NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheets and related condensed consolidated statements of comprehensive income and cash flows contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”), which are unaudited, include the accounts of AMN Healthcare Services, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. These entries consisted of all normal recurring items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year or for any future period.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. Please refer to the Company’s audited consolidated financial statements and the related notes for the fiscal year ended
December 31, 2015
, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
, filed with the Securities and Exchange Commission on February 24, 2016 (“
2015
Annual Report”).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, accruals for self-insurance, compensation and related benefits, accounts receivable, contingencies and litigation, earn-out liabilities, and income taxes. Actual results could differ from those estimates under different assumptions or conditions.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This standard provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for by the customer consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted this pronouncement prospectively beginning January 1, 2016, and the adoption did not have a material effect on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments.” This standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The standard also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company adopted this pronouncement prospectively beginning January 1, 2016, and the adoption did not have a material effect on the Company’s consolidated financial statements.
2. BUSINESS COMBINATIONS
As set forth below, the Company completed
six
acquisitions from January 1, 2015 through
September 30, 2016
. The Company accounted for each acquisition using the acquisition method of accounting. Accordingly, it recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. For each acquisition, the Company did not incur any material acquisition-related costs.
Peak Provider Solutions Acquisition
On June 3, 2016, the Company completed its acquisition of Peak Provider Solutions (“Peak”), which provides remote medical coding and consulting solutions to hospitals and physician medical groups nationwide. The addition of Peak has expanded the Company’s workforce solutions and enables the Company to offer services in coding diagnosis and procedure codes, which is critical to clinical quality reporting and the financial health of healthcare organizations. The initial purchase price of
$52,125
included (1)
$51,645
cash consideration paid upon acquisition, funded through cash-on-hand, net of cash received, and borrowings under the Company’s revolving credit facility, and (2) a contingent earn-out payment of up to
$3,000
with an estimated fair value of
$480
as of the acquisition date. The contingent earn-out payment is based on the operating results of Peak for the year ending December 31, 2016. As the acquisition’s operations are not considered material, pro forma information is not provided. The results of Peak have been included in the Company’s other workforce solutions segment since the date of acquisition. During the third quarter of 2016, an additional
$275
of cash consideration was paid to the selling shareholders for the final working capital settlement.
The preliminary allocation of the
$52,400
purchase price, which included the additional cash consideration paid for the final working capital settlement, consisted of (1)
$5,601
of fair value of tangible assets acquired, (2)
$9,568
of liabilities assumed, (3)
$19,220
of identified intangible assets, and (4)
$37,147
of goodwill, none of which is deductible for tax purposes. The fair value of intangible assets primarily includes
$7,600
of trademarks and
$11,500
of customer relationships with a weighted average useful life of approximately
thirteen
years.
HealthSource Global Staffing Acquisition
On January 11, 2016, the Company completed its acquisition of HealthSource Global Staffing (“HSG”), which provides labor disruption and rapid response staffing. The acquisition helps the Company expand its service lines and provide clients with rapid response staffing services. The initial purchase price of
$8,367
included (1)
$2,655
cash consideration paid upon acquisition, funded through cash-on-hand, net of cash received, and settlement of the pre-existing relationship between AMN and HSG, (2)
$2,122
cash holdback for potential indemnification claims, and (3) a tiered contingent earn-out payment of up to
$4,000
with an estimated fair value of
$3,590
as of the acquisition date. The contingent earn-out payment is comprised of (A) up to
$2,000
based on the operating results of HSG for the year ending December 31, 2016, and (B) up to
$2,000
based on the operating results of HSG for the year ending December 31, 2017. As the acquisition is not considered material, pro forma information is not provided. The results of HSG have been included in the Company’s nurse and allied solutions segment since the date of acquisition. During the third quarter of 2016, the final working capital settlement resulted in
$292
due from the selling shareholders to the Company, which was settled through a reduction to a cash holdback.
The preliminary allocation of the
$8,075
purchase price, which was reduced by the final working capital settlement, consisted of (1)
$965
of fair value of tangible assets acquired, (2)
$5,614
of liabilities assumed, (3)
$3,944
of identified intangible assets, and (4)
$8,780
of goodwill, none of which is deductible for tax purposes. The intangible assets include the fair value of trademarks, customer relationships, staffing databases, and covenants not to compete with a weighted average useful life of approximately
eight
years.
B.E. Smith Acquisition
On January 4, 2016, the Company completed its acquisition of B.E. Smith (“BES”), a full-service healthcare interim leadership placement and executive search firm, for
$162,232
in cash, net of cash received, and settlement of the pre-existing relationship between AMN and BES. BES places interim leaders and executives across all healthcare settings, including acute care hospitals, academic medical and children’s hospitals, physician practices, and post-acute care providers. The acquisition provides the Company additional access to healthcare executives and enhances its integrated services to hospitals, health systems, and other healthcare facilities across the nation. To help finance the acquisition, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”), which provided
$125,000
of additional available borrowings to the Company. The First Amendment is more fully described in Note (7), “Notes Payable and Credit Agreement.” The results of BES have been included in the Company’s other workforce solutions segment since the date of acquisition. During the second quarter of 2016,
$524
was returned to the Company for the final working capital settlement.
