Dear Healthcare Industry Executive,
November 9, 2011
This letter updates information we published on August 18, 2011, for the healthcare staffing industry. We will be discussing the 2011 third-quarter performance for AMN, Cross Country and On Assignment.
Based on what we are hearing, we believe that healthcare staffing growth is being seen more by the public and larger private companies than their smaller competitors. This is probably because growth is supply constrained and the public companies and larger private companies have more robust recruiting than the smaller companies. The end result will be that during this recovery, larger companies will take market share from the smaller, weaker companies. Despite the growth we are currently seeing, we think that it is very unlikely that revenue will return to historical levels, and that the recovery will be a slow and uneven. The revenue results and other information that follow show how Cross Country, AMN and On Assignment are doing.
Revenue Change
|
Cross Country |
Q1’11 |
Q1’11 |
Q2'11 |
Q2'11 |
Q3'11 |
Q3'11 |
|
Nurse and Allied Staffing |
3.4% |
12.5% |
14.1% |
2.1% |
26.0% |
7.5% |
|
Clinical Trials Services |
3.0% |
2.2% |
(2.1%) |
4.0% |
6..8% |
1.6% |
|
Other Human Capital Management Services |
(2.5%) |
(8.5%) |
4.3% |
5.5% |
(2.2%) |
(4.3%) |
|
Physician Staffing |
(5.5%) |
5.5% |
2.4% |
5.6% |
(1.5%) |
0.1% |
|
Company Total |
0.6% |
7.4% |
7.0% |
3.3% |
13.3% |
4.1% |
Cross Country’s Nurse and Allied Staffing segment again had a pick-up in revenue year-over-year, this time stronger than it was last quarter on a year-over-year basis due to a broad based increase in demand. Nursing and Allied Staffing grew 26% year-over-year for the same quarter versus a 14% year-over- year increase last quarter. Sequential growth also increased to 7.5%. Of note is that total revenue for Q3’11 was up for the third time this year and exceeded revenue for each of the last three quarters. Cross Country expects that revenue in Q4’11 will show a similar pattern to that of Q3’11 and that 2011 will end strongly.
Joe Boshart, President and Chief Executive Officer of Cross Country Healthcare said “Our nurse and allied staffing segment delivered strong top and bottom line growth year-over-year in the third quarter driven by a broad-based resurgence in demand. The fact that net weeks booked were up 24% during the third quarter suggests that the fourth quarter should show similar year-over-year comparisons, which also bodes well for our largest segment as we enter 2012. Currently, there appears to be nothing in our metrics that would be consistent with an economic slowdown from current levels.” He also said “Our clinical trial services business saw modest top-line improvement in the third quarter both sequentially and compared to a year ago.”
|
AMN Healthcare Services (AHS) |
Q1’11 |
Q1’11 |
Q2'11 |
Q2'11 |
Q3'11 |
Q3'11 |
|
Nursing and Allied Staffing |
79.2% |
5.9% |
85.2% |
3.9% |
58.8% |
5.5% |
|
Locum Tenens Staffing |
16.2% |
1.1% |
8.8% |
1.3% |
3.6% |
1.4% |
|
Physician Permanent Placement |
40.5% |
16.3% |
13.8% |
(12.6%) |
53.9% |
(3.0%) |
|
Home Health |
100.0% |
(4.8%) |
100.0% |
2.5% |
164.6% |
(4.6%) |
|
Company Total |
60.1% |
4.1% |
57.1% |
2.2% |
37.4% |
3.3% |
Within the segment box of Q1’11 versus Q1’10 column, the first percentage (on the top line) is the reported increase by segment and the second percentage (on the bottom line) is the increase without the acquisition of Medfinders. If in the periods noted above there is no percentage shown without acquisition, it is because AMN did not publish this information, as was the case in Q2’11 and Q3’11.
In the Nursing and Allied and Locum Tenens Staffing segments, AMN had growth on a quarter-to-quarter basis. This is in line with Cross Country’s experience. However, in this quarter, Cross Country experienced higher quarter- to-quarter growth than AMN both overall in the Nursing and Allied Staffing segment.
Susan R. Salka, President and Chief Executive Officer of AMN Healthcare said "We continue to experience a steady market recovery, with sequential revenue growth across our largest business segments of Nursing and Allied Healthcare Staffing and Locum Tenens. We have been successful in adding new managed services program (MSP) clients and expanded our leadership position in this important service offering, which is increasingly preferred by clients. Since July of this year, we have executed new MSP contracts with an expected annualized gross revenue opportunity of over $35 million in 2012 and beyond.”
