Description
Filed with the SEC from Aug 09 to Aug 15:
AMN Healthcare Services (AHS)
Goldman Sachs (GS) cut its holdings in the big health-care staffing and workforce-management firm to 3,587,264 shares (8.2%) by selling 542,000 from July 25 through Aug. 9. The prices it received ranged from $5.75 to $6.51 per share.
Goldman said in its filing that it intends to sell shares "from time to time as [it] determines appropriate depending upon market conditions."
BUSINESS OVERVIEW
Our Company
We are the nation’s innovator in healthcare workforce solutions, providing managed services and recruitment and placement of physicians, nurses and allied healthcare professionals into temporary and permanent positions with clients throughout the United States. Our clients include acute and sub-acute care hospitals, government facilities, community health centers and clinics, physician practice groups, retail and mail-order pharmacies and several other healthcare-related settings.
Our clients utilize our workforce solutions and our healthcare staffing services to cost-effectively manage their clinical workforce needs, both temporary and permanent. Our managed services program enables healthcare organizations to increase their efficiency by managing all of their clinical supplemental recruitment needs through one company. Physicians, in particular, are significant drivers of our clients’ revenue, influencing many hospitals, healthcare facilities and physician practice groups to contract with firms such as us to recruit physicians. Short- and long-term shortages in our clients’ workforce arise due to a variety of circumstances, including a lack of qualified, specialized local healthcare professionals, attrition, leave schedules and new unit openings. Increasingly, our clients seek proven and stable partners that provide a sophisticated and integrated clinical workforce approach that enables them to achieve high quality patient outcomes more efficiently. We believe our clients contract with us because of our access to a large national network of quality temporary and permanent healthcare professionals, our leadership position in workforce solutions, our reputation for quality and innovation and our reliable and superior customer service. Our large number of hospital, healthcare facility and other clients provides us with the opportunity to offer clinical positions typically in all 50 states and in a variety of work environments and clinical settings.
We use distinct brands to market our differentiated services throughout the healthcare recruitment spectrum. We market our managed service solutions and travel nurse and allied recruitment services to hospitals and healthcare facilities generally under one brand, AMN Healthcare ® , as a single managed services provider with access to healthcare professionals through multiple recruitment brands. We generally market our locum tenens and physician permanent placement services to clients as an AMN Healthcare company under brand names, including Staff Care ® and Merritt Hawkins ® . We use a multi-brand recruiting strategy to attract healthcare professionals. Specifically, we primarily market our employment and career opportunities to healthcare professionals under the following brands: American Mobile ® Healthcare, Nursefinders ® , Medical Express SM , NurseChoice ® , NursesRx ® , Med Travelers ® , Club Staffing ® , Rx Pro Health ® , O’Grady Peyton International ® , Staff Care ® , Linde Healthcare ® , Kendall & Davis ® and Merritt Hawkins ® . Each brand has a distinct clinician focus, market strength and brand reputation.
Physicians, nurses and allied healthcare professionals choose temporary assignments for a variety of reasons that include seeking flexible work opportunities, exploring different areas of the country and diverse practice settings, building clinical skills and experience by working at prestigious healthcare facilities, avoiding the demands and political environment of working as permanent staff, working through life and career transitions, and as a means of access into a permanent staff position. We provide our temporary healthcare professionals with a benefit package that may include free or subsidized housing, meals and incidentals, free or reimbursed travel, competitive wages, professional development opportunities, professional liability insurance, and, for employed professionals, a 401(k) plan and health insurance. We believe that we attract temporary healthcare professionals due to our long-standing reputation for providing a high level of service, our numerous employment opportunities, our benefit packages, our innovative marketing programs and word-of-mouth referrals from the thousands of current and former healthcare professionals who have worked with us.
During the fourth quarter of 2011, we decided to divest our home healthcare services segment. This change will allow management to focus its full attention on our core competencies and to make additional resources available to invest in our core businesses. We completed this sale in January 2012. We used $5.0 million of the proceeds from the sale to pay down our long-term debt. We classified the home healthcare services segment as disposal group held for sale as of December 31, 2011, and we classified its results of operations as discontinued operations for the fiscal years ended December 31, 2011 and 2010, the two fiscal years during which we maintained a home healthcare services segment.
Competition
The healthcare recruitment and workforce solutions industry is highly competitive. We compete in national, regional and local markets for both healthcare professionals and hospital and healthcare facility clients. We compete with staffing and workforce management companies for hospital and healthcare facility clients primarily based on the depth and quality of our healthcare professionals, the quality and breadth of our service offerings and our experience and reputation in delivering these services, our national footprint, our customer service and our recruitment expertise. When recruiting for healthcare professionals, in addition to other recruitment and staffing firms, we also compete with hospital systems that have developed their own recruitment departments and interim staffing pools. We compete for healthcare professionals primarily based on customer service, recruitment and placement expertise, the quantity, diversity and quality of available assignments and placement opportunities, compensation packages and, for our temporary nurses and allied healthcare professionals, the benefits that we provide to them while they are on assignment.
We believe that larger, national firms that offer a broad spectrum of services such as us have distinct advantages over smaller, local and regional competitors. We generally have access to a larger pool of available candidates, substantial word-of-mouth referral networks and recognizable brand names, enabling us to attract a consistent flow of new applicants. The breadth of our services also allows us to provide even greater value through a more strategic, comprehensive and integrated approach to our clients. Larger firms also generally have a deeper, more comprehensive infrastructure with a more established operating model and processes that provide the long-term stability and foundation for quality standards recognition, such as the Joint Commission staffing agency certification and National Committee for Quality Assurance Credentials Verification Organization certification. We also believe a solid financial structure provides an advantage as the provision of payroll and housing services are working capital intensive. We believe periods of tight credit markets and general depressed economic conditions amplify this advantage.
Some of our competitors in the clinical workforce managed services, travel nurse, allied and locum tenens recruitment sectors include Cross Country Healthcare, CHG Healthcare Services, On Assignment and LocumTenens.com. The local per diem industry is highly fragmented with thousands of small, local companies. National competitors include Medical Staffing Network, Supplemental Health Care, Maxim Healthcare Services, and Favorite Healthcare Staffing. The competitors in our permanent placement division are primarily regional rather than national players.
Services Provided
Nurse and Allied Healthcare Staffing Segment
Through our nurse and allied healthcare staffing segment, we provide hospital and other healthcare facilities with a range of clinical workforce solutions, including (1) a comprehensive managed services workforce solution in which we can manage all of the contingent clinical needs for a client; (2) a recruitment process outsourcing program that leverages our expertise and support systems to replace or complement a client’s existing internal recruitment function for permanent staffing needs; and (3) more traditional staffing service solutions of local, short- and long-term assignment lengths. We set forth our nurse and allied healthcare staffing segment’s revenue and operating income in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1(s).”
Nurses . We provide a wide range of nurse specialties and disciplines, most of whom are registered nurses for temporary assignments throughout the United States. Assignments in acute-care hospitals, including teaching institutions, trauma centers and community hospitals comprise the majority of our assignments. The length of the assignment varies with a typical travel nurse assignment of 13 weeks. We also offer a shorter-term staffing solution of four to eight weeks under our NurseChoice brand to address hospitals’ urgent need for registered nurses. NurseChoice is targeted to recruit and staff nurses who can begin assignments within one to two weeks in acute-care facilities in contrast to the three to five week lead time that may be required for travel nurses. We also offer local (per diem) staffing. Local staffing involves the placement of locally based healthcare professionals on daily shift work on an as-needed basis. Hospitals and healthcare facilities often give only a few hours notice of their local staffing assignments, which require a turnaround from their staffing agencies of generally less than 24 hours. Nurses comprised approximately 83% of total nurse and allied temporary healthcare professionals working for us in 2011.
Allied Health Professionals . We provide allied health professionals under brands that include Med Travelers, Club Staffing and Rx Pro Health to acute-care hospitals and other healthcare facilities such as skilled nursing facilities, rehabilitation clinics, and retail and mail-order pharmacies. Allied health professionals include such disciplines as physical therapists, respiratory therapists, occupational therapists, medical and radiology technologists, speech pathologists, rehabilitation assistants, pharmacists and pharmacy technicians. Allied health professionals comprised approximately 17% of the total nurse and allied temporary healthcare professionals working for us in 2011.
Locum Tenens Staffing Segment
Under our Staff Care and Linde Healthcare brands, we place as independent contractors physicians of all specialties, certified registered nurse anesthetists, nurse practitioners, physician assistants and dentists on a temporary, or “locum tenens,” basis with all types of healthcare organizations throughout the United States, including hospitals, medical groups, occupational medical clinics, individual practitioners, networks, psychiatric facilities, government institutions, and managed care entities. We recruit these professionals nationwide and typically place them on multi-week contracts with assignment lengths ranging from a few days up to one year. We set forth our locum tenens staffing segment’s revenue and operating income in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1(s).”