The preliminary allocation of the
$161,708
purchase price, which was reduced by the final working capital settlement, consisted of (1)
$11,953
of fair value of tangible assets acquired, (2)
$6,739
of liabilities assumed, (3)
$65,900
of identified intangible assets, and (4)
$90,594
of goodwill, most of which is deductible for tax purposes. The intangible assets acquired have a weighted average useful life of approximately
fifteen
years. The following table summarizes the fair value and useful life of each intangible asset acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
|
|
|
(in years)
|
|
Identifiable intangible assets
|
|
|
|
|
|
Tradenames and Trademarks
|
|
$26,300
|
|
20
|
|
|
Customer Relationships
|
|
25,700
|
|
|
12
|
|
|
Staffing Database
|
|
13,000
|
|
|
10
|
|
|
Non-Compete Agreements
|
|
900
|
|
|
5
|
|
|
|
|
$65,900
|
|
|
Approximately
$27,149
of revenue and
$3,950
of income before income taxes of BES were included in the unaudited condensed consolidated statement of comprehensive income for the
three months ended September 30, 2016
. Approximately
$81,246
of revenue and
$10,910
of income before income taxes of BES were included in the unaudited condensed consolidated statement of comprehensive income for the
nine months ended September 30, 2016
. The following summary presents unaudited pro forma consolidated results of operations of the Company for the
three and nine months ended September 30, 2015
as if the BES acquisition had occurred on January 1, 2015, which gives effect to certain adjustments, including the reduction of compensation expense related to non-recurring executive salary expense and the addition of acquisition-related costs and amortization of intangible assets. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the date indicated, nor is it necessarily indicative of our future operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
Nine Months Ended September 30, 2015
|
|
|
Revenue
|
$
|
407,172
|
|
$
|
1,127,939
|
|
|
|
Income from operations
|
$
|
39,172
|
|
$
|
96,071
|
|
|
|
Net income
|
$
|
32,947
|
|
$
|
60,810
|
|
|
|
Net income per common share:
|
|
|
|
|
Basic
|
$
|
0.69
|
|
$
|
1.28
|
|
|
|
Diluted
|
$
|
0.67
|
|
$
|
1.25
|
|
|
MillicanSolutions Acquisition
On October 5, 2015, the Company acquired MillicanSolutions (“Millican”), a physician and executive leadership search firm. The total purchase price of
$3,985
included (1)
$2,985
cash consideration paid upon acquisition, funded by cash-on-hand, (2)
$500
to be paid on December 31, 2016, and (3)
$500
to be paid on December 31, 2017. The acquisition enhances the Company’s ability to respond to the specialized leadership needs within academic pediatrics and children’s medical centers and expands its expertise in serving academic medical centers and teaching hospitals in physician and leadership search. As the acquisition is not considered material, pro forma information is not provided. The results of operations of Millican have been included in the Company’s other workforce solutions segment since the date of acquisition.
The preliminary allocation of the
$3,985
purchase price consisted of (1)
$261
of fair value of tangible assets acquired, (2)
$287
of liabilities assumed, (3)
$645
of identified intangible assets, and (4)
$3,366
of goodwill, a portion of which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, staffing databases, customer relationships, and a covenant not to compete. The weighted average useful life of the acquired intangible assets subject to amortization is approximately
five years
.
The First String Healthcare Acquisition
On September 15, 2015, the Company completed its acquisition of The First String Healthcare (“TFS”), a leading provider of interim staffing and permanent placement of nurse leaders and executives. The total purchase price of
$7,653
included (1)
$4,453
cash consideration paid upon acquisition, funded by cash-on-hand, net of cash received, (2)
$500
to be paid
on the first anniversary of the acquisition date, which was paid during the three months ended September 30, 2016, and (3) a contingent earn-out with a fair value of
$2,700
as of the acquisition date. Also, the purchase agreement included an additional
$1,000
payment to be paid on the second anniversary of the acquisition date conditioned upon, subject to certain exceptions, continued employment of the selling shareholders, which is being recorded as compensation expense for post-combination services. The acquisition enhances the Company’s capabilities to provide interim and permanent nursing leadership. As the acquisition is not considered material, pro forma information is not provided. The results of operations of TFS are included in the other workforce solutions segment since the date of acquisition.
