AMN Healthcare Services, Inc. — Q2 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. AMN provides healthcare staffing and workforce solutions across nurse and allied staffing, locum tenens, physician permanent placement, and home healthcare. Results include Nursefinders, Inc. (NFI), acquired September 1, 2010; therefore, the 2010 comparisons do not include NFI operations.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $234.5 million | $149.3 million | $463.9 million | $292.6 million |
| Gross profit / margin | $65.0 million / 27.7% | $41.2 million / 27.6% | $132.9 million / 28.6% | $81.2 million / 27.8% |
| Operating income / margin | $8.2 million / 3.5% | $3.4 million / 2.3% | $18.7 million / 4.0% | $8.2 million / 2.8% |
| Interest expense, net | $5.6 million | $2.6 million | $11.1 million | $5.2 million |
| Net income | $0.8 million | $0.1 million | $3.1 million | $0.9 million |
| Diluted earnings per share | $0.02 | $0.00 | $0.07 | $0.03 |
- Quarterly revenue rose 57% and six-month revenue rose 59%; management attributed the increases principally to NFI and more temporary healthcare professionals on assignment.
- For the six months, operating cash flow was $7.9 million, down from $18.3 million. Investing activities provided $0.3 million versus using $0.2 million; financing activities used $2.1 million versus $3.7 million.
- Cash and cash equivalents were $7.9 million at June 30, 2011, versus $1.9 million at year-end 2010; restricted cash was $18.2 million. Net accounts receivable was $139.0 million. DSO was 54 days, compared with 53 days at year-end and 55 days a year earlier.
- At June 30, debt outstanding under credit facilities was $215.8 million, net of discount, including $5.0 million drawn on the revolver; available revolver capacity was $23.8 million. Cash generated from operations and available revolver borrowings were expected to fund operations for the next 12 months.
- Six-month operating cash flow was affected by increased accounts receivable and lower accounts payable and accrued expenses, partly offset by higher accrued compensation. A 1% interest-rate change above the debt floor would have changed six-month interest expense by approximately $1.1 million.
Material changes and segment results
- Nurse and allied staffing revenue increased 85% in Q2 and 82% for the six-month period, with substantial portions of the increases attributed to NFI and the remainder primarily to higher assignment volumes.
- Locum tenens revenue increased 9% in Q2 and 12% for six months; the filing attributes most of the increase to NFI, with additional six-month growth from more days filled.
- Physician permanent placement revenue rose 14% in Q2 and 27% for six months. The comparison reflects NFI and adoption of new multiple-deliverable revenue guidance, which added $2.9 million of six-month revenue; management said the adoption was not material to consolidated revenue.
- Home healthcare, added through NFI, generated $13.9 million of Q2 and $27.5 million of six-month revenue. It represented 6% of six-month consolidated revenue.
- Six-month gross margin improved to 28.6% from 27.8%, reflecting a $1.9 million workers’ compensation benefit, the revenue-recognition change, and the acquired NFI business. SG&A rose 59% for six months, including about $2.5 million of integration costs; interest expense more than doubled, principally due to higher and refinanced acquisition-related debt.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management reported travel nurse demand in Q2 was about twice the prior-year level, but remained below 2008 levels. Locum tenens demand was generally stable; physician permanent placement remained pressured by clients’ budget constraints and internal recruiting.
- Home health faces Medicare reimbursement reductions and new documentation requirements; more cuts were proposed for 2012. Over half of the home-health business came from federal- or state-funded programs. Healthcare reform’s eventual effects remained uncertain.
- On July 25, 2011, after quarter-end, credit amendments increased the revolver from $40 million to $50 million and added a conditional $15 million accordion, changed certain covenants and excess-cash-flow prepayment terms, and extended specified integration-adjustment periods. The amendments generated approximately $2.0 million in fees.
- The company reported compliance with its credit covenants at June 30. Debt carried floating interest rates, and credit agreements restricted additional debt, dividends, capital expenditures, and other actions. The filing identifies covenant compliance, cash flow, integration of NFI, recruitment and retention, client demand, reimbursement policy, regulation, and self-insured claims as risks.
- The estimated 2011 effective tax rate was approximately 57.9%, above the 35% federal statutory rate, principally due to state taxes, uncertain tax positions, and other items. Realization of deferred tax assets depends partly on future taxable income.
- Management stated disclosure controls were effective at June 30, 2011, and reported no quarterly change in internal control over financial reporting that materially affected, or was reasonably likely to materially affect, controls.
Investor facts to verify
- How much of continuing revenue and operating improvement reflects underlying assignment growth versus NFI acquisition contribution, and whether integration produces expected efficiencies.
- Whether accounts-receivable growth and reduced operating cash flow reverse, and whether DSO and customer collections remain stable.
- Debt service, variable-rate exposure, available borrowing capacity, and continued compliance with amended financial covenants.
- Whether staffing demand, home-health reimbursement, and regulatory developments support the company’s stated outlook and liquidity expectations.
- The final NFI purchase-price allocation, including tax-related items, and the assumptions supporting deferred tax asset realization and goodwill values.