Physician Permanent Placement Services Segment
We provide physician permanent placement services under our Merritt Hawkins and Kendall & Davis brands to hospitals, healthcare facilities and physician practice groups throughout the United States. Using a distinct consultative approach that we believe is more client-oriented, we perform the vast majority of our services on a retained basis, through our Merritt Hawkins brand, for which we are generally paid through a blend of retained search fees and variable fees tied to work performed and successful placement. To a smaller degree, we also perform our services on a contingent basis, exclusively through our Kendall & Davis brand, for which fees are paid once physician candidates are ultimately hired by our clients. Our broad specialty offerings include over 70 specialist and sub-specialist opportunities such as internal medicine, family practice and surgery. We set forth our physician permanent placement services segment’s revenue and operating income in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1(s).”
National Presence and Diversified Hospital and Healthcare Facility Client Base
We offer healthcare professionals placement opportunities and provide staffing solutions to our clients throughout the United States. We typically generate revenue in all 50 states. During 2011, the largest percentages of our revenue were concentrated in California, Texas, New York, North Carolina and Florida.
The majority of our temporary healthcare professional assignments are at acute-care hospitals. In addition to acute-care hospitals, we provide services to sub-acute healthcare facilities, physician groups, rehabilitation centers, dialysis clinics, pharmacies, home health service providers and ambulatory surgery centers. Our clients include Kaiser Foundation Hospitals, New York Presbyterian Health System, Georgetown University Hospital, HCA, NYU Medical Center, Stanford Hospital and Clinics, UCLA Medical Center, The University of Chicago Hospitals and Mayo Health System. No single client healthcare system comprised more than 10% of revenue and no single client facility comprised more than 3% of revenue for the year ended December 31, 2011.
Our Business Model
We have developed and continually refine our business model to achieve greater levels of productivity and service delivery efficiency. We seek to optimize the communication with, and service to, both our healthcare professionals and our clients.
Marketing and Recruitment of New Healthcare Professionals
We believe that physician, nursing and allied professionals are attracted to us because of our customer service and relationship-oriented approach, our competitive compensation and benefits package, and our large and diverse offering of work assignments that provide the opportunity to work at numerous attractive locations throughout the United States. We believe that our multi-brand recruiting strategy makes us more effective at reaching a larger number of healthcare professionals, while still leveraging operational efficiencies.
In our effort to attract and retain highly qualified healthcare professionals, we offer a variety of benefits to our employed professionals. These benefits may include free or subsidized housing, meals and incidentals, free or reimbursed travel, competitive wages, professional development opportunities, professional liability insurance and, for employed professionals, a 401(k) plan and health insurance.
Screening, Licensing and Quality Management
Through our quality service departments, we screen all of our temporary healthcare professionals prior to placement. We continue to evaluate our healthcare professionals after we place them to ensure adequate performance and manage risk, as well as to determine feasibility for future placements. We design our internal processes to ensure that our healthcare professionals have the appropriate experience, credentials and skills for the assignments they accept. Additionally, our processes enable us to assist with licensing and privileging for our physicians placed on assignments. Our experience has shown us that well-matched placements result in more satisfied healthcare professionals and healthcare facility clients.
Placement
Through our nurse and allied healthcare staffing segment, we provide acute-care systems as well as other healthcare facilities with a range of clinical workforce management and staffing solutions. These offerings include a comprehensive managed services workforce solution in which we can manage all of the temporary staffing needs for a client, a recruitment process outsourcing service that leverages our expertise and support systems to replace or complement our client’s existing internal recruitment function for permanent staffing needs and more traditional staffing service solutions of local, short- and long-term assignment lengths. Under our national sales approach, staffing orders are generally entered into our placement systems by our account managers and are available to the recruiters at all of our recruitment brands. The account managers develop a relationship with the staffing managers, arrange telephone interviews between the temporary healthcare professional and the hiring authority, and confirm offers and placements with the healthcare facility. At the same time, our recruiters seek to develop and maintain strong and lasting relationships with our healthcare professionals.
For the locum tenens staffing and physician permanent placement services segments, our national marketing teams generate orders for temporary physicians or permanent placement requests. Our national presence and infrastructure enable us to provide physicians with a variety of attractive client locations, perquisites and opportunities for career enhancement. Our recruiters and account representatives work together using proprietary information systems to fill orders and schedule physicians on temporary assignments. Our permanent placement recruiters work closely with our clients and marketing team to recruit and fill permanent placement requests. We also have the ability to cross-sell our permanent placement and temporary placement services to our clients.
Client Billing
During 2011, we billed substantially all of the temporary nurse, allied and physician healthcare professionals on assignment based on hours and days worked contracts. Under hours and days worked contracts, the temporary healthcare professional is either our employee for payroll and benefits purposes or an independent contractor, typically paid directly by us on behalf of our clients. Under this arrangement, we bill our clients at an hourly or daily rate that effectively includes reimbursement for recruitment fees, compensation and, for the temporary healthcare professionals who are our employees, any benefits and any applicable employer taxes. Housing, travel expenses, and meals and incidentals, if applicable, are either included in the hourly/daily rate or billed separately. We typically bill overtime, shift differential and holiday hours worked at a premium rate. In turn, we pay the temporary healthcare professional’s wages or contracted fees, housing, travel costs, and meals and incidentals costs, if applicable, and any other benefits. Providing payroll services is a value-added and convenient service that we believe hospitals and healthcare facilities generally expect from their supplemental staffing sources.
For our physician permanent placement services, we typically bill clients for a search initiation fee, hours worked and expenses on the search engagement and a non-refundable placement fee once the placement occurs.
Information Systems
Our management information and communications systems, including our financial reporting systems, are primarily centralized and controlled in our corporate headquarters in San Diego, California, with additional systems for our physician businesses centralized and controlled at our offices in Irving, Texas and other systems for our local staffing, managed services program solutions centralized and operated in our offices in Arlington, Texas. We have developed and currently operate proprietary information systems that include integrated processes for healthcare professional and healthcare facility contract management, matching of healthcare professionals with client assignments, healthcare professional file submissions for placements, quality management tracking, managing compensation packages and managing healthcare facility contract and billing terms. These systems provide our staff with fast, detailed information regarding individual healthcare professionals and hospital and other clients and are scalable to support future business growth. We use leading commercial package systems for our corporate back-office functions. In addition, we maintain a backup data center to assist us in providing continued system operations in case of a major disaster or system outage.
CEO BACKGROUND
R. Jeffrey Harris , age 57, has served as our director since September 2005. He is Chairman of the Compensation Committee and a member of the Audit Committee. The Board has concluded that Mr. Harris is qualified to serve on the Board because he brings considerable mergers and acquisitions experience. In addition, Mr. Harris has experience as a director on public company compensation and corporate governance committees, which experience is essential in designing and maintaining our executive compensation programs and developing our succession planning strategies. Mr. Harris served on the board of Sybron Dental Specialties in 2005 until Danaher Corporation acquired it in 2006. Mr. Harris served on the board of Playtex Products, Inc. from 2001 until Energizer Holdings acquired it in October 2007. Mr. Harris was director of Prodesse, Inc., an early stage biotechnology company, from 2002 until 2009, when Gen-Probe Incorporated acquired it. Since 2002, Mr. Harris has been involved as an investor in and a director of early stage companies primarily in southeast Wisconsin, and, since 2008, Mr. Harris has been a director of Guy & O’Neill, Inc., which is in the business of formulation, packaging and liquid filling. Mr. Harris also served Apogent Technologies, Inc. in the following capacities: (1) as Of Counsel from December 2000 through 2003, (2) as Vice President, General Counsel and Secretary from 1988 to 2000, and (3) as a director from 2000 to 2004, when Fisher Scientific International, Inc. acquired it.
Michael M.E. Johns, M.D. , age 70, has served as our director since December 2008. He is a member of the Compensation Committee and the Corporate Governance Committee. The Board has concluded that Dr. Johns is qualified to serve on the Board because he has extensive healthcare experience and is a recognized healthcare thought leader. This expertise is vital in shaping our strategy to deliver innovative and expanded service offerings as a healthcare workforce solutions company. In addition, Dr. Johns has experience serving on the board and the compensation committee of a large publicly-traded company, Johnson & Johnson, since 2005. In October 2007, Dr. Johns was appointed Chancellor of Emory University. From 1996 to 2007, Dr. Johns served as Executive Vice President for Health Affairs and Chief Executive Officer of the Robert W. Woodruff Health Sciences Center of Emory University and the Chairman of the Board of Directors of Emory Healthcare. From 1990 to 1996, Dr. Johns was Dean of the Johns Hopkins School of Medicine and Vice President of the Medical Faculty at Johns Hopkins University. Since 2000, Dr. Johns has served on the board of the Genuine Parts Company, for which he is a member of its compensation, governance and nominating committee, and he is a member of the Board of Regents of the Uniformed Services University for the Health Sciences. Additionally, Dr. Johns sits on several philanthropic boards, including the National Health Museum Board.
