AMN Healthcare Services, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. AMN provides healthcare staffing and workforce solutions through nurse and allied staffing, locum tenens staffing, and physician permanent placement. Home healthcare was sold in January 2012 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $243.9 | $229.0 | $706.1 | $665.4 |
| Gross profit / margin | $69.6 / 28.5% | $63.7 / 27.8% | $199.8 / 28.3% | $186.5 / 28.0% |
| Operating income / margin | $13.8 / 5.6% | $10.3 / 4.5% | $39.2 / 5.6% | $27.7 / 4.1% |
| Continuing-operations income | $5.9 | $1.0 | $9.2 | $3.3 |
| Net income (loss) | $5.9 | $(26.9) | $10.1 | $(23.8) |
| Diluted EPS | $0.12 | $(0.59) | $0.22 | $(0.52) |
- Revenue and segments: Q3 revenue grew 7%; nine-month revenue grew 6%. Q3 nurse and allied revenue rose 13% to $166.3 million, locum tenens fell 6% to $67.6 million, and physician permanent placement rose 9% to $10.0 million. For nine months, those segments were up 13% to $478.8 million, down 7% to $198.7 million, and down to $28.6 million, respectively.
- Margins and operating results: Gross margin improved year over year, primarily from wider locum tenens bill-to-pay spreads; Q3 physician permanent placement margin also benefited from revenue mix and lower sourcing costs. Nine-month SG&A was $149.9 million, or 21.2% of revenue, versus $146.4 million, or 22.0%, a year earlier.
- Cash flow and liquidity: Nine-month operating cash flow was $42.1 million versus $12.8 million in 2011; investing cash flow was $4.2 million provided, including home-health sale proceeds, and financing cash flow was $46.4 million used. Cash was $3.8 million at September 30; restricted cash and investments were $18.9 million. DSO improved to 54 days from 61 at December 31, 2011. Management said operating cash generation and revolver availability should fund operations for the next 12 months and beyond.
- Debt: Term-loan debt was $170.0 million net of discount; no revolver borrowings were outstanding and $38.7 million of revolver availability remained. The new secured facilities comprise a $50 million revolver maturing in 2017 and a $200 million face-value term loan maturing in 2018. Term-loan interest was 6.0% at quarter-end and floats with benchmark rates and leverage-based spreads. A 1 percentage-point interest-rate change would have affected nine-month interest expense by approximately $1.5 million.
Material changes and unusual items
- Net income comparisons were substantially affected by prior-year home-health impairment charges: Q3 2011 included $24.5 million of goodwill impairment and $6.7 million of tradename impairment. The 2012 nine-month discontinued-operations result included a $1.2 million after-tax gain on sale; the sale price was $9.65 million, with $1.006 million held in escrow at September 30.
- AMN refinanced its prior credit facilities in April 2012. Nine-month interest expense included a $9.8 million debt-extinguishment loss, comprising an $8.6 million write-off of deferred financing fees and original issue discount and a $1.2 million prepayment penalty. Despite this charge, Q3 interest expense fell to $3.7 million from $7.0 million, reflecting lower rates and debt balances.
- A California payroll-tax settlement generated a $2.012 million SG&A benefit in the first nine months of 2012. AMN also reported a 43.1% estimated annual effective tax rate for 2012, versus 64.0% in 2011, citing pretax income mix and uncertain-tax-position provisions.
- After September 30, AMN made $12.0 million of voluntary term-loan prepayments through the filing date; the balance sheet classifies this amount as current. The filing says these prepayments satisfied scheduled quarterly amortization payments through the facility term.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management described strong demand for specialty nurses and therapy, while noting travel-nurse demand remained below 2007–2008 levels. Managed-services-program contracts represented about one-third of nurse and allied business in 2012, compared with 1% in 2008.
- Management reported strong locum tenens demand in primary care, emergency medicine, and hospitalist specialties, but weaker demand in anesthesia and radiology. A portion of therapy clients reduced demand following Medicare Part B reimbursement changes; management said this affected a small portion of the therapy business.
- Key disclosed risks include economic and client-demand weakness, healthcare reimbursement and regulatory changes, competition and pricing pressure, recruiting and retaining clinicians, independent-contractor classification, malpractice and self-insurance exposure, information-system interruptions, goodwill or intangible impairment, tax contingencies, and the ability to service debt. Credit agreements include maximum leverage and minimum interest-coverage covenants.
- Management stated that disclosure controls were effective at September 30, 2012 and reported no material change in internal control over financial reporting during the quarter. Interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether nurse and allied growth and improved gross margins continue, and whether weaker locum tenens specialties or Medicare-related therapy demand worsen.
- Actual post-quarter debt repayments, term-loan balance, revolver availability, and compliance with leverage and interest-coverage covenants.
- Home-health sale escrow release and any remaining indemnification matters; AMN disclosed 457 preferred shares remained in escrow at September 30.
- Effects of variable interest rates, tax estimates and uncertain tax positions, and self-insured claims on future cash flow and earnings.
- Preferred-stock dilution: approximately 3.258 million preferred shares converted to common stock from October 1 through October 31; 1.215 million preferred shares remained outstanding at November 1.