AMN Healthcare Services, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. AMN provides healthcare staffing and workforce solutions through nurse and allied staffing, locum tenens staffing, and physician permanent placement services. Financial amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $257.1 | $243.9 | $763.2 | $706.1 |
| Gross profit | $75.7 | $69.6 | $223.1 | $199.8 |
| Gross margin | 29.4% | 28.5% | 29.2% | 28.3% |
| Operating income | $16.7 | $13.8 | $49.5 | $39.2 |
| Net income | $8.6 | $5.9 | $24.6 | $10.1 |
| Diluted EPS | $0.18 | $0.12 | $0.51 | $0.22 |
- Cash flow: Nine-month operating cash flow was $43.1 million, versus $42.1 million in 2012. Investing activities used $5.8 million; financing activities used $11.3 million. Capital expenditures were $6.4 million. Cash and cash equivalents were $31.7 million at September 30, 2013.
- Debt and liquidity: Notes payable, net of discount, were $148.6 million; no revolver borrowings were outstanding and $39.3 million of revolver capacity was available. Restricted cash, cash equivalents and investments were $22.0 million. The company reported compliance with its credit covenants and said operating cash flow and available revolver capacity should fund operations for at least the next 12 months.
- Other balance-sheet measures: Total assets were $544.2 million, total liabilities $335.9 million, and stockholders’ equity $208.3 million. Days sales outstanding were 52 days, compared with 53 days at year-end 2012 and 54 days a year earlier.
Material changes versus prior periods
- Q3 revenue rose 5%; nine-month revenue rose 8%. All three segments grew. For nine months, nurse and allied revenue increased 8% to $517.9 million, locum tenens increased 7% to $213.4 million, and physician permanent placement increased 12% to $31.9 million.
- Gross margin improved year over year in both comparison periods. Management cited favorable service mix and lower insurance expenses in nurse and allied staffing, wider bill-to-pay spreads in locum tenens, and improved placement revenue.
- Nine-month interest expense declined to $7.8 million from $22.8 million, largely because 2012 included a $9.8 million debt-extinguishment loss, and 2013 had lower average debt and interest rates. AMN paid down $10.0 million on its term loan during the first nine months of 2013.
- Nine-month net income comparisons also reflect 2012 discontinued operations, including income related to the sale of the home healthcare segment. That segment was sold in January 2012.
Outlook, management commentary and risks
- No specific revenue or earnings guidance was provided. Management estimated a 2013 annual effective tax rate of approximately 40.5%.
- Demand was mixed: overall demand was roughly in line with the prior year, despite strength in selected travel nursing, EMR, imaging, lab, hospitalist, emergency medicine and advanced-practice areas. Therapy and radiology demand were weaker. Management attributed subdued demand partly to weaker hospital admissions, reimbursement cuts, and hospital spending controls amid healthcare reform uncertainty.
- Managed services relationships represented about 40% of nurse and allied staffing revenue for the first nine months. Management said these programs helped mitigate weaker demand and improve its ability to fill client needs. Higher housing costs and locum tenens professional liability costs were pressures.
- The April 2013 credit-agreement amendment reduced interest-rate spreads and increased the letter-of-credit sublimit. Floating-rate debt remains exposed to interest-rate changes; management said a 1% rate change would not have materially affected the nine-month financial statements.
- Tax contingency: The IRS proposed adjustments concerning clinician and locum tenens per diems for 2007–2010 and related net operating loss carryforwards; a separate employment-tax report proposed payroll taxes and penalties for 2009–2010. The proposals include mutually exclusive positions, so the company could not estimate a reasonable range of potential claims. AMN protested both and intends to defend its position; it does not expect resolution within 12 months.
- Other matters: A wage-and-hour class action and related action were settled for an immaterial amount, subject to court approval; the company said it had fully reserved the settlement. Management identified demand, client concentration and pricing, clinician recruitment and retention, regulatory and employment-law compliance, liability claims, tax adjustments, impairment, and debt-service capacity among key risks. It reported no material risk-factor changes from its 2012 Annual Report.
Important facts for investors to verify
- Whether demand trends and segment growth—especially in therapy and radiology—persist, and whether managed services continue to offset softness.
- Whether gross-margin gains are sustainable given housing, insurance, and professional-liability cost trends.
- The potential outcome and financial exposure from the IRS and employment-tax examinations; the filing provides no clear estimate of a reasonable claim range.
- Debt repayment, interest-rate exposure, covenant compliance, and the continued availability of revolver capacity.
- The court’s final approval of the wage-and-hour settlement and any subsequent changes to the related reserve.