Martha H. Marsh , age 63, has served as our director since September 2010. She is a member of the Compensation Committee and the Corporate Governance Committee. The Board has concluded that Ms. Marsh is qualified to serve on the Board because she has extensive “C-suite” leadership and expertise in the healthcare industry. In fact, in 2004, Modern Healthcare named her as one of the nation’s 100 most powerful people in healthcare. Ms. Marsh’s experience and understanding of the challenges and opportunities of large healthcare facilities is immensely useful in directing our strategy to innovate and provide enhanced and expanded workforce solutions service offerings to meet our clients’ shifting needs. Ms. Marsh served as President and CEO of Stanford Hospital and Clinics for eight years, from April 2002 until her retirement in August 2010. Previously, Ms. Marsh served as the CEO of UC Davis Medical Center and the Chief Operating Officer of the UC Davis Health System from 1999 to 2002. Prior to that time, she served as the Senior Vice President for Professional Services and Managed Care at the University of Pennsylvania Health System, and before that as President and CEO of Matthew Thornton Health Plan in Nashua, New Hampshire. Ms. Marsh is a past Chair of the Board of Trustees for the California Hospital Association and the California Association of Hospitals and Health Systems. Appointed by President George W. Bush in 2003, Ms. Marsh has served on the National Infrastructure Advisory Council. She also serves on the boards of Teichert, Radisphere and Ascension Healthcare Network, three privately held companies.
Susan R. Salka , age 47, has been our director since September 2003, our President since May 2003 and our CEO since May 2005. She serves as a member of the Executive Committee of the Board. The Board has concluded that Ms. Salka is qualified to serve on the Board because she has over two decades of experience in the healthcare services industry, including 22 years’ experience with us in various roles. In such roles, she has helped grow our business both organically and through acquisitions into the national industry leader we are today. Ms. Salka also has experience serving on other public company boards. Since 1990, Ms. Salka has been employed by us in a variety of leadership positions, including Chief Financial Officer and Chief Operating Officer. Prior to joining us, Ms. Salka worked at BioVest Partners, a venture capital firm, and at Hybritech, a subsidiary of Eli Lilly & Co., which Beckman Coulter later acquired. Ms. Salka served on the board of directors and the audit committee of Beckman Coulter from 2007 until 2011, when Danaher Corporation acquired it. Additionally, she served on the board of Playtex Products, Inc. from 2001 until Energizer Holdings acquired it in October 2007. Ms. Salka also serves on the boards of BIOCOM and the San Diego State University Campanile Foundation.
Andrew M. Stern , age 63, has served as our director since November 2001. He is Chairman of our Corporate Governance Committee and a member of the Audit Committee. The Board has concluded that Mr. Stern is qualified to serve on the Board because he brings deep and long-standing healthcare industry experience as well as unparalleled investor communications and media expertise, which have been critical in guiding the structuring of our communications strategy with our investors, clients and other key stakeholders. Since 1983, Mr. Stern has served as Chairman of the Board and Chief Executive Officer of Sunwest Communications, Inc., a public relations firm. From 1975 to 1977, he served as Staff Assistant to President Gerald R. Ford at The White House and then served in senior corporate positions until founding Sunwest in 1982. Mr. Stern also serves as a director of Medical City Dallas Hospital and as an advisory director of the Center for Political Communication. He is past Chairman of the Texas Healthcare Trustees Association, past director of DNB Bancshares and past advisory director of NeoSpire, Inc.
Paul E. Weaver , age 66, has served as our director since July 2006. Mr. Weaver is Chairman of our Audit Committee and is a member of the Executive Committee. He is designated as a financial expert on the Audit Committee. In addition to fulfilling the Sarbanes-Oxley financial expert requirement for the Audit Committee, the Board has further concluded that Mr. Weaver is qualified to serve on the Board because of his extensive international audit and finance experience and sophistication, which are instrumental to the Audit Committee’s effective review of periodic financial disclosures, evaluation of our independent auditors and our internal controls, and understanding of critical accounting practices and complex tax matters. Mr. Weaver is a former Vice Chairman of PricewaterhouseCoopers, LLP and was Chairman of its global technology, infocom and entertainment/media practice group. Mr. Weaver serves on the boards of Unisys Corporation and WellCare Health Plans, Inc., serving as Chairman of the audit committees and a member of the compensation committees of both companies. Mr. Weaver previously served on the boards of Idearc, Inc. and Gateway, Inc. He also serves on the corporate advisory board of the University of Michigan Business School, and is Chairman of the Board of the Statue of Liberty/Ellis Island Foundation.
Douglas D. Wheat , age 61, has served as our director almost continuously since November 1999. Mr. Wheat is Chairman of our Board and a member of the Executive Committee. The Board has concluded that Mr. Wheat is qualified to serve on the Board because he possesses significant healthcare staffing industry knowledge and extensive expertise in corporate finance and mergers and acquisitions. Such knowledge and expertise are critical to the successful design and implementation of our growth strategy. Mr. Wheat previously served on the boards of several companies, including Nebraska Book Company, Inc., Smarte Carte Corporation, and Playtex Products, Inc., for which he was Chairman from 2004 to 2006. Mr. Wheat is currently Chairman of the Board of SuperMedia, Inc., an advertising company for local small- to medium-sized businesses and publisher of yellow pages directories. Mr. Wheat is a partner of Southlake Equity Group, and previously served as Chairman of Foxbridge Partners, LLC and President of Haas Wheat & Partners, L.P.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are the nation’s innovator in healthcare workforce solutions, providing managed services and recruitment and placement of physicians, nurses and allied healthcare professionals into temporary and permanent positions with clients throughout the United States. Our clients include acute and sub-acute care hospitals, government facilities, community health centers and clinics, physician practice groups, and several other healthcare-related settings. Our clients utilize our workforce solutions and our healthcare staffing services to cost-effectively manage their clinical workforce needs, both temporary and permanent. Our managed services program enables healthcare organizations to increase their efficiency by managing all of their clinical supplemental recruitment needs through one company.
We conduct business through three reportable segments: nurse and allied healthcare staffing, locum tenens staffing and physician permanent placement services. For the year ended December 31, 2011, we recorded revenue of $887.5 million, as compared to revenue of $669.9 million for 2010. We recorded a net loss of $(26.3) million, which included pre-tax impairment charges of $38.9 million reported in the loss from discontinued operations for the year ended December 31, 2011, as compared to a net loss of $(52.0) million for 2010, which included pre-tax impairment charges of $50.8 million.
Nurse and allied healthcare staffing segment revenues comprised 64% and 55% of total consolidated revenues for the years ended December 31, 2011 and 2010, respectively. Through our nurse and allied healthcare staffing segment, we provide hospital and other healthcare facilities with a range of clinical workforce solutions, including: (1) a comprehensive managed services solution in which we manage all of the temporary nursing and allied needs of a client; (2) traditional clinical staffing solutions of variable assignment lengths; and (3) a recruitment process outsourcing program that leverages our expertise and support systems to replace or complement a client’s existing internal recruitment function for permanent placement needs.
Locum tenens staffing segment revenues comprised 31% and 40% of total consolidated revenues for the years ended December 31, 2011 and 2010, respectively. Through our locum tenens staffing segment, we place physicians of all specialties, as well as dentists, certified registered nurse anesthetists, physician assistants and nurse practitioners, with clients on a temporary basis as independent contractors. These locum tenens physicians and other professionals are used by our healthcare facility and physician practice group clients to fill temporary vacancies created by vacation and leave schedules and to bridge the gap while they seek permanent candidates or explore expansion. Our locum tenens clients represent a diverse group of healthcare organizations throughout the United States, including hospitals, medical groups, occupational medical clinics, individual practitioners, networks, psychiatric facilities, government institutions and managed care entities. The professionals we place are recruited nationwide and are typically placed on multi-week contracts with assignment lengths ranging from a few days up to one year.
Physician permanent placement services segment revenues comprised 5% of total consolidated revenues for each of the years ended December 31, 2011 and 2010. Through our physician permanent placement services segment, we assist hospitals, healthcare facilities and physician practice groups throughout the United States in identifying and recruiting physicians for permanent placement. We perform the vast majority of our services on a retained basis, through our Merritt Hawkins brand, for which we are generally paid through a blend of retained search fees and variable fees tied to our performance. To a smaller degree, we also perform our services on a contingent basis, exclusively through our Kendall & Davis brand, for which fees are paid once physician candidates are ultimately hired by our clients. Our broad specialty offerings include over 70 specialist and sub-specialist opportunities such as internal medicine, family practice and orthopedic surgery.
