AMN Healthcare Services, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. AMN provides healthcare staffing and workforce solutions through nurse and allied, locum tenens, and other workforce solutions segments. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $522.5 million | $495.2 million | +6% |
| Gross profit / margin | $167.8 million / 32.1% | $161.8 million / 32.7% | Profit +4%; margin down 0.6 percentage points |
| Operating income / margin | $55.2 million / 10.6% | $52.0 million / 10.5% | Income +6% |
| Income before taxes | $49.9 million | $46.9 million | +6% |
| Net income | $42.7 million | $32.0 million | +33% |
| Diluted EPS | $0.87 | $0.65 | +34% |
| Operating cash flow | $59.7 million | $44.7 million | +$15.1 million |
| Capital expenditures | $5.7 million | $5.5 million | — |
- Cash and cash equivalents were $54.5 million at March 31, versus $15.1 million at year-end. Cash, cash equivalents and restricted cash totaled $134.0 million under the cash-flow presentation.
- Current assets were $489.4 million and current liabilities $251.2 million. Accounts receivable, net, was $338.6 million; days sales outstanding improved to 58 days from 63 at December 31, 2017.
- Balance-sheet notes payable, net of fees, were $320.0 million. The company reported $325.0 million principal outstanding on its 5.125% Senior Notes due 2024 and no revolver borrowings at March 31. The new revolver had $389.8 million available after letters of credit.
- Net cash used in investing activities was $9.6 million; net cash used in financing activities was $15.0 million. Financing outflows included $10.9 million for shares withheld for payroll taxes, $2.3 million of new credit-facility fees and $1.7 million of acquisition earn-out payments.
Material changes and segment results
- Nurse and allied: Revenue rose 8% to $338.2 million, mainly as average professionals on assignment increased 6%; average bill rate declined 2%. Segment operating income increased to $51.8 million from $46.0 million.
- Locum tenens: Revenue was approximately flat at $103.1 million. Revenue per day filled rose 5%, offset by a 4% decline in days filled. Segment operating income fell to $10.0 million from $12.2 million.
- Other workforce solutions: Revenue increased 3% to $81.2 million, led by VMS, interim leadership and mid-revenue-cycle management; permanent placement businesses declined. Segment operating income was approximately flat at $19.9 million.
- Consolidated gross margin fell from 32.7% to 32.1%, reflecting business mix and a lower locum tenens bill-to-pay spread; improved nurse and allied margin partly offset the decline. SG&A rose in dollars but declined as a share of revenue, from 20.6% to 20.0%.
- Net income growth was amplified by a lower effective tax rate: 14% versus 32%. The 2018 quarter included a $4.5 million discrete benefit related to share-based compensation accounting and a $2.5 million tax benefit correcting an immaterial prior-period COLI tax error. Management estimated a 25% effective tax rate for full-year 2018.
Outlook, risks and unusual items
- Management cited near-record healthcare job openings, low unemployment and continued economic growth as supportive industry trends, while noting wage growth and margin pressure in some divisions.
- Nurse and allied demand was described as stable, but customers were using fewer premium-rate nursing placements, weighing on average bill rates. In locum tenens, lower demand from some large physician practice management firms affected hospitalist volumes. Operating-model and technology changes were expected to disrupt locum productivity and revenue through Q3 2018, despite anticipated longer-term benefits.
- Management said operating cash flow and available revolver capacity should fund operations and expected capital expenditures for the next 12 months and beyond. No specific revenue or earnings guidance was provided.
- On February 9, AMN replaced prior facilities with a $400 million secured revolving credit facility, maturing February 9, 2023, with floating-rate pricing tied to leverage. The facility is secured by substantially all company assets.
- After quarter-end, AMN acquired Phillips DiPisa and Leaders For Today on April 6 for $30 million plus potential earn-outs up to $7 million. On April 9 it acquired MedPartners for $195 million plus potential earn-outs up to $20 million; the acquisition was funded with a $195 million revolver borrowing. These transactions increase acquisition and debt exposure after the reporting date.
- Contingencies include wage-and-hour class actions involving overtime calculations, breaks and compensation for time worked. The company said accrued matters were not expected to have a material adverse effect, but litigation outcomes remain uncertain. Other disclosed risks include healthcare staffing demand and pricing, worker classification, regulation, cybersecurity, technology execution, acquisitions, debt and insurance accruals.
- The company adopted the new revenue standard in Q1; the $2.1 million after-tax opening retained-earnings adjustment primarily reflected capitalization of contract costs, and the reported-quarter impact was not material. Adoption of the lease standard in 2019 was expected to significantly increase balance-sheet lease assets and liabilities, but the amount had not been quantified.
Investor verification priorities
- Assess whether revenue and staffing growth can be sustained while bill-rate pressure, wage inflation and lower consolidated gross margin persist.
- Track locum tenens volumes, productivity and the expected disruption through Q3 2018, including whether the operating changes deliver the stated longer-term benefits.
- Separate recurring earnings from tax-related benefits: verify the impact of the $4.5 million share-based compensation benefit, the $2.5 million COLI correction and the 25% full-year tax-rate estimate.
- Review post-quarter acquisition funding and leverage after the $195 million MedPartners revolver draw, alongside acquisition integration and contingent earn-outs.
- Monitor operating cash conversion, receivable collections, revolver availability and debt-service capacity, as well as the wage-and-hour litigation and other disclosed contingencies.