AMN Healthcare Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. AMN provides healthcare staffing and workforce solutions through nurse and allied, locum tenens, and other workforce solutions segments. Financial amounts below are in millions unless noted.
Financial performance
- Third quarter: Revenue was $494.4, up 5% from $472.6; net income was $28.1 versus $27.3; diluted EPS was $0.57 versus $0.55.
- Gross profit was $159.5, with a 32.3% gross margin compared with 32.7%. Operating income was $50.8, or 10.3% of revenue, versus $46.7, or 9.9%. Interest expense and other increased to $4.8 from $3.0.
- First nine months: Revenue was $1,479.4, up 5%; net income was $91.4 versus $79.5; diluted EPS was $1.85 versus $1.61. Gross profit was $482.3 and gross margin was 32.6%, unchanged from the prior year. Operating income was $159.2, or 10.8% of revenue, versus $141.9, or 10.0%.
- Nine-month segment revenue: nurse and allied $917.2 (+5%); locum tenens $322.5 (approximately flat); other workforce solutions $239.7 (+11%). Third-quarter revenue grew 6% in nurse and allied, 3% in locum tenens, and 4% in other workforce solutions.
- Cash flow, nine months: Operating activities provided $96.4, compared with $84.8; investing activities used $23.4, compared with $241.3; financing activities used $63.8, compared with providing $162.4. Cash and cash equivalents were $19.6 at September 30, 2017.
- Debt and liquidity: AMN repaid the remaining term-loan balance during Q3. At September 30, it had $325.0 principal outstanding on 5.125% Senior Notes due 2024, no revolver borrowings, and $258.8 of available revolver capacity. Current assets were $442.5 and current liabilities were $245.0.
Changes and management commentary
- Q3 revenue growth was described as entirely organic. Nine-month growth included $12.4 of additional Peak acquisition revenue, with the remainder attributed to 4% organic growth.
- Nurse and allied growth reflected higher average professionals on assignment and bill rates. Locum tenens revenue was affected by fewer days filled over the nine-month period; management cited weaker demand in certain specialties, including hospitalists, but said demand was improving in most specialties.
- Other workforce solutions growth came from VMS, interim leadership, and workforce optimization; permanent placement and recruitment process outsourcing businesses declined. Management said it was making organizational and operational changes to address performance.
- Quarterly gross margin declined due to sales mix, higher insurance costs in other workforce solutions, and lower locum tenens bill-pay spreads; nurse and allied margins improved. Nine-month consolidated margin was flat, with similar segment-level offsets.
- Interest expense and other rose to $14.9 for the first nine months from $9.1, primarily reflecting the Notes compared with term loans and revolver borrowings in the prior-year period. The 2017 period also included a $5.4 income-tax benefit from adoption of share-based compensation guidance.
Outlook, risks, and contingencies
- Management estimated a 2017 annual effective tax rate of approximately 38% and said operating cash flow plus available revolver borrowings should fund operations for at least the next year. No revenue or earnings guidance was provided in the filing.
- Management cited near-record healthcare job openings and quits as supportive industry trends, while noting uncertainty around potential changes to the Affordable Care Act and related effects on client reimbursement, healthcare utilization, and demand.
- Other disclosed risks include staffing and recruitment challenges, pricing and buyer concentration, healthcare regulation and worker classification, cybersecurity and technology disruption, insurance accruals, acquisition integration, and indebtedness.
- The IRS appeal concerning 2011–2012 income and employment tax examinations remained unresolved; management anticipated resolution within 12 months and considered reserves adequate. Wage-and-hour class-action loss accruals were described as not material, though actual losses could differ. The company said other outstanding contingencies were not expected to have a material adverse effect.
- Management reported no goodwill or other identified asset impairment indicators during the period. The company expected to adopt the new revenue recognition standard in Q1 2018 using the modified retrospective approach; its impact assessment was still in progress.
Important facts for investors to verify
- Whether nurse and allied growth and improving locum tenens demand continue, and whether permanent placement declines are reversed.
- Whether gross-margin pressure, particularly in locum tenens and other workforce solutions, persists.
- Debt repayment, interest costs, revolver availability, and cash generation relative to operating and acquisition needs.
- The outcome and financial effect, if any, of the IRS appeal and wage-and-hour matters.
- The eventual effects of revenue-standard adoption and healthcare policy or reimbursement changes.