During the fourth quarter of 2011, we decided to divest our home healthcare services segment. Accordingly, we classify the home healthcare services segment as a disposal group held for sale as of December 31, 2011 and its results of operations as discontinued operations for the years ended December 31, 2011 and 2010, the only two years in which we maintained a home healthcare services segment. We completed the sale of this segment in January 2012.
Management Initiatives
Our growth strategy focuses on providing an innovative and differentiated value and experience to our clients and healthcare professionals. To accomplish this, we have broadened our service offerings beyond our traditional core travel nurse and allied temporary staffing, locum tenens staffing, and physician permanent placement services, to include more strategic and recurring revenue sources from innovative clinical workforce solutions offerings such as managed services programs and recruitment process outsourcing. Through these differentiated services, we have built strategic relationships with our clients to assist them in improving their financial, operational and patient care results through productivity and candidate quality enhancements. We continually seek strategic opportunities to expand into complementary service offerings that leverage our core capabilities of recruiting and credentialing clinical professionals, while providing a more recurring stream of revenues that reduces our exposure to economic cycle risk.
Recent Trends
Toward the end of 2008, demand decreased considerably in the nurse and allied healthcare staffing segment, reaching a low point in 2009, due to widespread and unprecedented economic conditions. Travel nurse demand improved throughout 2010 and 2011, but remained below peak levels experienced in 2007 through 2008. In 2011, we experienced broad based increased travel nurse demand across both managed services program clients and traditional contract clients, as well as across specialties and geographies. The demand growth has been particularly strong for specialty nurses for which there is limited supply. We continue to see our hospital clients migrate to managed services program relationships, and during the past year we substantially increased the number of managed services relationships in our nursing business and have begun to see the extension of these relationships to our allied business. Early in 2012, we are experiencing a slight decrease in demand due to a light flu season and mild winter. However, the number of travel nurses on assignment continues to increase due to our improved ability to fill the demand.
Within the allied staffing business, in response to the strength in demand for several supply-constrained therapy disciplines and continued weakness in demand for imaging technicians due in large part to lower government reimbursement levels and a strong supply of available technicians, our mix of business had been shifting towards therapy staffing. In our locum tenens staffing segment, generally, market demand in 2011 remained consistent with 2010.
Throughout most of 2011, our physician permanent placement services segment demand remained stagnant as we believe clients responded to weak economic conditions and budget pressure by, among other things, utilizing their internal resources for recruiting efforts and limiting their use of external retained permanent placement services. In the fourth quarter, however, we experienced a noticeable increase in new searches, our primary indicator of demand.
In 2010, Congress passed the PPACA, providing for extensive healthcare reform. The measure is being legally challenged and, if sustained, many of its reforms are scheduled to be phased in over a number of years. Accordingly, many questions remain concerning the impact of this legislation, including to what extent it will cause the government to assume a larger role in the healthcare system, expand healthcare coverage of Americans, and/or impose new and potentially significant restrictions on reimbursement. Given these open questions, we cannot predict the impact of the legislation on our clients or the direct or indirect impact on us. The implementation of such healthcare reforms in their current form would impact our clients and may affect certain aspects of our business, including through: (1) changes to provider reimbursement methods and payment rates, which could impact demand for and pricing of our services; (2) the manner in which we contract with physicians and other healthcare professionals or with hospitals and other healthcare clients; (3) the imposition of additional medical, administrative, technology or other costs on us and our clients; and (4) the regulation of the collection, use, disclosure, maintenance and disposal of individually identifiable health information.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, accounts receivable and contingencies and litigation, valuation and recognition of share-based payments and income taxes. We base these estimates on the information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Goodwill and Indefinite-lived Intangible Assets
In accordance with accounting guidance on goodwill and other intangible assets, we perform annual impairment analyses to assess the recoverability of the goodwill and indefinite-lived intangible assets.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Valuation techniques consistent with the market approach and income approach are used to measure the fair value of each reporting unit. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, and determining appropriate discount rates, growth rates, company control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value.
We experienced declines in home healthcare revenue subsequent to the acquisition of NFI due to federal and state reimbursement rate and funding pressures, such that during the third quarter of 2011, we lowered our projected near-term growth rate in the home healthcare services segment. The revised growth rate triggered interim impairment testing on the home healthcare services segment, which was also the reporting unit, as of August 31, 2011. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with the reporting unit’s carrying amount, including goodwill. We determined the fair value of the reporting unit using a combination of the income approach (using discounted future cash flows) and the market valuation approach. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of our reporting unit’s goodwill based on a number of factors, including the implied discount rate, with the carrying amount of that goodwill. During the third quarter of 2011, we completed the first step of our goodwill impairment testing, which indicated that the fair value of our home healthcare services reporting unit was lower than its respective carrying value. The decrease in value was due to lower projected near-term growth rates in the home healthcare industry, lowering the anticipated growth trend used for goodwill impairment testing. We recognized a preliminary pre-tax goodwill impairment charge of approximately $24.5 million during the third quarter of 2011, which represented management’s best estimate of the goodwill impairment based on the fair value analysis completed to date. During the fourth quarter of 2011, we finalized the interim valuation of our identified tangible and intangible assets and liabilities for purposes of determining the implied fair value of goodwill and determined there was no further impairment of goodwill at that time. We included the goodwill impairment charges in loss from discontinued operations on the consolidated statement of operations for the year ended December 31, 2011.
During the fourth quarter of 2011, we performed our annual impairment test as of October 31, 2011 and determined there was no impairment of our goodwill. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied hypothetical decreases to the fair value of each reporting unit. We determined that hypothetical decreases in fair value of at least 10% would be required before any reporting unit would have a carrying value in excess of its fair value. However, changes in our estimates, such as forecasted cash flows, would affect the estimated fair value of our reporting units and could have resulted in a goodwill impairment charge particularly for our physician permanent placement reporting unit. The fair values of our domestic nurse staffing reporting unit, international nurse staffing unit, allied healthcare staffing reporting unit and locum tenens staffing reporting unit significantly exceeded their respective book values. However, the calculated fair value of our physician permanent placement services reporting unit exceeded its respective carrying value by a narrower margin. No events or circumstances have occurred subsequent to October 31, 2011 that indicate that further impairment may have occurred.
In addition, during the third quarter of 2011, as a result of lowering our projected near-term growth rate in the home healthcare services segment, we recorded a preliminary pre-tax impairment charge of $6.7 million, which related to an indefinite-lived intangible asset shared by the domestic nurse staffing reporting unit and home healthcare services reporting unit. During the fourth quarter of 2011, we performed our annual impairment testing and recorded an additional impairment charge of $7.7 million as a result of the January 2012 sale of the home healthcare business, which further impaired the above indefinite-lived asset. We included the intangible asset charges in loss from discontinued operations on the consolidated statement of operations for the year ended December 31, 2011.
Intangible assets with estimable useful lives are required to be amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment evaluation is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of assets and liabilities. We assess potential impairments to intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use, including estimates of future cash flows, volumes, market penetration and discount rates, are consistent with our internal planning. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our long-lived intangible assets. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on our reported asset values. Future events could cause us to conclude that impairment indicators exist and that long-lived intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on our results of operations. We have analyzed our amortizable long-lived assets for impairment and determined that there is no other impairment for the years ended December 31, 2011 and 2010, except as discussed above.
Valuation of assets held for sale
We measure disposal groups classified as held for sale at the lower of their carrying amount or fair value less cost to sell, and we do not depreciate or amortize disposal groups. Classification of our disposal groups as held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale, an active program to sell the disposal group has been initiated and its sale is probable within one year. If at any time these criteria are no longer met, the disposal group would be reclassified as held and used. We evaluate the held for sale classification and the fair value of such disposal groups at each reporting period. We determine the fair value of assets held for sale by considering active bids from potential buyers and also using the income or the market valuation approaches or a combination thereof. The fair value analysis using the income or market approach for assets held for sale is similar to the fair value analysis of reporting units for goodwill impairment described above and requires significant judgment.
Professional Liability Reserve
We maintain an accrual for professional liability self-insured retention limits, which we include in accounts payable and accrued expenses and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of this undiscounted accrual by evaluating our historical experience and trends, loss reserves established by our insurance carriers, management and third party administrators, as well as by analyzing independent actuarial studies. We obtain actuarial studies on a semi-annual basis that use our historical claims data and industry data to assist us in determining the appropriate reserves.
