and other legal risks. A wage-and-hour class-action settlement completed in Q1 was immaterial.
Important facts for investors to verify
- Whether the improving demand and booking trends continue, particularly in nurse and allied staffing, and whether they translate into revenue and margins.
- Whether receivables, restricted insurance-related funds, and other working-capital movements improve enough to support stronger operating cash flow.
- Debt levels, floating-rate exposure, covenant headroom, and the effect of required term-loan amortization; the filing states a 1% interest-rate change would not have had a material effect for the six-month period.
- Developments in the IRS income- and payroll-tax audits, associated reserves, and the estimated 2014 tax rate.
- Integration and contribution of ShiftWise, growth in managed-services revenue, and the finalization of ShiftWise’s provisional purchase-price allocation.