AMN Healthcare Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results. AMN provides healthcare staffing and workforce solutions through nurse and allied healthcare staffing, locum tenens staffing, and physician permanent placement services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $382.9m | $264.6m | $1,060.5m | $756.4m |
| Gross profit / margin | $126.0m / 32.9% | $80.3m / 30.4% | $337.6m / 31.8% | $231.4m / 30.6% |
| Operating income / margin | $37.6m / 9.8% | $15.9m / 6.1% | $92.6m / 8.7% | $49.0m / 6.5% |
| Net income | $33.6m | $8.5m | $61.7m | $23.3m |
| Diluted EPS | $0.69 | $0.18 | $1.27 | $0.49 |
- Cash flow: Nine-month operating cash flow was $55.6m, versus $22.5m in 2014. Investing cash use was $105.6m, including $81.1m for acquisitions and $21.1m for capital expenditures. Financing provided $51.3m. Cash at September 30 was $14.4m.
- Debt and liquidity: Term loan outstanding was $138.8m and revolver borrowings were $75.5m; $140.1m of revolver availability remained. The company classified $30m of revolver debt as current, based on its intention to repay it within 12 months. Management said operating cash flow and available borrowing capacity should fund operations for the next 12 months and beyond.
- Working capital: Days sales outstanding were 60 days, compared with 61 at December 31, 2014 and 57 at September 30, 2014. Accounts receivable increased, including subcontractor receivables.
Material changes and drivers
- Revenue grew 45% in Q3 and 40% for the first nine months. Management attributed growth to 29% and 25% organic growth, respectively, with the balance primarily reflecting acquisitions of Onward Healthcare, Avantas, and The First String Healthcare (TFS).
- All three segments grew. Q3 revenue was $266.3m in nurse and allied staffing, $101.8m in locum tenens, and $14.8m in physician permanent placement. Management cited higher assignment volumes, bill rates and hours, more locum days filled, and increased permanent searches.
- Gross margin improved as each segment expanded margins. Management cited higher-margin Medefis and Avantas businesses, growth in RPO and ShiftWise, improved locum bill-to-pay spreads, and lower recruiter compensation as a share of permanent-placement revenue.
- SG&A rose in dollars with acquisitions and growth, but declined as a share of revenue to 21.7% from 22.8% in Q3 and to 21.6% from 22.5% for the nine-month period.
- Acquisitions added goodwill and intangible assets; purchase-price allocations for OH and TFS remained preliminary. AMN completed the $4.1m Millican Solutions acquisition on October 5, 2015, after quarter-end.
Outlook, commentary and risks
- Management reported a strong staffing environment, with demand significantly above prior-year levels, increased professionals on assignment, and stronger future bookings. It also reported more first-time travel nurses and expects workforce-solutions revenue to continue growing. No specific revenue or earnings guidance was provided.
- Management said higher clinician pay rates were partly offset by increased client bill rates. Continued competition for healthcare professionals could affect costs, staffing capacity and margins.
- Net income benefited from a one-time $12.2m federal income-tax benefit after settlement of IRS audits for 2007–2010; the settlement required a $7.2m payment including interest. The company estimated a 33% annual effective tax rate for 2015 and expected approximately $1.5m of state tax benefits by the quarter ending December 31, 2016, subject to statute expirations.
- The IRS issued proposed adjustments for 2011–2012; AMN filed protests and intends to defend its positions. The company said reserves for open tax years were adequate. It also reported ordinary-course legal matters that it did not expect, individually or collectively, to have a material adverse effect.
- Variable-rate debt remains an exposure. A swap fixes the rate on $100m of term debt at 0.983% against one-month LIBOR through March 2018; management said a 100-basis-point rate increase would not have materially affected the reported period.
- Other risks cited include demand and client-contract changes, healthcare regulation, independent-contractor classification, recruiting and retention, privacy and technology risks, litigation and insurance accruals, acquisition execution, and the ability to service debt. A new Dallas office lease has estimated base rent of about $24.0m over ten years.
Important facts for investors to verify
- How much of future growth and margin improvement is organic and recurring versus acquisition-related.
- Whether strong demand can be met with sufficient clinicians at costs that preserve bill-to-pay spreads and gross margins.
- Receivables, subcontractor balances and DSO trends, given working-capital use and the timing-related contribution to operating cash flow.
- Final purchase-price allocations, acquisition earn-out assumptions and integration results; contingent consideration liabilities totaled $3.8m at quarter-end.
- Outcomes of the 2011–2012 IRS examination, expected state tax benefits, and the sustainability of earnings excluding the 2015 tax benefit.
- Debt repayment and revolver capacity, including the planned repayment of the $30m current portion.