Workers Compensation Reserve
We maintain an accrual for workers compensation self-insured retention limits, which we include in accrued compensation and benefits and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of these undiscounted accruals by evaluating our historical experience and trends, loss reserves established by our insurance carriers and third party administrators, as well as through the use of independent actuarial studies. We obtain updated actuarial studies on a semi-annual basis that use our payroll and actual claims data, as well as industry data, to determine the appropriate reserves for each policy year. The actuarial study for workers compensation provides us with the estimated losses for prior policy years and an estimated percentage of payroll compensation to be accrued for the current year. We record our accruals based on the amounts provided in the actuarial study, which we believe is the best estimate of our liability.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are healthcare’s workforce innovator, providing a broad spectrum of workforce solutions and staffing services to the nation’s healthcare facilities. As an innovative workforce solutions partner, our managed services programs, recruitment process outsourcing, consulting services, and placement of physicians, nurses and allied healthcare professionals into temporary and permanent positions enable clients to successfully reduce complexity, increase efficiency and improve patient outcomes within the rapidly evolving healthcare environment. Our clients include acute and sub-acute care hospitals, government facilities, community health centers and clinics, physician practice groups, and several other healthcare-related settings. Our clients utilize our workforce solutions and our healthcare staffing services to cost-effectively manage their clinical workforce needs, both temporary and permanent.
We conduct business through three reportable segments: nurse and allied healthcare staffing, locum tenens staffing and physician permanent placement services.
For the three months ended June 30, 2012, we recorded revenue of $235.8 million, as compared to revenue of $220.6 million for the same period last year. For the three months ended June 30, 2012, we recorded a net loss of $(0.08) million, which included a pre-tax $(9.8) million loss on debt extinguishment charged to interest expense associated with the successful refinancing of our prior credit facilities, as compared to net income of $0.8 million for the same period last year. For the six months ended June 30, 2012, we recorded revenue of $462.2 million, as compared to revenue of $436.4 million for the same period last year. We recorded net income of $4.2 million for the six months ended June 30, 2012, as compared to net income of $3.1 million for the same period last year.
Nurse and allied healthcare staffing segment revenue comprised 68% and 63% of total consolidated revenue for the six months ended June 30, 2012 and 2011, respectively. Through our nurse and allied healthcare staffing segment, we provide hospital and other healthcare facilities with a range of clinical and workforce staffing solutions, including: (1) a comprehensive managed services solution in which we manage all of the temporary nursing and allied needs of a client; (2) traditional clinical staffing solutions of variable assignment lengths; and (3) a recruitment process outsourcing program that leverages our expertise and support systems to replace or complement a client’s existing internal recruitment function for permanent placement needs.
Locum tenens staffing segment revenue comprised 28% and 32% of total consolidated revenue for the six months ended June 30, 2012 and 2011, respectively. Through our locum tenens staffing segment, we place physicians of all specialties, as well as dentists, certified registered nurse anesthetists, physician assistants and nurse practitioners with clients on a temporary basis as independent contractors. These locum tenens physicians and other professionals are used by our healthcare facility and physician practice group clients to fill temporary vacancies created by vacation and leave schedules and to bridge the gap while they seek permanent candidates or explore expansion. Our locum tenens clients represent a diverse group of healthcare organizations throughout the United States, including hospitals, medical groups, occupational medical clinics, individual practitioners, networks, psychiatric facilities, government institutions and managed care entities. The professionals we place are recruited nationwide and are typically placed on multi-week contracts with assignment lengths ranging from a few days up to one year.
Physician permanent placement services segment revenue comprised 4% and 5% of total consolidated revenue for the six months ended June 30, 2012 and 2011, respectively. Through our physician permanent placement services segment, we assist hospitals and physician practice groups throughout the United States in identifying and recruiting physicians for permanent placement. We perform the vast majority of our services on a retained basis, through our Merritt Hawkins brand, for which we are generally paid through a blend of retained hourly, sourcing and placement fees. To a smaller degree, we also perform our services on a contingent basis, exclusively through our Kendall & Davis brand, for which fees are paid once physician candidates are ultimately hired by our clients. Our broad specialty offerings include over 70 specialist and sub-specialist opportunities such as internal medicine, family practice and orthopedic surgery.
In January 2012, we completed the sale of our home healthcare services segment. Accordingly, its results of operations are recorded as discontinued operations for the three and six months ended June 30, 2012 and 2011.
Management Initiatives
Our growth strategy focuses on providing an innovative and differentiated value and experience to our clients and healthcare professionals. To accomplish this, we have broadened our service offerings beyond our traditional travel nurse and allied temporary staffing, locum tenens staffing, and physician permanent placement services, to include more strategic and recurring revenue sources from innovative clinical workforce solutions offerings such as managed services programs and recruitment process outsourcing. Through these differentiated services, we have built strategic relationships with our clients to assist them in improving their financial, operational and patient care results through productivity and candidate quality enhancements. We continually seek strategic opportunities to expand into complementary service offerings that leverage our core capabilities of recruiting and credentialing clinical professionals, while providing a more recurring stream of revenues that reduces our exposure to economic cycle risk.
Recent Trends
Demand has rebounded in the nurse and allied healthcare staffing segment from its low point in 2009, but still remains below levels experienced in 2007 through 2008. Demand has been particularly strong for specialty nurses for which there is limited supply. While our demand is spread across a broad base of clients, we continue to see more of our hospital clients migrate to managed services program relationships, and during 2012 revenue from these contracts represent approximately one-third of our nurse and allied healthcare staffing business, a substantial increase from 1% in 2008. As a result of these managed service relationships, we have an improved ability to fill more of the demand and create operational efficiencies.
Within the allied staffing business, we continue to have strength in demand for several supply-constrained therapy disciplines and more recently we have seen improving market conditions for our imaging and laboratory businesses.
In our locum tenens staffing segment, we are seeing increased market demand in certain specialties. As a result of market demand and operational changes, we are experiencing improving margins due primarily to more favorable bill rates and improved bill to pay spreads.
Throughout most of 2011, our physician permanent placement services segment demand remained constrained as we believe clients responded to weak economic conditions and budget pressure by, among other things, utilizing their internal resources for recruiting efforts and limiting their use of external retained permanent placement services. To date in 2012, we have seen an increase in market demand as well as our recruiter productivity.
In 2010, Congress passed the Patient Protection and Affordable Care Act (the “PPACA”), providing for extensive healthcare reform. Numerous states, organizations and individuals filed suit in federal court challenging the constitutionality of the PPACA. In June 2012, the Supreme Court of the United States upheld a majority of the provisions of the PPACA, including a provision commonly referred to as the “individual mandate” generally requiring most adults not covered by an employer or government-sponsored insurance plan to maintain health insurance coverage or pay a penalty. Although many questions remain and we are currently evaluating the PPACA’s potential effect on our business and those of our clients, it appears that the federal and state governments will assume a larger role in the healthcare system, the number of individuals covered by health care insurance will increase, and new and potentially significant restrictions on reimbursement for healthcare products and services may occur. We currently believe that the PPACA may: (1) give rise to changes to provider reimbursement methods and payment rates, which could affect demand for and pricing of our services; (2) affect the manner in which we contract with physicians and other healthcare professionals or with hospitals and other healthcare clients; and (3) impose additional employer-related medical costs on us.
Comparison of Results for the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011
Revenue. Revenue increased 7% to $235.8 million for the three months ended June 30, 2012 from $220.6 million for the same period in 2011, primarily due to higher revenue in the nurse and allied healthcare staffing segment, partially offset by lower revenue in the locum tenens staffing segment.
Nurse and allied healthcare staffing segment revenue increased 13% to $158.6 million for the three months ended June 30, 2012 from $140.0 million for the same period in 2011. The increase was primarily attributable to an increase in the average number of temporary healthcare professionals on assignment and an increase in bill rates during the three months ended June 30, 2012.
Locum tenens staffing segment revenue decreased 5% to $67.6 million for the three months ended June 30, 2012 from $71.1 million for the same period in 2011. The decrease was primarily attributable to a decline in the number of days filled by healthcare professionals and an increasing percentage of our days filled being attributable to lower bill rate specialties, partially offset by an increase in the average bill rate across most specialties.
Physician permanent placement services segment revenue increased slightly to $9.6 million for the three months ended June 30, 2012 from $9.5 million for the same period in 2011.
Cost of Revenue. Cost of revenue increased 5% to $168.8 million for the three months ended June 30, 2012 from $160.4 million for the same period in 2011. The increase was primarily due to an increase in the average number of temporary healthcare professionals on assignment in the nurse and allied healthcare staffing segment.
Nurse and allied healthcare staffing segment cost of revenue increased 12% to $116.2 million for the three months ended June 30, 2012 from $103.9 million for the same period in 2011. The increase was primarily attributable to the increase in the average number of temporary healthcare professionals on assignment during the three months ended June 30, 2012.
Locum tenens staffing segment cost of revenue decreased 8% to $48.8 million for the three months ended June 30, 2012 from $53.0 million for the same period in 2011. The decrease was primarily attributable to a decline in the number of days filled by healthcare professionals and an increasing percentage of our days filled being attributable to the lower pay rate specialties.