The acquisition agreement provides for a tiered contingent earn-out payment of up to
$4,000
, of which (1)
$1,000
was paid to the sellers in March 2016 based on the operating results of TFS for the twelve months ended December 31, 2015, and (2) up to
$3,000
may be paid in 2017 based on the operating results of TFS for the twelve months ending December 31, 2016. The allocation of the
$7,653
purchase price consisted of (A)
$919
of fair value of tangible assets acquired, (B)
$891
of liabilities assumed, (C)
$3,373
of identified intangible assets, and (D)
$4,252
of goodwill, which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, customer relationships, a staffing database, and covenants not to compete. The weighted average useful life of the acquired intangible assets subject to amortization is approximately
seven years
.
Onward Healthcare Acquisition
On January 7, 2015, the Company completed its acquisition of Onward Healthcare, including its
two
wholly-owned subsidiaries, Locum Leaders and Medefis (collectively, “OH”), for approximately
$76,643
in cash, funded by cash-on-hand and borrowings under the Company’s revolving credit facility. Onward Healthcare is a national nurse and allied healthcare staffing firm, Locum Leaders is a national locum tenens provider, and Medefis is a provider of a software-as-a-service (“SaaS”)-based vendor management system for healthcare facilities. The acquisition helps the Company to expand its service lines and its supply and placement capabilities of healthcare professionals to its clients. The results of Onward Healthcare are included in the Company’s nurse and allied solutions segment, the results of Locum Leaders are included in the Company’s locum tenens solutions segment, and the results of Medefis are included in the Company’s other workforce solutions segment, in each case, since the date of acquisition.
The allocation of the
$76,643
purchase price consisted of (1)
$25,216
of fair value of tangible assets acquired (including
$21,313
of accounts receivable), (2)
$22,275
of liabilities assumed (including
$11,113
of accounts payable and accrued expenses), (3)
$30,219
of identified intangible assets, and (4)
$43,483
of goodwill, a portion of which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, customer relationships, staffing database, acquired technologies, and non-compete agreements. The weighted average useful life of the acquired intangible assets is approximately
eleven
years. The following table summarizes the fair value and useful life of each intangible asset acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
|
|
|
(in years)
|
|
Identifiable intangible assets
|
|
|
|
|
|
Tradenames and Trademarks
|
|
$
|
8,100
|
|
|
3 - 15
|
|
|
Customer Relationships
|
|
17,600
|
|
|
10 - 15
|
|
|
Staffing Database
|
|
2,600
|
|
|
5
|
|
|
Acquired Technologies
|
|
1,700
|
|
|
8
|
|
|
Non-Compete Agreements
|
|
219
|
|
|
2
|
|
|
|
|
$
|
30,219
|
|
|
|
Of the
$43,483
allocated to goodwill,
$23,032
,
$5,241
, and
$15,210
were allocated to the Company’s nurse and allied solutions, locum tenens solutions, and other workforce solutions segments, respectively.
3. REVENUE RECOGNITION
Revenue consists of fees earned from the temporary and permanent placement of healthcare professionals and executives as well as from the Company’s SaaS-based technology, including its vendor management systems and its scheduling software. Revenue from temporary staffing services is recognized as the services are rendered by the healthcare professional or executive. Under the Company’s managed services program arrangements, the Company manages all or a part of a customer’s supplemental workforce needs utilizing its own pool of healthcare professionals along with those of third-party subcontractors. When the Company uses subcontractors, revenue is recorded net of the related subcontractor’s expense. Payables to
subcontractors of
$45,126
and
$56,177
were included in accounts payable and accrued expenses in the unaudited condensed consolidated balance sheet as of
September 30, 2016
and the audited consolidated balance sheet as of
December 31, 2015
, respectively. Revenue from recruitment and permanent placement services is recognized as the services are provided and upon successful placements. The Company’s SaaS-based revenue is recognized ratably over the applicable arrangement’s service period. Fees billed in advance of being earned are recorded as deferred revenue.
4. NET INCOME PER COMMON SHARE
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. The following table sets forth the computation of basic and diluted net income per common share for the three months and
nine months ended September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net income
|
$
|
27,296
|
|
|
$
|
33,647
|
|
|
$
|
79,487
|
|
|
$
|
61,726
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
$
|
0.57
|
|
|
$
|
0.71
|
|
|
$
|
1.66
|
|
|
$
|
1.30
|
|
|
Net income per common share - diluted
|
$
|
0.55
|
|
|
$
|
0.69
|
|
|
$
|
1.61
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
48,049
|
|
|
47,674
|
|
|
47,993
|
|
|
47,466
|
|
|
Plus dilutive effect of potential common shares
|
1,361
|
|
|
1,304
|
|
|
1,294
|
|
|
1,271
|
|
|
Weighted average common shares outstanding - diluted
|
49,410
|
|
|
48,978
|
|
|
49,287
|
|
|
48,737
|
|
Share-based awards to purchase
eleven
shares of common stock were not included in the above calculation of diluted net income per common share for the
three months ended September 30, 2016
because the effect of these instruments was anti-dilutive. Share-based awards to purchase
eighteen
and
twelve
shares of common stock were not included in the above calculation of diluted net income per common share for the
nine months ended September 30, 2016
and
2015
, respectively, because the effect of these instruments was anti-dilutive.
