AMN Healthcare Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. AMN provides healthcare staffing and workforce solutions through nurse and allied, locum tenens, and other workforce solutions segments. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $532.4 | $522.5 | Up 2% |
| Gross profit / margin | $176.8 / 33.2% | $167.8 / 32.1% | Margin up 1.1 percentage points |
| SG&A | $120.0 | $104.7 | Up 15% |
| Operating income / margin | $45.1 / 8.5% | $55.2 / 10.6% | Down 18% |
| Net income | $34.1 | $42.7 | Down 20% |
| Diluted EPS | $0.71 | $0.87 | Down 18% |
| Operating cash flow | $36.2 | $59.7 | Down $23.5 |
Gross margin benefited from the acquired businesses’ higher-than-average margins and a $4.3 million reclassification of physician-placement recruiter compensation from cost of revenue to SG&A. Excluding these effects, management said gross margin declined slightly year over year, principally due to locum tenens.
Segment performance and material changes
- Nurse and allied: Revenue was $337.0 million, down less than 1%; segment operating income was $47.9 million versus $51.8 million. Management cited a 1% decline in average bill rate and fewer contingent nurse staffing needs from a large client, partly offset by slightly more professionals on assignment.
- Locum tenens: Revenue was $80.5 million, down 22%; segment operating income was $5.7 million versus $10.0 million. Days filled fell 23%, partly offset by 2% higher revenue per day. Management said operating-model and technology changes were more disruptive than expected; demand for hospitalists and emergency-room physicians also declined.
- Other workforce solutions: Revenue was $114.9 million, up 42%; segment operating income was $26.2 million versus $19.9 million. Acquisitions contributed $34.3 million of revenue across the company, while this segment also experienced declines in interim leadership and mid-revenue-cycle businesses.
Consolidated revenue growth included $34.3 million from the PDA/LFT, MedPartners, and Silversheet acquisitions; excluding acquisition revenue, revenue declined 5%. SG&A increased due to acquisitions, the compensation reclassification, higher acquisition, integration and extraordinary legal costs, and other expenses. Depreciation and amortization rose to $11.7 million from $7.9 million, partly reflecting acquired intangibles and technology investment.
Cash, debt, and liquidity
- Cash and cash equivalents were $19.1 million at March 31, 2019, versus $13.9 million at year-end. Cash, cash equivalents and restricted cash totaled $86.0 million, compared with $84.3 million at year-end.
- Operating cash flow was $36.2 million; investing cash outflow was $36.2 million, including $29.5 million for acquisitions and $7.4 million of capital expenditures. Financing cash inflow was $1.8 million, including $30.0 million of revolving-credit borrowings, offset in part by $17.9 million of share repurchases and $10.3 million of tax withholding on vested awards.
- Debt included $150.0 million drawn on the $400 million secured revolving facility and $325.0 million principal of 5.125% senior notes due 2024. The filing reports $234.7 million of available revolver capacity. The facility matures February 9, 2023; its borrowings carry floating rates.
- Total current assets were $488.9 million and current liabilities were $333.3 million. The company stated that operating cash flow and available revolver borrowings should fund operations and expected capital expenditures for the next 12 months and beyond.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; at March 31, operating lease liabilities were $112.3 million in total, including $12.3 million current. Adoption had no opening retained-earnings impact.
Outlook, commentary, risks, and unusual items
- Management described healthcare staffing demand as generally strong, citing high job openings and quits, low unemployment, and continued economic growth, while noting wage pressure. It expects strategic managed-services relationships to become a larger share of staffing revenue.
- Management estimated a 2019 annual effective tax rate of approximately 26%; Q1’s 13% rate included discrete tax benefits of $4.6 million related to equity awards and $1.5 million related to company-owned life-insurance cash-value changes. This is a tax-rate estimate, not earnings guidance.
- On April 29, 2019, AMN agreed to acquire Advanced Medical Personnel Services for $200 million cash plus tiered contingent consideration of up to $20 million. Closing remained subject to conditions.
- Q1 included the January acquisition of Silversheet, a clinician credentialing software provider, for an initial purchase price of $31.7 million, including contingent consideration. The purchase allocation included $26.5 million goodwill, none tax-deductible.
- Two wage-and-hour class-action settlements entered in 2018 remained subject to court approval, considered probable. The company had recorded $12.1 million of related accrual increases in Q3 2018; total loss-contingency accruals were $24.6 million at March 31, 2019. Management said outstanding matters were not expected to have a material adverse effect, but litigation outcomes remain uncertain.
- Key risks include staffing demand and pricing, client consolidation and concentration, recruiting and retention costs, independent-contractor classification, healthcare and employment regulation, technology and cybersecurity, acquisition integration, debt and variable-rate exposure, and insurance-related accrual estimates. Management reported no material change to previously disclosed risk factors. Disclosure controls were effective, with no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether locum tenens sales productivity and revenue recover following the operating-model and technology changes, and whether nurse-and-allied demand from the large client stabilizes.
- How much reported growth and margin performance depends on acquisitions and the recruiter-compensation reclassification, versus underlying organic trends.
- Whether cash conversion improves, given lower operating cash flow and higher receivables; monitor DSO, which was 62 days versus 58 days a year earlier.
- Revolver utilization, floating-rate exposure, and financing capacity after the proposed Advanced acquisition, including whether it closes on the stated terms.
- Developments in wage-and-hour litigation and the adequacy of loss-contingency, insurance, and acquisition earn-out estimates.