Physician permanent placement services segment cost of revenue increased 6% to $3.8 million for the three months ended June 30, 2012 from $3.6 million for the same period in 2011.
Gross Profit. Gross profit increased 11% to $67.0 million for the three months ended June 30, 2012 from $60.2 million for the same period in 2011, representing gross margins of 28.4% and 27.3%, respectively. The increase in gross margin was primarily due to higher margins in nurse and allied healthcare staffing and locum tenens staffing segments due to higher bill to pay spreads. The increase in gross margin was partially offset by a lower margin in the physician permanent placement segment due to the prior year impact from the adoption of the accounting guidance on revenue arrangements with multiple deliverables effective on January 1, 2011. Gross margin by reportable segment for the three months ended June 30, 2012 and 2011 was 26.7% and 25.8% for nurse and allied healthcare staffing, 27.9% and 25.5% for locum tenens staffing and 59.9% and 62.4% for physician permanent placement services, respectively.
Depreciation and Amortization. Amortization expense decreased 5% to $1.7 million for the three months ended June 30, 2012 from $1.8 million for the same period in 2011. Depreciation expense decreased 17% to $1.9 million for the three months ended June 30, 2012 from $2.3 million for the same period in 2011, with the decrease primarily attributable to having more fixed assets fully depreciated during the three months ended June 30, 2012.
Interest Expense, Net. Interest expense, net, was $13.6 million for the three months ended June 30, 2012 as compared to $5.6 million for the same period in 2011. Interest expense for the three months ended June 30, 2012 included an $8.6 million write-off of unamortized deferred financing fees and original issue discount and a $1.2 million prepayment penalty paid in connection with the refinancing of our credit facilities.
Income Tax Expense (Benefit). Income tax benefit was $(0.4) million for the three months ended June 30, 2012, as compared to income tax expense of $1.7 million for the same period in 2011, reflecting effective income tax rates of 82.9% and 73.6% for these periods, respectively. The increase in the effective income tax rate was primarily attributable to the relationship of pre-tax income to permanent differences and the impact of provisions for uncertain tax positions. See additional information in “Item 1. Condensed Consolidated Financial Statements (unaudited)—Notes to Unaudited Condensed Consolidated Financial Statements—Note 8, Income Taxes.”
Comparison of Results for the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011
Revenue. Revenue increased 6% to $462.2 million for the six months ended June 30, 2012 from $436.4 million for the same period in 2011, primarily due to higher revenue in the nurse and allied healthcare staffing segment, partially offset by lower revenue in the locum tenens staffing and physician permanent placement services segments.
Nurse and allied healthcare staffing segment revenue increased 14% to $312.5 million for the six months ended June 30, 2012 from $274.8 million for the same period in 2011. The increase was primarily attributable to an increase in the average number of temporary healthcare professionals on assignment and an increase in bill rates during the six months ended June 30, 2012.
Locum tenens staffing segment revenue decreased 7% to $131.1 million for the six months ended June 30, 2012 from $141.3 million for the same period in 2011. The decrease was primarily attributable to a decline in the number of days filled by healthcare professionals and an increasing percentage of our days filled being attributable to lower bill rate specialties.
Physician permanent placement services segment revenue decreased 8% to $18.6 million for the six months ended June 30, 2012 from $20.3 million for the same period in 2011. The decrease was primarily attributable to the prior year’s adoption of the accounting guidance on revenue arrangements with multiple deliverables, which resulted in recognition of additional revenue of $2.9 million that would have previously been deferred during the six months ended June 30, 2011.
Cost of Revenue. Cost of revenue increased 6% to $332.0 million for the six months ended June 30, 2012 from $313.5 million for the same period in 2011. The increase was primarily due to an increase in the average number of temporary healthcare professionals on assignment in the nurse and allied healthcare staffing segment.
Nurse and allied healthcare staffing segment cost of revenue increased 14% to $229.5 million for the six months ended June 30, 2012 from $201.6 million for the same period in 2011. The increase was primarily attributable to the increase in the average number of temporary healthcare professionals on assignment during the six months ended June 30, 2012 and a $1.6 million actuarial-based workers compensation benefit recorded during the six months ended June 30, 2011.
Locum tenens staffing segment cost of revenue decreased 9% to $95.0 million for the six months ended June 30, 2012 from $104.8 million for the same period in 2011. The decrease was primarily attributable to a decline in the number of days filled by healthcare professionals and an increasing percentage of our days filled being attributable to the lower pay rate specialties.
Physician permanent placement services segment cost of revenue increased 4% to $7.5 million for the six months ended June 30, 2012 from $7.2 million for the same period in 2011 primarily due to increases in travel expenses and recruiter compensation.
Gross Profit. Gross profit increased 6% to $130.2 million for the six months ended June 30, 2012 from $122.9 million for the same period in 2011, representing gross margins of 28.2% for both periods. Gross margin by reportable segment for the six months ended June 30, 2012 and 2011 was 26.6% and 26.6% for nurse and allied healthcare staffing, 27.5% and 25.8% for locum tenens staffing, and 59.7% and 64.7% for physician permanent placement services, respectively.
Operating Activities:
Net cash provided by operations during the six months ended June 30, 2012 was $30.6 million, compared to $7.9 million for the same period last year. The increase in net cash provided by operations during the six months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to better operating results and a decrease in accounts receivable as a result of strong collection efforts. Our Days Sales Outstanding (“DSO”) was 53 days at June 30, 2012. DSO was 61 days and 54 days at December 31, 2011 and June 30, 2011, respectively.
Investing Activities:
Net cash provided by investing activities during the six months ended June 30, 2012 was $6.3 million, compared to $0.3 million for the same period in 2011. The change was primarily related to the proceeds from the sale of the home healthcare services segment during the six months ended June 30, 2012.
Financing Activities:
Net cash used in financing activities during the six months ended June 30, 2012 was $25.3 million, primarily due to paying off our prior credit facilities offset with the additional borrowings under our new credit facilities. During the six months ended June 30, 2011, cash used in financing activities was $2.1 million primarily due to paying down our then-existing debt.
On April 5, 2012, we entered into a Credit Agreement (the “New Credit Agreement”). The New Credit Agreement provides two credit facilities (the “Credit Facilities”), including (A) a $50 million secured revolving credit facility (the “Revolver”) that includes a $20 million sublimit for the issuance of letters of credit and a $15 million sublimit for swingline loans and (B) a $200 million face value secured term loan credit facility (the “Term Loan”), net of unamortized original issue discount of $2.0 million. In addition, the New Credit Agreement provides that we may from time to time obtain an increase in the Revolver or the Term Loan in an aggregate principal amount not to exceed $75 million (with a $37.5 million sublimit for the Revolver) subject to, among other conditions, the arrangement of additional commitments with financial institutions reasonably acceptable to us and the administrative agent. The Revolver is available to us for working capital, capital expenditures, permitted acquisitions and general corporate purposes. The standby letters of credit issued under one of the previous credit facilities were also rolled under and deemed issued under the Revolver. The maturity dates of the Revolver and the Term Loan are April 5, 2017 and April 5, 2018, respectively.
The proceeds from the initial drawdown under the Credit Facilities were used to repay in full all outstanding indebtedness under our previous credit facilities and to pay related transaction costs. In addition, during the six months ended June 30, 2012 and prior to our entry into the New Credit Agreement, we made the following payments on the prior first lien term loan credit facility: (1) a $4.6 million quarterly principal amortization payment, (2) a $5.0 million voluntary payment using the proceeds from the sale of our home healthcare services business in January 2012 and (3) a $0.2 million payment to satisfy the excess cash flow prepayment requirement for 2011. In connection with obtaining the Credit Facilities, we incurred approximately $3.9 million in deferred financing fees, which were capitalized and are amortized to interest expense over the term of the New Credit Agreement. In addition, the loss on debt extinguishment, before tax, included the write-off to interest expense of $8.6 million of unamortized deferred financing fees and original issue discount and a $1.2 million prepayment penalty associated with the repayment of the prior credit facilities.
During the six months ended June 30, 2012, we made a quarterly principal amortization payment and voluntary prepayment on the Term Loan, which totaled $4.4 million. At June 30, 2012, the aggregate outstanding principal amount of the Term Loan (including both the current and long-term portions), net of discount, was $193.7 million. The $20.0 million current portion of the notes payable set forth in our unaudited condensed consolidated balance sheet dated June 30, 2012 represents voluntary prepayments we made subsequent to June 30, 2012 through the time of filing of this Quarterly Report on Form 10-Q with the SEC, which prepayments also satisfied all scheduled quarterly principal amortization payments due under the Credit Facilities through June 30, 2013.