5. SEGMENT INFORMATION
The Company’s operating segments are identified in the same manner as they are reported internally and used by the Company’s chief operating decision maker for the purpose of evaluating performance and allocating resources. Effective as of January 1, 2016, the Company modified its reportable segments. The Company previously utilized
three
reportable segments, which it identified as follows: (1) nurse and allied healthcare staffing, (2) locum tenens staffing, and (3) physician permanent placement services. In light of the Company’s acquisitions over the past several years as well as its transition to a healthcare workforce solutions company, the Company’s management renamed its three reportable segments and also placed several of its business lines that were in the nurse and allied healthcare staffing segment into a different segment to better reflect how the business is evaluated by the chief operating decision maker. As of January 1, 2016, the Company began to disclose the following three reportable segments: (1) nurse and allied solutions, (2) locum tenens solutions, and (3) other workforce solutions. The nurse and allied solutions segment consists of the Company’s nurse, allied, and local staffing businesses. The locum tenens solutions segment consists of the Company’s locum tenens staffing business. The other workforce solutions segment consists of the Company’s (i) physician permanent placement services business, (ii) healthcare interim leadership staffing and executive search services business, (iii) vendor management systems business, (iv) recruitment process outsourcing business, (v) education business, (vi) medical coding and related consulting business, and (vii) workforce optimization services business.
The Company’s chief operating decision maker relies on internal management reporting processes that provide revenue and operating income by reportable segment for making financial decisions and allocating resources. Segment operating income represents income before income taxes plus depreciation, amortization of intangible assets, share-based compensation, interest expense, net, and other, and unallocated corporate overhead. The Company’s management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed.
The following table, which includes reclassified prior period data to conform to the new segment reporting structure, provides a reconciliation of revenue and operating income by reportable segment to consolidated results and was derived from each segment’s internal financial information as used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Nurse and allied solutions
|
$
|
286,810
|
|
|
$
|
246,748
|
|
|
$
|
877,197
|
|
|
$
|
690,234
|
|
|
Locum tenens solutions
|
108,553
|
|
|
101,755
|
|
|
320,420
|
|
|
285,835
|
|
|
Other workforce solutions
|
77,273
|
|
|
34,356
|
|
|
216,750
|
|
|
84,444
|
|
|
|
$
|
472,636
|
|
|
$
|
382,859
|
|
|
$
|
1,414,367
|
|
|
$
|
1,060,513
|
|
|
Segment operating income
|
|
|
|
|
|
|
|
|
Nurse and allied solutions
|
$
|
37,396
|
|
|
$
|
32,354
|
|
|
$
|
118,517
|
|
|
$
|
90,875
|
|
|
Locum tenens solutions
|
14,026
|
|
|
13,321
|
|
|
43,634
|
|
|
34,142
|
|
|
Other workforce solutions
|
20,867
|
|
|
13,074
|
|
|
56,311
|
|
|
28,397
|
|
|
|
72,289
|
|
|
58,749
|
|
|
218,462
|
|
|
153,414
|
|
|
Unallocated corporate overhead
|
15,113
|
|
|
13,817
|
|
|
45,908
|
|
|
38,681
|
|
|
Depreciation and amortization
|
7,789
|
|
|
5,304
|
|
|
21,888
|
|
|
15,631
|
|
|
Share-based compensation
|
2,704
|
|
|
2,021
|
|
|
8,795
|
|
|
6,551
|
|
|
Interest expense, net, and other
|
3,016
|
|
|
2,013
|
|
|
9,065
|
|
|
5,797
|
|
|
Income before income taxes
|
$
|
43,667
|
|
|
$
|
35,594
|
|
|
$
|
132,806
|
|
|
$
|
86,754
|
|
The following table summarizes the activity related to the carrying value of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nurse and Allied Solutions
|
|
Locum Tenens Solutions
|
|
Other Workforce Solutions
|
|
Total
|
|
Balance, January 1, 2016
|
$
|
95,309
|
|
|
$
|
19,743
|
|
|
$
|
89,727
|
|
|
$
|
204,779
|
|
|
Goodwill from BES acquisition
|
—
|
|
|
—
|
|
|
90,594
|
|
|
90,594
|
|
|
Goodwill from HSG acquisition
|
8,780
|
|
|
—
|
|
|
—
|
|
|
8,780
|
|
|
Goodwill from Peak acquisition
|
—
|
|
|
—
|
|
|
37,147
|
|
|
37,147
|
|
|
Goodwill adjustment for OH acquisition
|
850
|
|
|
—
|
|
|
—
|
|
|
850
|
|
|
Goodwill adjustment for TFS acquisition
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Balance, September 30, 2016
|
$
|
104,939
|
|
|
$
|
19,743
|
|
|
$
|
217,492
|
|
|
$
|
342,174
|
|
|
Accumulated impairment loss as of December 31, 2015 and September 30, 2016
|
$
|
154,444
|
|
|
$
|
53,940
|
|
|
$
|
6,555
|
|
|
$
|
214,939
|
|
6. DERIVATIVE INSTRUMENTS
In April 2015, the Company entered into an interest rate swap agreement to minimize its exposure to interest rate fluctuations on
$100,000
of its outstanding variable rate debt under one of its term loans whereby the Company pays a fixed rate of
0.983%
per annum and receives a variable rate equal to floating one-month LIBOR. This agreement expires on March 30, 2018, and no initial investment was made to enter into this agreement.