It also acquired Medfinders in the third quarter of last year and this substantially increased its revenue base in Nursing and Allied Staffing, Physician Permanent Placement and Home Health.
|
On Assignment (ASGN) |
Q1’11 |
Q1’11 versus |
Q2'11 |
Q2'11 |
Q3'11 |
Q3'11 |
|
Healthcare Staffing |
6.8% |
7.0% |
12.6% |
9.5% |
36.4% |
24.6% |
|
Physician Staffing |
(12.5%) |
(5.7%) |
(7.7%) |
2.9% |
24.5% |
37.5% |
|
Life Sciences |
43.0% |
6.7% |
55.3% |
20.2% |
39.1% |
5.5% |
|
IT and Engineering |
67.9% |
10.9% |
58.4% |
8.6% |
47.7% |
7.2% |
|
Company Total |
33.4% |
6.8% |
37.5% |
11.0% |
39.8% |
13.0% |
During Q3’11, On Assignment's total revenue increased by 39.8%% from Q3'10. Most of this increase was internally generated. Total revenue was up 13% from Q2’11 to Q3’11. Healthcare Staffing revenue was up by approximately 25% sequentially and by 36% over last year. The Physician Staffing segment increased 25% from last year, but was up 38% from Q2'11 to Q3’11. Both the Healthcare and Physician Staffing segments of On Assignment experienced revenue increases that were far stronger than those experienced by either Cross Country or AMN.
The IT and Engineering segment continues to recover very strongly. IT and Engineering revenue increased by 48% from Q3'10 to Q3’11 and by 7% from last quarter. This is a much higher rate of increase than competitors within the IT and Engineering staffing segments are experiencing.
The Life Sciences segment is also recovering. It was up 39% from Q3'10 to Q3'11, helped by acquisitions as well as internal growth.
On Assignment’s quarterly revenue was $96 million in Q1'10, $104 million in Q2’10, $116 million in Q3’10, $121 million in Q4’10, $129 million in Q1’11, $144 million in Q2’11 and $163 million in Q3’11. On Assignment expects Q4 '11 revenue to be in the range of $157 million to $159 million and for future revenues to continue growing both with and without acquisitions.
Peter Dameris, President and Chief Executive Officer of On Assignment said “We are very pleased that, for the first time since Q3 of 2007, all our operating segments reported for the quarter both sequential and year-over-year revenue growth, with each segment contributing double-digit revenue increases as compared with the third quarter of 2010. While the economic climate remains difficult, our client diversification and focus on highly-skilled positions have served us well and permitted us to report record quarterly revenues.”
Gross Margin
All the public companies have taken steps and are attempting to increase their gross margin percentages. See commentary below:
Gross Margin Percentage
|
Cross Country (CCRN) |
Q3'10 Percentage |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Company Total |
28.0% |
28.7% |
28.2% |
27.0% |
27.5% |
27.2% |
In Q3’11, Cross Country experienced a 0.8% decrease in gross margin (27.2% versus 28.0%) from Q3’10 gross margin which is similar to its experience in the last two quarters where gross margin percentage also decreased. The decrease in gross margin was driven by the Nursing and Allied Staffing business becoming a greater portion of consolidated revenue due to its faster growth and lower gross margin percentage than the other segments. Cross Country does not break out or discuss gross margin by segments in its quarterly and annual SEC reporting. It is difficult to know what Cross Country's gross margin is by segment other than by inference which would lead us to believe that its historic gross margin by segment is similar to AMN's historic gross margin by segment.
|
AMN Healthcare Services (AHS) |
Q3'10 Percentage |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Nursing and Allied Staffing |
25.7% |
26.1% |
25.9% |
27.5% |
25.8% |
26.6% |
|
Locum Tenens Staffing |
25.3% |
25.4% |
25.7% |
26.2% |
25.5% |
26.0% |
|
Physician Permanent Placement |
56.2% |
62.3% |
58.4% |
66.7% |
64.2% |
60.5% |
|
Home Health |
37.4% |
37.0% |
37.1% |
38.1% |
34.5% |
38.0% |
|
Company Total |
27.4% |
28.1% |
27.8% |
29.6% |
27.7% |
28.4% |
For the Nursing and Allied Staffing segment, AMN experienced an increase in gross margin of 0.9%% from Q3’10 to Q3’11. Gross margin in the Locum Tenens Staffing segment increased 0.7% year-to-year. Physician Permanent Placement gross margin was again surprisingly high and Home Health gross margin showed some quarter to quarter growth. AMN's total gross margin as a percentage of revenue was up 1% from Q3’10 to Q3’11 on a consolidated basis.
Commenting on gross margin, Susan Salka, President and Chief Executive Officer said “Gross margin in the third quarter of 2011 was 28.4%, an increase of 70 basis points compared to the previous quarter and an increase of 100 basis points from the same quarter last year. The sequential increase was due primarily to $1.1 million of positive workers’ compensation adjustments along with an improvement in bill-pay spreads in our temporary staffing segments. Without the workers’ compensation adjustments, gross margin was up 20 basis points sequentially and 50 basis points year-over-year.”
|
On Assignment (ASGN) |
Q3'10 Percentage |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Healthcare Staffing |
34.5% |
29.6% |
30.2% |
28.4% |
28.3% |
27.5% |
|
Physician Staffing |
29.8% |
34.1% |
32.4% |
32.1% |
33.1% |
33.3% |
|
Healthcare/Physician Staffing Total |
32.3% |
31.8% |
31.3% |
30.0% |
30.4% |
30.2% |
|
Life Sciences |
37.2% |
36.4% |
34.5% |
34.2% |
34.3% |
33.9% |
|
IT and Engineering |
36.8% |
36.1% |
36.3% |
34.9% |
35.8% |
35.8% |
|
Company Total |
35.4% |
34.9% |
34.1% |
33.3% |
34.0% |
33.6% |
On Assignment is doing an excellent job of maintaining or growing its gross margin percentages in all business segments and is a good candidate to rapidly increase profitability as revenue increases, if it continues to control its SG&A expenses as it has done in the last two quarters.
