AMN Healthcare Services, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts below are in millions unless stated otherwise. AMN provides healthcare staffing and workforce solutions, including nurse and allied staffing, locum tenens, executive search, managed services, technology, and medical coding. Results include acquisitions completed in 2015 and 2016; the company also changed its reportable segment structure effective January 1, 2016 and recast prior-period segment data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $472.6 | $382.9 | $1,414.4 | $1,060.5 |
| Gross profit / margin | $154.5 / 32.7% | $126.0 / 32.9% | $461.1 / 32.6% | $337.6 / 31.8% |
| Operating income / margin | $46.7 / 9.9% | $37.6 / 9.8% | $141.9 / 10.1% | $92.6 / 8.7% |
| Net income | $27.3 | $33.6 | $79.5 | $61.7 |
| Diluted EPS | $0.55 | $0.69 | $1.61 | $1.27 |
| Interest expense, net, and other | $3.0 | $2.0 | $9.1 | $5.8 |
Q3 revenue increased 23%, including 12% organic growth; nine-month revenue increased 33%, including 20% organic growth. Q3 net income declined despite higher revenue and operating income, principally reflecting income tax expense of $16.4 million versus $1.9 million a year earlier. The 2015 quarter included a $12.2 million federal tax benefit from an IRS audit settlement. Nine-month tax expense was $53.3 million versus $25.0 million; management estimated a 40% effective tax rate for 2016.
Segments and operating trends
- Nurse and allied solutions: Q3 revenue $286.8 million, up 16%; nine-month revenue $877.2 million, up 27%. Growth reflected higher assignment counts and bill rates, along with acquisitions.
- Locum tenens solutions: Q3 revenue $108.6 million, up 7%; nine-month revenue $320.4 million, up 12%. Management reported strong demand but said recruitment, credentialing, and placement capacity constrained faster growth.
- Other workforce solutions: Q3 revenue $77.3 million, up 125%; nine-month revenue $216.8 million, up 157%. Acquisitions were a major contributor; the segment also benefited from VMS and workforce optimization growth.
Management described healthcare staffing demand as strong and near all-time highs. MSP revenue grew faster than traditional staffing and was about 50% of nurse and allied revenue for the nine-month period. High demand supported higher bill rates, but nurse pay-rate increases put pressure on nurse and allied gross margin. Prioritizing MSP orders and using more company-employed nurses supported revenue and gross profit but modestly reduced gross margin percentage. Other workforce solutions supported consolidated margins, although its own margin percentage fell with the acquired-business mix.
Cash flow, balance sheet, and financing
- Nine-month operating cash flow was $84.8 million, versus $55.6 million in 2015. Investing cash outflow was $241.3 million, including $216.6 million for acquisitions; capital expenditures were $17.7 million. Financing cash inflow was $162.4 million. Cash rose to $15.7 million from $9.6 million at year-end 2015.
- At September 30, 2016, total assets were $1,169.8 million, current assets $433.7 million, and current liabilities $240.1 million. Accounts receivable, net, was $331.2 million; days sales outstanding were 64, unchanged from December 31, 2015.
- Debt at September 30 included $182.5 million drawn on the revolver and $202.5 million of term loans, net of unamortized fees. The revolver had $81.6 million of available credit. The credit agreement is secured by substantially all company assets and contains leverage and interest-coverage covenants. A $100 million interest-rate swap hedged variable-rate debt; its notional amount was reduced to $40 million after quarter-end.
- On October 3, 2016, the company issued $325 million of 5.125% senior notes due 2024. It used proceeds and operating cash to repay $131.3 million of term loans, $7.2 million of additional term loans, and the full $182.5 million revolver balance, and paid about $6.2 million in offering costs. The notes are senior unsecured obligations, subject to indenture covenants.
- On November 1, 2016, the board authorized repurchases of up to $150 million of common stock. The program has no minimum purchase requirement and may be suspended or discontinued.
Management stated that operating cash flow and revolver availability were expected to fund operations for the next 12 months and beyond. This assessment preceded the post-quarter note issuance and share-repurchase authorization.
Acquisitions, risks, and contingencies
In 2016, AMN acquired B.E. Smith, HealthSource Global Staffing, and Peak Provider Solutions. The acquisitions expanded interim leadership and executive search, rapid-response staffing, and medical coding and consulting. Nine-month acquisition-related revenue from HSG, B.E. Smith, and Peak was included in reported results; acquired businesses and earlier acquisitions affect comparability. Goodwill increased to $342.2 million from $204.8 million at December 31, 2015. Management reported no impairment trigger through September 30.
- Management identified staffing-supply constraints, recruiting and retention, wage and hour and other employment claims, professional liability, healthcare regulation, cybersecurity and technology disruption, acquisition integration, goodwill impairment, insurance accrual estimates, and debt service as risks.
- Wage-and-hour class actions were the most significant disclosed legal matters. Management considered probable losses not significant and accruals not material, but noted actual losses could differ. It believed outstanding contingencies would not materially adversely affect the company.
- An IRS audit of 2011–2012 tax years remained at IRS Appeals; the company could not predict resolution timing. Management considered tax reserves adequate. It also expected to record about $1.2 million of remaining state tax benefits by 2019 as statutes lapse.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- How much of revenue and earnings growth is organic versus acquisition-driven, and how acquired businesses perform against expectations.
- Whether strong staffing demand can be converted into placements given clinician and physician supply constraints, and the resulting effect on pay costs and gross margins.
- The post-refinancing debt balance, interest burden, covenant headroom, and funding available after any share repurchases or acquisitions.
- Cash conversion and working-capital trends, particularly receivables and DSO, alongside acquisition spending and capital expenditures.
- Developments in the IRS Appeals matter, wage-and-hour litigation, and professional liability reserves.
- The eventual impact and adoption timing of new revenue-recognition and lease-accounting standards; the filing says the company was still evaluating these effects.