At
September 30, 2016
, the interest rate swap agreement had a fair value of
$(396)
, which is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of
September 30, 2016
. At
December 31, 2015
, the interest rate swap agreement had a fair value of
$165
, which was included in other assets in the audited consolidated balance sheet as of
December 31, 2015
. The Company has formally documented the hedging relationship and accounts for this arrangement as a cash flow hedge. The Company recognizes all derivatives on the balance sheet at fair value based on quotes from an independent pricing service. Gains or losses resulting from changes in the values of the arrangement are recorded in other comprehensive income (loss), net of tax, until the hedged item is recognized in earnings. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instrument that is used in the hedging transaction is highly effective in offsetting changes in fair values or cash flows of the hedged item. When it is determined that a derivative instrument is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively and recognizes subsequent changes in market value in earnings.
In connection with the Company’s issuance of
$325,000
aggregate principal amount of
5.125%
Senior Notes due 2024 (the “Notes”) and the use of a portion of the proceeds thereof to repay
$138,438
of certain of its term loan indebtedness on October 3, 2016, the Company reduced the interest rate swap notional amount to
$40,000
. As the reduction of the notional amount occurred subsequent to the end of the third quarter, there has been no impact on the valuation of the hedge as of
September 30, 2016
. In addition, the impact of the reduction in notional amount is expected to be immaterial for the fourth quarter. See additional information in Note (12), “Subsequent Events.”
7. NOTES PAYABLE AND CREDIT AGREEMENT
On April 18, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with several lenders to provide for
two
credit facilities to replace its prior credit facilities, including (1) a
$225,000
secured revolving credit facility (the “Revolver”) that includes a
$40,000
sublimit for the issuance of letters of credit and a
$20,000
sublimit for swingline loans and (2) a
$150,000
secured term loan credit facility (the “Term Loan”). On January 4, 2016, the Company entered into the First Amendment (together with the Credit Agreement and the Second Amendment (as defined elsewhere in this Note (7)), the “Amended Credit Agreement”) with several lenders to provide for, among other things, (A) a
$50,000
increase to the Revolver to
$275,000
, and (B) an additional
$75,000
secured term loan (the “Additional Term Loan”). The Company used the proceeds from the Additional Term Loan and drawdowns of the Revolver to complete its acquisitions of BES and Peak, as more fully described in Note (2), “Business Combinations.” The Additional Term Loan is subject to amortization of principal of
5.00%
per year of the original Additional Term Loan amount, payable in equal quarterly installments. The maturity date of the Additional Term Loan is January 4, 2021.
On September 19, 2016, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”), which, among other things, permits the Company to increase the commitments that may be obtained under the Amended Credit Agreement by the amount of certain prepayments made thereunder. Accordingly, the Amended Credit Agreement now provides that the Company may from time to time obtain an increase in the Revolver or obtain additional term loans or both in an aggregate principal amount not to exceed
$125,000
plus the amount of certain prepayments of credit facilities thereunder (including
$138,438
of prepayments of the Term Loan and the Additional Term Loan made by the Company on October 3, 2016) subject to, among other conditions, the arrangement of additional commitments with financial institutions reasonably acceptable to the Company and the administrative agent.
The obligations of the Company under the Amended Credit Agreement are secured by substantially all of the assets of the Company and the common stock or equity interests of its domestic subsidiaries. The payment obligations under the Amended Credit Agreement may be accelerated upon the occurrence of defined events of default. Additionally, the Amended Credit Agreement no longer requires (as was originally set forth in the original Credit Agreement) the Company to make mandatory prepayments under any of the credit facilities provided thereunder with the proceeds of extraordinary receipts and excess cash flow.
