Business context and reporting period
AMN Healthcare Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company provides healthcare staffing and workforce solutions through nurse and allied staffing, locum tenens staffing, and physician permanent placement. Its home healthcare segment was sold in January 2012 and is reported as discontinued operations.
Financial performance and liquidity
Amounts below are in millions except per-share data; comparisons are with the corresponding 2011 period.
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $235.8, up 7% | $462.2, up 6% |
| Gross profit / margin | $67.0 / 28.4% (27.3% prior year) | $130.2 / 28.2% (28.2% prior year) |
| Operating income / margin | $13.1 / 5.6% | $25.5 / 5.5% |
| Interest expense, net | $13.6 | $19.1 |
| Continuing operations income (loss) | $(0.1) | $3.4 |
| Net income (loss), including discontinued operations | $(0.1) | $4.2 |
| Net income (loss) per diluted share | $0.00 | $0.09 |
Cash generated by operations was $30.6 million for the first half, versus $7.9 million a year earlier. Investing activities provided $6.3 million, including $8.6 million of sale proceeds; financing activities used $25.3 million. Cash rose to $15.5 million at June 30, from $4.0 million at year-end. Days sales outstanding improved to 53 from 61 at December 31, 2011.
At June 30, total assets were $523.2 million and total liabilities were $357.3 million. Notes payable, net of discount, were $193.7 million; there were no revolver borrowings and $39.6 million of revolving availability. Restricted cash and investments were $18.3 million, including cash collateral for letters of credit. The company had $28.4 million in outstanding standby letters of credit, of which $18.0 million was cash-collateralized.
Material changes versus prior period
- Revenue growth was led by nurse and allied staffing: Q2 revenue rose 13% to $158.6 million; first-half revenue rose 14% to $312.5 million. Locum tenens revenue fell 5% in Q2 and 7% in the first half; physician permanent placement revenue was nearly flat in Q2 and down 8% for the first half.
- Q2 gross margin improved to 28.4%, primarily from higher bill-to-pay spreads in nurse/allied and locum tenens staffing. First-half gross margin was unchanged at 28.2%.
- Operating income improved to $13.1 million in Q2 from $7.9 million, and to $25.5 million for the first half from $17.4 million. SG&A was higher in dollars but lower as a share of revenue.
- Q2 included a $9.8 million pretax loss on extinguishment of prior debt, comprising an $8.6 million write-off of deferred financing fees and original issue discount and a $1.2 million prepayment penalty. This refinancing-related charge drove Q2 continuing operations to a small loss despite higher operating income.
- On April 5, 2012, the company refinanced its debt with a $200 million face-value term loan and a $50 million revolving facility, replacing prior credit facilities. Term-loan maturity is April 2018; revolver maturity is April 2017.
- The sale of home healthcare services generated $9.65 million of consideration, with $1.03 million held in escrow at June 30. First-half discontinued operations included an after-tax $1.19 million gain on sale.
Outlook, commentary and risks
Management said nurse and allied staffing demand had recovered from its 2009 low but remained below 2007–2008 levels; demand was strong in some specialty areas, and managed-services contracts represented about one-third of nurse and allied business in 2012. Locum tenens demand and margins were improving in certain specialties. Physician permanent placement demand and recruiter productivity had also improved in 2012. The filing provides no specific revenue or earnings guidance.
Management believed operating cash flow and available revolver borrowings would be sufficient to fund operations for the next 12 months and beyond. The new credit agreement includes leverage and interest-coverage covenants and restrictions on additional debt, dividends, asset dispositions, and other activities. The term loan bears floating interest; management estimated that a 1% rate change would have changed first-half interest expense by approximately $1.0 million.
The company was evaluating potential effects of the upheld Patient Protection and Affordable Care Act, including changes to reimbursement, service demand and pricing, contracting, and employer healthcare costs. Other disclosed risks include economic weakness and staffing demand, client pricing power and consolidation, recruiting and retaining qualified professionals, independent-contractor classification, malpractice and self-insurance exposure, legal and tax contingencies, goodwill or intangible impairment, system disruptions, and the ability to service debt. A California payroll-tax assessment was settled in March 2012; the company received a $2.0 million refund and recorded it as a reduction of SG&A.
The company estimated a 44.4% annual effective tax rate for 2012. It reported effective rates of 46.8% for the first half and 82.9% for Q2; the Q2 rate reflects the small pretax loss and tax-position effects. Management stated that disclosure controls were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether nurse and allied staffing growth and improved gross margins continue, and whether locum tenens and physician placement trends recover.
- The recurring earnings and cash-flow profile excluding the debt-extinguishment charge, divestiture proceeds, and the one-time California tax refund.
- Term-loan repayment, floating-rate exposure, covenant headroom, and actual availability under the revolver after letters of credit.
- Whether cash conversion and improved DSO are sustainable, given receivables and working-capital fluctuations.
- The realized impact of healthcare reform, client reimbursement changes, staffing regulation, and self-insured legal or professional-liability claims.