At June 30, 2012, we maintained outstanding standby letters of credit totaling $28.4 million as collateral in relation to our professional liability insurance agreements, workers compensation insurance agreements, and a corporate office lease agreement. Of the $28.4 million outstanding letters of credit, we have cash collateralized $18.0 million and the Revolver collateralizes the remaining $10.4 million. Outstanding standby letters of credit at December 31, 2011 totaled $28.4 million.
The Revolver carries an unused fee of 0.5% per annum. There are no mandatory reductions in the Revolver. Borrowings under the Revolver bear interest at floating rates based upon either a LIBOR or a base rate option selected by us, plus a spread of 3.75% to 4.25% and 2.75% to 3.25%, respectively, in each case, as specifically determined quarterly based upon our then-existing consolidated leverage ratio (as defined in the New Credit Agreement). At June 30, 2012, there was no amount outstanding under the Revolver. At December 31, 2011, there was $3.0 million outstanding under our prior revolving facility.
The Term Loan is subject to amortization of principal of 1.00% per year of the original Term Loan amount, payable in equal quarterly installments. Borrowings under the Term Loan bear interest at floating rates based upon either a LIBOR (with a floor of 1.25%) or a base rate option selected by us, plus a spread of 4.50% to 4.75% and 3.50% to 3.75%, respectively, in each case, as specifically determined quarterly based upon our then-existing consolidated leverage ratio.
CONF CALL
Christopher Powell - Director of Investor Relations
Good afternoon. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the company's earnings results for the fourth quarter 2008. For the call this afternoon, we have Susan Nowakowski, AMN's President and Chief Executive Officer, and David Dreyer, AMN's Chief Financial Officer.
A replay of this web cast is available at amnhealthcare.com/Investors and will be available until March 12, 2009. Details for the audio replay of the conference call can be found in our earnings press release.
I would also like to mention our policy regarding forward-looking statements. As we conduct this call, various remarks that we make about future expectations, plans and prospects can constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may, and other similar expressions. Any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result the various important factors, including those identified in our annual report on Form 10-K for the year ended December 31, 2007, and our current reports on Form 8-K, which have been filed with and are publicly available from the SEC. The results reported in this call may not be indicative of results for future quarters.
These statements reflect the company's current beliefs and are based upon information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The company does not intend, however, to update the guidance provided today prior to its next earnings release.
I will now turn the call over to Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.
Susan R. Nowakowski - President and Chief Executive Officer
Good afternoon everyone and thank you for joining us today for our fourth quarter earnings call. Companies that achieve sustainable leadership positions always balance between investments that will build a stronger, healthier company for the future while at the same time remaining agile and adjusting to the short-term market trends. In the current economic environment, striking this balance is more critical and more difficult than other. Fortunately, AMN Healthcare’s 24-year history and strong leadership position show our proven ability to strike this balance better than others in our field.
Throughout previous economic recessions, AMN Healthcare has executed effectively, built market share, and emerged in a stronger leadership position. Our strategy of leveraging the advantages of our size, our differentiated business model, and our diversified service line, combined with our talented team and solid financial fundamentals give us the ability to be proactive in our market place. It was solid execution of this strategy by our employees that allowed AMN to increase our market share and achieve record revenue of $1.22 billion, adjusted EBITDA of $96 million, and $1.6 of pro forma diluted EPS in 2008.
The nurse and allied segment experienced single digit growths that moderated throughout the year. Specifically, short-term nurse staffing experienced consistent year-over-year revenue growth of 2% to 3% over the past three quarters. Based on comments and reports from competitors and our own clients, it is clear that AMN has been expanding market share over the last year. Our broad and diversified client base enables us to better whether this market relative to the competition. To this point, in 2008, our top 10 clients in nurse and allied staffing accounted for only 9% of revenues in that segment. As hospitals reduce the number of staffing companies they use, we are well positioned to retain our slot as one of their providers and to gain market share.
Our ability to offer the largest selection of assignments to nurse candidates becomes an even greater differentiator in a down market. While orders are significantly down, we believe we still have about twice as many assignments to offer than our closest competitors. Despite lower levels, there is still an overall consistent need from hospitals for clinical staff to serve the healthcare needs of the general population.
During the earnings call of one of the major hospital systems, they mentioned that they will “continue to protect the labor at the bedside,” and that they will need more nurses next year than this year to take care of increasing volume level. Some competitors are forced to turn away high-quality candidates in today’s market because they just don’t have enough assignments to offer. Our larger selection of assignments also helps us to retain our existing working travelers. This strength was best reflected in the fourth quarter where our short-term nurse traveler count was flat with prior year as many competitors experienced declines. Our decline in overall nursing volume was due primarily to international nursing which was down about 200 nurses as we continue to feel the effects of user retrogression.
The pricing environment remains relatively stable in nursing. During 2008, our average revenue per traveler per day increased by 3%, with the fourth quarter rising similarly over the prior year. On top of this, we have seen continued improvements in our housing and insurance costs allowing our short-term nursing business to achieve gross margin improvement of 60 basis points in 2008 over the prior year.
In our allied division, we are positioned well in the long-term to serve the staffing disciplines that are projected to be the fastest growing, such as rehab therapy, laboratory, and pharmacy. During 2008, our rehab specialties experienced 9% growth. However, the allied industry continues to be impacted by the declines in the imaging specialties. In the fourth quarter, we also began to experience a drop in overall allied orders, although less significant than the drop in nursing.
We continued to lead the locum tenens industry with revenues of $322 million or 4% higher than the prior year. Our revenue results were a combination of strong double-digit volume growth in behavioral health and dentistry as well as our largest specialty of primary care. This growth was offset by continued decline in radiology and some softness in surgery and anesthesia in the second half of 2008. Our aggregate days-filled volume improved 2% year over year and our revenue per day filled contributed the other 2%. Several of the physician divisions actually experienced stronger pricing growth, but these were offset by the pricing declines and relatively lower mix of radiology placements which typically have the highest daily bill rates.
Gross margins for the year improved slightly at 26.3%, up 30 basis points over 2007, driven by improved bill-to-pay spread but partially offset by lower temp-to-perm placement fees. In 2008, our top 10 clients in locum tenens accounted for only 6% of revenues in that segment indicated our low client concentration. Going forward, we continue to see strong but moderating growth in primary care, behavioral health, and dentistry. However, there are some external trends such as fewer physician days, some physicians who are delaying their retirement, and pressure on state and county budgets that could affect the growth rate.
In physician permanent placement, we reported 2008 revenues of $51 million which was flat with prior year. The consistent need for quality physicians to drive revenue and margin at healthcare facilities helps provide a more sustainable demand environment than experienced by permanent placement companies in other industries. For example, during recent earnings calls, major hospital systems reported that expanding their physician recruitment is a key strategy for gaining market share. One hospital’s CEO said, “I think our physician recruiting is probably the best thing we can do to increase market share.” According to another CEO, their success in the face of weak and mean economy was due in part to their success expanding their active physician staff.
While the long-term drivers of our business remain well intact and potentially more compelling than ever, we must deal with the realities of a short-term and proactively adjust our infrastructure to the expected lower revenue and volumes. To this end, we have taken a number of steps to ensure we achieve operational efficiencies and are the right size to accommodate the decline in travel, nursing, and allied orders.
We of course looked first externally to eliminate costs through lower spending with third party vendors. Those efforts have been very fruitful, and we will continue to pursue more external opportunities throughout the year, but our largest cost center is our employee expense. Over the past 3 months, we have implemented a variety of measures including minimal replacement for attrition and a reduction in our workforce. This week, we also announced the consolidation of three of our smaller nursing recruitment brands which will result in lower future operating expenses including a further reduction in our workforce and the closing of our Huntersville, NC office.
These initiatives to streamline our travel nursing operations by consolidating physical locations and rationalizing our 8 travel nurse brands down to 5, we decided in conjunction with a long-term strategic brand study that we launched in 2008. As part of the study, we surveyed over 3200 current, former, and prospective clients and healthcare professionals. The results confirm that AMN Healthcare has significantly higher overall brand ratings than our competitors. Specifically, we were rated particularly high as having an excellent reputation, being easy to work with, being innovative, and filling assignments quickly. Although we are adjusting our infrastructure and redeploying resources to reflect the current market conditions, we have also been careful to continue supporting initiatives that diversity our product lines and broaden our client base for the future.
During 2008, we launched 3 important new service offerings including recruitment process outsourcing and staffing services in the home health market and ambulatory surgery centers. The recently announced economic stimulus package and proposed federal budget includes significantly healthcare related spending that will likely drive increased need for physicians and nurses, although the timing and magnitude of that impact is certainly very difficult to predict.
A large portion of this spending is focused on increasing access to healthcare services. Also, there is a long-term funding towards health information technology. We believe that this will also drive an increased demand for temporary physicians and nurses as hospitals implement new systems. In fact, this past year, we have already worked with a number of clients who have begun such technology instillations.