The Amended Credit Agreement contains various customary affirmative and negative covenants, including restrictions on incurrence of additional indebtedness, declaration and payment of dividends, dispositions of assets, consolidation into another entity, and allowable investments. Additionally, there are financial covenants based on the Company’s consolidated leverage ratio and interest coverage ratio as calculated in accordance with the Amended Credit Agreement.
In connection with the First Amendment, the Company incurred
$632
in fees paid to lenders and other third parties, of which
$448
was capitalized and amortized to interest expense over the remaining term of the Amended Credit Agreement and the remaining amount was recorded as interest expense during the
nine months ended September 30, 2016
. The Company incurred de minimis costs in connection with the Second Amendment.
The Company described in further detail other aspects of the Amended Credit Agreement in effect prior to the Second Amendment in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (8), Notes Payable and Credit Agreement” of the
2015
Annual Report.
As of September 30, 2016, except for the
$3,750
scheduled annual payment under the Additional Term Loan, all outstanding balances under the Revolver, the Term Loan and the Additional Term Loan were classified as long-term payments due to the post-balance sheet date issuance of the Notes on October 3, 2016.
8. FAIR VALUE MEASUREMENT
The Company’s valuation techniques and inputs used to measure fair value and the definition of the three levels (Level 1, Level 2, and Level 3) of the fair value hierarchy are disclosed in Part II, Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4—Fair Value Measurement” of the 2015 Annual Report. The Company
has not changed the valuation techniques or inputs it uses for its fair value measurement during the
nine months ended September 30, 2016
.
Assets and Liabilities Measured on a Recurring Basis
The Company’s restricted cash equivalents that serve as collateral for the Company’s outstanding letters of credit
typically consist of money market funds that are measured at fair value based on quoted prices, which are Level 1 inputs.
As of September 30, 2016, the Company’s restricted cash equivalents and investments that serve as collateral for the Company’s captive insurance company primarily consist of commercial paper that is measured at observable market prices for identical securities that are traded in less active markets, which are Level 2 inputs. Of the
$20,989
commercial paper as of September 30, 2016,
$1,996
had original maturities greater than three months, which were considered available for sale securities. The Company did not have commercial paper as of December 31, 2015.
The Company’s interest rate swap is measured at fair value using a discounted cash flow analysis that includes the contractual terms, including the period to maturity, and Level 2 observable market-based inputs, including interest rate curves. The fair value of the swap is determined by netting the discounted future fixed cash receipts payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate yield curves. The valuation also considers credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company, which are considered Level 3 inputs; however, as of
September 30, 2016
, the credit risk adjustments, including nonperformance risk, were considered insignificant to the total fair value of the interest rate swap.
The Company’s contingent consideration liabilities are measured at fair value using probability-weighted discounted cash flow analysis for the acquired companies, which are Level 3 inputs.
The following tables present information about the above-referenced assets and liabilities and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of September 30, 2016
|
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Money market funds
|
$
|
5,627
|
|
|
$
|
5,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Commercial paper
|
20,989
|
|
|
—
|
|
|
20,989
|
|
|
—
|
|
|
Interest rate swap liability
|
(396
|
)
|
|
—
|
|
|
(396
|
)
|
|
—
|
|
|
Acquisition contingent consideration earn-out liabilities
|
(6,752
|
)
|
|
—
|
|
|
—
|
|
|
(6,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015
|
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Money market funds
|
$
|
5,627
|
|
|
$
|
5,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swap asset
|
165
|
|
|
—
|
|
|
165
|
|
|
—
|
|
|
Acquisition contingent consideration earn-out liabilities
|
(3,770
|
)
|
|
—
|
|
|
—
|
|
|
(3,770
|
)
|
Level 3 Information
The following tables set forth reconciliations of changes in the fair value of contingent consideration liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Balance as of July 1,
|
$
|
(7,054
|
)
|
|
$
|
(1,400
|
)
|
|
Change in fair value of contingent consideration earn-out liability from Avantas acquisition
|
—
|
|
|
300
|
|
|
Contingent consideration earn-out liability from TFS acquisition on September 15, 2015
|
—
|
|
|
(2,700
|
)
|
|
Change in fair value of contingent consideration earn-out liability from TFS acquisition
|
(94
|
)
|
|
—
|
|
|
Change in fair value of contingent consideration earn-out liability from HSG acquisition
|
(84
|
)
|
|
—
|
|
|
Change in fair value of contingent consideration earn-out liability from Peak acquisition
|
480
|
|
|
—
|
|
|
Balance as of September 30,
|
$
|
(6,752
|
)
|
|
$
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Balance as of January 1,
|
$
|
(3,770
|
)
|
|
$
|
(1,400
|
)
|
|
Contingent consideration earn-out liability from TFS acquisition on September 15, 2015
|
—
|
|
|
(2,700
|
)
|
|
Settlement of TFS earn-out for year ended December 31, 2015
|
1,000
|
|
|
—
|
|
|
Contingent consideration earn-out liability from HSG acquisition on January 11, 2016
|
(3,590
|
)
|
|
—
|
|
|
Change in fair value of contingent consideration earn-out liability from Avantas acquisition
|
660
|
|
|
300
|
|
|
Change in fair value of contingent consideration earn-out liability from TFS acquisition
|
(859
|
)
|
|
—
|
|
|
Change in fair value of contingent consideration earn-out liability from HSG acquisition
|
(193
|
)
|
|
—
|
|
|
Contingent consideration earn-out liability from Peak acquisition on June 3, 2016
|
(480
|
)
|
|
—
|
|
|
Change in fair value of contingent consideration earn-out liability from Peak acquisition
|
480
|
|
|
—
|
|
|
Balance as of September 30,
|
$
|
(6,752
|
)
|
|
$
|
(3,800
|
)
|
Assets Measured on a Non-Recurring Basis
The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to its goodwill, indefinite-lived intangible assets, long-lived assets, and equity method investment.
The Company evaluates goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. The Company determines the fair value of its reporting units based on a combination of inputs, including the market capitalization of the Company, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. The Company determines the fair value of its indefinite-lived intangible assets using the income approach (relief-from-royalty method) based on Level 3 inputs.
There were no triggering events identified and no indication of impairment of the Company’s goodwill, indefinite-lived intangible assets, long-lived assets, or equity method investment during the
nine months ended September 30, 2016
and
2015
.
Fair Value of Financial Instruments
The carrying amount of the Company’s notes payable and revolving credit facility approximate their fair value as the instruments’ interest rates are variable and comparable to rates currently offered for similar debt instruments of comparable maturity. The fair value of the Company’s long-term self-insurance accruals cannot be estimated as the Company cannot reasonably determine the timing of future payments.
9. INCOME TAXES
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of September 30, 2016, the Company is no longer subject to state, local, or foreign examinations by tax authorities for tax years before 2006, and the Company is no longer subject to U.S. federal income or payroll tax examinations for tax years before 2011. The Company’s tax years 2007, 2008, 2009 and 2010 had been under audit by the Internal Revenue Service (“IRS”) for several years and in 2014, the IRS issued the Company its Revenue Agent Report (“RAR”) and an Employment Tax Examination Report (“ETER”). The RAR proposed adjustments to the Company’s taxable income for tax years 2007-2010 and net operating loss carryforwards for 2005 and 2006, resulting from the proposed disallowance of certain per diems paid to the Company’s healthcare professionals, and the ETER proposed assessments for additional payroll tax liabilities and penalties for tax years 2009 and 2010 related to the Company’s treatment of certain non-taxable per diem allowances and travel benefits. The positions in the RAR and ETER were mutually exclusive, and contained multiple tax positions, some of which were contrary to each other. The Company filed a Protest Letter for both the RAR and ETER positions in 2014 and the Company received a final determination from the IRS in July 2015 on both the RAR adjustments and ETER assessments, effectively settling these audits with the IRS for
$7,200
(including interest) during the third quarter of 2015. As a result of the settlement, the Company recorded federal income tax benefits of approximately
$12,200
during the quarter ended September 30, 2015, state income tax benefits (net of federal tax impact) of
$568
during the quarter ended September 30, 2016 and expects to record the remaining state income tax benefits (net of federal tax impact) of approximately
$1,200
by fiscal year 2019, when the various state statutes are projected to lapse.
The IRS conducted and completed a separate audit of the Company’s 2011 and 2012 tax years that focused on income and employment tax issues similar to those raised in the 2007 through 2010 examination. The IRS completed its audit during the quarter ended March 31, 2015, and issued its RAR and ETER to the Company with proposed adjustments to the Company’s taxable income for 2011 and 2012 and net operating loss carryforwards from 2010 and assessments for additional payroll tax liabilities and penalties for 2011 and 2012 related to the Company’s treatment of certain non-taxable per diem allowances and travel benefits. The positions in the RAR and ETER for the 2011 and 2012 years are mutually exclusive and contain multiple tax positions, some of which are contrary to each other. The Company filed a Protest Letter for both the RAR and ETER in April 2015 and the matter is currently at IRS Appeals. The Company recently held its first meeting with the IRS Appeals office and will continue to meet with the IRS Appeals office during the next twelve months. The Company cannot predict with certainty the timing of a resolution of such matter. The IRS began an audit of the Company’s 2013 tax year during the quarter ended June 30, 2015. The Company believes its reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years. Notwithstanding the foregoing, the Company could adjust its provision for income taxes and contingent tax liability based on future developments.