As a thought leader in the industry, we believe it is very important that we stay on top of these and other trends. As such, we are excited to mention that in December 31, 2008, Dr. Michael John, Chancellor of Emory University in Atlanta joined AMN’s Board of Directors. Dr. John has previously led Emory University’s Health Sciences Center which includes the schools of medicine, nursing, and public health along with Emory Healthcare, the largest healthcare system in Georgia. In addition, prior to Emory, he served as dean of the John Hopkins School of Medicine. We are very, very pleased to have Dr. John as a board member. With his deep knowledge of the healthcare system, he can further enable AMN Healthcare to continue being the industry thought leader.
At this point, I would now like to turn the call over to David Dreyer, our CFO, who will give you more detail on our full year and fourth quarter results.
David C. Dreyer - Chief Financial Officer
Thank you, Susan and good afternoon. Consolidated revenue for the fourth quarter was $296 million, 3% higher than the same quarter last year and 6% lower than last quarter. The year-over-year increase was due mainly to the acquisition of Platinum Select Staffing last February along with volume growth in the locum tenens staffing segment. The sequential decrease in revenue was mainly from the lower volume in our nursing business that Susan discussed earlier. Fourth quarter revenue was within our revenue guidance given on October 30, 2008.
Consolidated gross margin in the fourth quarter was 25.7%, down 90 basis points from the same quarter last year and unchanged with the last quarter. The year-over-year decline was driven mostly by lower gross profit contribution from our higher margin businesses such as international nursing and physician permanent placement along with continued shift in the mixed specialties within our locum tenens staffing segment.
Gross margin remained unchanged from the prior quarter despite a typical fourth quarter seasonal downward trend as travelers end assignments early for the holidays. SG&A, as a percentage of revenue in the fourth quarter, was 18.6% down 100 basis points from last year and 50 basis points from last quarter. The improvements were driven primarily by cost cutting initiatives starting during the fourth quarter along with favorable trends and bad debt and insurance expenses.
SG&A was down 8% compared to the prior quarter, mostly in employee cost and third-party expenses as management slowed down hiring and spending. In addition, last quarter’s SG&A included a $1.6 million charge for restructuring and legal expenses associated with our pharmacy staffing division.
Depreciation and amortization expense in the fourth quarter was $3.6 million, slightly lower than prior quarter and up 12% over last year due mainly to the acquisition of Platinum Select. Net interest expense for the fourth quarter was $2.7 million, down 9% compared to the same quarter last year and up 5% compared to last quarter. The fluctuations were mainly due to changes in average LIBOR rates. The effect of income tax rate for the fourth quarter was 47.5% compared to 39.4% for the same quarter last year and 34.4% last quarter. These tax rates have been adjusted for the tax matter we discussed last quarter. Management is currently working with advisors to develop alternatives for reducing the future impact to our tax rate. On a go-forward basis for 2009, we estimate our effective tax rate to remain consistent at the mid 40% range.
Please note that beginning last quarter, all prior period earnings per share amounts reported have been adjusted to reflect per the end tax adjustment. Fourth quarter fully diluted earnings per share of $0.23 was at the higher end of guidance. This was $0.02 lower than last fourth quarter’s earnings per share of $0.25 and $0.05 lower than last quarter’s earnings per share of $0.28. The year-over-year decline was mostly due to lower results in the permanent placement segment while the sequential decrease was due mainly to the higher effective tax rate.
Fully diluted earnings per share of $1.2 was negatively impacted by $0.03 due to charges taken in the third quarter for the pharmacy business restructuring along with $0.02 of charges for sales reserve adjustments in our permanent placement division during both the third and fourth quarters. Pro forma 2008 earnings per share without these charges was $1.6 which was 3% above 2007 full year GAAP earnings per share of $1.4.
Fully diluted shares outstanding during the fourth quarter were 32.9 million, down 4% from last year and 3% from last quarter, reflecting share repurchases during the year. We did not repurchase any shares during the fourth quarter and with access to credit markets tightening up, we are focusing on conserving cash and do not anticipate repurchasing any more shares in the short term. Our average fully diluted shares outstanding for the year were 33.8 million.
The company generated $14 million of operating cash flow during the fourth quarter which when combined with $7 million of net cash on hand and $7 million of revolver draw downs during the quarter, were used primarily to pay estimated taxes and reduced debt. Full year operating cash was $16 million lower than last year primarily because of the higher cash tax payments. DSO at the end of the quarter was 57 days, down 2 days from last year and up a day from last quarter. The company continues to focus on its collection efforts to drive strong cash flow.
We ended the quarter with $146 million of debt outstanding and a leverage ratio of 1.5 times adjusted EBITDA, a slight improvement compared to 1.6 times a year ago. The company’s debt agreement with lenders has a more stringent leverage ratio covenant that includes letters of credit and capital leases and requires a resulting leverage ratio to be below 2.5 times in the fourth quarter and below 2 times in 2009 and beyond. Our covenant ratio at the fourth quarter was 1.7 times, well within compliance. Our debt agreement also includes a covenant for fixed charge coverage or adjusted EBITDA divided by scheduled interest and principal payments that must exceed a ratio of 1.25. This ratio was 2 at year end, also well within compliance.
Now, turning to our business segments, revenue in the nurse and allied segment was $207 million for the quarter, 5% growth year over year but down 5% sequentially. Travelers on assignment averaged 6865 this quarter, up 3% year over year, but down 4% from last quarter. Gross margin at 23.6% was down 80 basis points from last year, due mainly to the lower revenues from our higher margin international nursing division. Sequentially, gross margin remained steady as the loss of the international nursing margin was offset by favorable bill-pay spreads. The adjusted EBITDA margin for this segment was 6.9% for the quarter, down 50 basis points from last year, due primarily to higher insurance cost. Compared to prior quarter, adjusted EBITDA was up 60 basis points.
Compared to prior quarter, adjusted EBITDA was up 60 basis points. Revenue in the locum tenens segment this quarter was $76 million, a slight increase over last year, but a 10% decrease from last quarter. The sequential decline was the result of a 9% decrease in days filled volume. Gross margin for the quarter was 26%, consistent with last year and down 60 basis points from last quarter. Fourth quarter adjusted EBITDA margin of 7.9% was up 230 basis points from last year and steadied sequentially with both comparisons affected by a favorable actuarial insurance adjustment recorded in the fourth quarter.
Revenue for the physician permanent placement segment was $12.2 million, down 7% from last year and 3% from last quarter. This year’s fourth quarter revenue was impacted by an unfavorable sales reserve adjustment. Adjusted EBITDA margin for the quarter at 23.7% was down from last year and up from last quarter was driven by lower SG&A expenses. Management performed required impairment testing of goodwill and other long-lived assets effective December 31 in accordance with GAAP and concluded that there was no impairment. However, should the company have a sustained decrease in market value, this would be an indicator that goodwill should be reevaluated for impairment. If the charge were to be recognized, it would not impact compliance with our debt covenants as it would be a non-cash expense.
With that, now let me return the call back to Susan.
Susan Nowakowski
As I hope you’ve learned from our comments today, we are very focused on building and sustaining for the long term while remaining balanced with the need to expand our leadership position today and adjust the company’s infrastructure ahead of the challenging market condition. We are confident that we are well positioned to navigate through this market environment. Like most industries, the current economic environment is making it more difficult to forecast our annual financial performance and provide meaningful guidance. Therefore, we will continue to share general business trends, but we will no longer provide specific quarterly or full year financial guidance.
During the first quarter, order levels have slowed from most our business lines, most significantly with nurse and allied. This has resulted in travel nurse volumes declining by double-digit percentages both sequentially and year over year. In locum tenens, aggregate volumes are trending fairly consistently with prior year and prior quarter levels. Pricing is stable across most of our business lines, helping to maintain gross margins. On a consolidated basis, we are anticipating first quarter revenues to decline in the low to mid-teens on both a year over year and sequential basis, driven primarily by volume declines in nursing.
The company expects to record a restructuring charge of approximately $3 million in the first quarter related to employee severance benefits and lease termination costs. Non-cash restructuring expenses are expected to total $400,000. We expect these restructuring actions to result in savings of approximately $10 million for 2009 and $15 million annually thereafter. As I said earlier, we have taken proactive steps to manage our business and strengthen our operating model through this economic downturn.
There are three key aspects of our strategy that we continue to focus on. First, capturing more market share by leveraging our client base; second, proactively adjusting our cost structure and capturing additional productivity gains; and finally pursuing further penetration in emerging market opportunities and client segments. We are working very hard to ensure that we can flex our operating model in the short term while at the same time making the appropriate investments to be well positioned and innovative in the long term, and with that, we would now like to open up the call to your questions.
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