10. COMMITMENTS AND CONTINGENCIES: LEGAL
From time to time, the Company is involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. These matters typically relate to professional liability, tax, payroll, contract, and employee-related matters and include individual and collective lawsuits, as well as inquiries and investigations by governmental agencies regarding the Company’s employment practices. Additionally, some of the Company’s clients may also become subject to claims, governmental inquiries and investigations, and legal actions relating to services provided by the Company’s healthcare professionals. Depending upon the particular facts and circumstances, the Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters. The Company records a liability when management believes an adverse outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated. Significant judgment is required to determine both probability of loss and the estimated amount. The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or other new information, as deemed necessary. The most significant matters in which the Company is currently involved are class actions related to wage and hour claims. Management currently believes the probable loss related to these wage and hour claims is not significant and the amount accrued by the Company for such claims is not material as of
September 30, 2016
. However, losses ultimately incurred for such claims could materially differ from amounts already accrued by the Company.
With regards to outstanding loss contingencies as of
September 30, 2016
, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows.
11. BALANCE SHEET DETAILS
The consolidated balance sheets detail is as follows as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Other current assets:
|
|
|
|
|
|
Restricted cash
|
|
$
|
17,438
|
|
|
$
|
11,995
|
|
|
Income taxes receivable
|
|
288
|
|
|
3,687
|
|
|
Other
|
|
12,981
|
|
|
8,041
|
|
|
Other current assets
|
|
$
|
30,707
|
|
|
$
|
23,723
|
|
|
|
|
|
|
|
|
Fixed assets:
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
27,707
|
|
|
$
|
23,380
|
|
|
Software
|
|
108,892
|
|
|
97,962
|
|
|
Leasehold improvements
|
|
6,306
|
|
|
5,472
|
|
|
|
|
142,905
|
|
|
126,814
|
|
|
Accumulated depreciation and amortization
|
|
(84,940
|
)
|
|
(76,680
|
)
|
|
Fixed assets, net
|
|
$
|
57,965
|
|
|
$
|
50,134
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
58,274
|
|
|
$
|
53,261
|
|
|
Subcontractor payable
|
|
45,126
|
|
|
56,177
|
|
|
Professional liability reserve
|
|
13,692
|
|
|
7,962
|
|
|
Other
|
|
1,197
|
|
|
1,422
|
|
|
Accounts payable and accrued expenses
|
|
$
|
118,289
|
|
|
$
|
118,822
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits:
|
|
|
|
|
|
Accrued payroll
|
|
$
|
29,709
|
|
|
$
|
21,058
|
|
|
Accrued bonuses
|
|
23,170
|
|
|
24,476
|
|
|
Accrued travel expense
|
|
3,582
|
|
|
2,740
|
|
|
Accrued health insurance reserve
|
|
3,196
|
|
|
3,225
|
|
|
Accrued workers compensation reserve
|
|
8,213
|
|
|
7,701
|
|
|
Deferred compensation
|
|
30,147
|
|
|
23,044
|
|
|
Other
|
|
1,612
|
|
|
1,457
|
|
|
Accrued compensation and benefits
|
|
$
|
99,629
|
|
|
$
|
83,701
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
Workers’ compensation reserve
|
|
$
|
18,265
|
|
|
$
|
16,899
|
|
|
Professional liability reserve
|
|
42,672
|
|
|
37,369
|
|
|
Deferred rent
|
|
12,784
|
|
|
11,826
|
|
|
Unrecognized tax benefits
|
|
8,081
|
|
|
8,081
|
|
|
Other
|
|
5,147
|
|
|
3,959
|
|
|
Other long-term liabilities
|
|
$
|
86,949
|
|
|
$
|
78,134
|
|
12. SUBSEQUENT EVENTS
5.125%
Senior Notes Due 2024
On October 3, 2016, the Company completed the issuance of
$325,000
aggregate principal amount of the Notes, which mature on October 1, 2024. Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 1, 2017.
With the proceeds from the Notes and cash generated from operations, the Company (1) repaid
$131,250
of existing Term Loan indebtedness, (2) repaid
$7,188
of existing Additional Term Loan indebtedness, (3) repaid
$182,500
under the Revolver, and (4) paid approximately
$6,200
of fees and expenses related to the offering and issuance of the Notes.
Share Repurchase Program Authorized
On November 1, 2016, the Company’s Board of Directors approved a share repurchase program under which the Company may repurchase up to
$150,000
of its outstanding common stock.
The amount and timing of the purchases will depend on a number of factors including the price of the Company’s shares, trading volume, Company performance, Company liquidity, general economic and market conditions and other factors that the Company’s management believes are relevant. The share repurchase program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time.
The Company intends to make all repurchases and to administer the plan in accordance with applicable laws and regulatory guidelines, including Rule 10b-18 of the Exchange Act, and in compliance with its debt instruments. Repurchases may be made from cash on hand, free cash flow generated from the Company’s business or from the Company’s credit facilities. Repurchases may be made from time to time through open market purchases or privately negotiated transactions. Repurchases may also be made pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading restrictions.