Sales General & Administrative Expenses
Unfortunately, a higher SG&A as a percentage of revenue during downtimes can turn into higher SG&A as a percentage of revenue during good times. SG&A expenses are not self-correcting and will always tend to rise as a percentage of revenue unless managed closely. See below:
Sales General & Administrative Expenses Percentage
(Excludes Interest, Bad Debt, Depreciation, Amortization and Impairment Charges)
|
Cross Country (CCRN) |
Q3'10 |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Company Total |
23.0% |
23.9% |
23.3% |
23.7% |
23.4% |
22.2% |
In Q3'11, Cross Country experienced a 0.8% decrease (22.2% versus 23.0%) in SG&A expense as a percent of revenue from the previously reported Q3'10 SG&A expense. SG&A expense is up by more than 3% of revenue in the last 3 years (SG&A expense was 19% of revenue in 2008). Cross Country will require diligent management of SG&A expense to raise EBITDA in the future above the 5% of revenue experienced in Q3’11 if it is to return to past levels of profitability.
|
AMN Healthcare Services (AHS) |
Q3'10 Percentage |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Nursing and |
19.8% Est. |
20.9% Est. |
19.8% Est. |
19.2% Est. |
18.3% Est. |
19.1% Est. |
|
Locum Tenens Staffing |
21.1% Est. |
21.8% Est. |
21.0% Est. |
20.8% Est. |
21.0% Est. |
20.3% Est. |
|
Physician Permanent Placement |
43.8% Est. |
44.2% Est. |
42.8% Est. |
37.2% Est. |
42.3% Est. |
|
|
Home Health |
33.6% Est. |
34.3% Est. |
34.1% Est. |
37.4% Est. |
37.6% Est. |
34.7% Est. |
|
Company Total (excluding restructuring charges) |
21.9% |
23.0% |
21.8% |
21.9% |
21.2% |
21.2% |
SG&A expense as a percentage of revenue rose by 0.2% in Q3’11 versus Q2’11 and decreased by 0.5% from Q3’10. SG&A expenses remain high as a percent of revenue for all segments of AMN’s business. AMN does not seem to be experiencing all of the $10 million in cost-savings initiatives that were being undertaken as a result of the Medfinders acquisition to bring SG&A down.
Of note, during Q3’11, AMN wrote off $31.2 million in non-cash goodwill and other intangible asset impairment charges associated with the Home Healthcare Services segment of the business that it acquired in Q3’10. It would not surprise us to see another write off of goodwill in the future as the ANM Balance Sheet still has a significant balance of goodwill and intangible assets and the write-off was for only about 10% of the previous balance of those assets.
|
On Assignment (ASGN) |
Q3'10 Percentage |
Q4'10 |
2010 |
Q1'11 |
Q2'11 |
Q3'11 |
|
Company Total (including restructuring charges) |
27.2% |
27.5% |
28.0% |
26.9% |
24.9% |
23.7% |
In Q3’11, On Assignment’s SG&A expense as a percentage of revenue decreased by 3.5% versus Q3’10 and by 1.2% versus Q2’11. Before recasting equity based compensation and acquisition related costs out of SG&A, we compute Adjusted EBITDA as 9.9% for Q3’11, 9.1% for Q2’11, 6.4% for Q1’11 and 8.1% for Q3’10. On Assignment now is and needs to continue to leverage its SG&A expense so that it can continue to increase profitability, which on a year- over-year basis increased by 1.8% from Q3’10 to Q3’11. In the current environment of revenue growth, On Assignment is continuing to bring SG&A down as a percentage of sales. On Assignment will substantially increase 2011’s EBITDA percentage versus the 6% EBITDA percentage it experienced in 2010 as it is already at 8.6% EBITDA on a year-to-date basis.
Summary Commentary
Although Healthcare Staffing revenue is improving for Cross Country, AMN and On Assignment and they are forecasting revenue increases for next quarter, we are not yet seeing any evidence that Healthcare Staffing revenue will return to levels experienced a few years ago and we are hearing from the smaller local and regional companies that revenue is not growing as rapidly as it is with the larger companies. Healthcare Staffing is still a sluggish market by historical standards.
There is acquisition demand by both public and private companies and there is good pricing for solid, profitable companies. From smaller companies, there is also acquisition demand for companies that are not doing so well, but the pricing of the acquisition will reflect this.
Sellers remain hesitant to explore the acquisition market, so many potential sellers may miss a good opportunity if they try to time the selling of their companies to when their revenue increases significantly (We think that in this market most companies will not see a large increase in revenue versus what they are now experiencing.). Trying to timing the market usually happens at a market top and since earn-outs are prevalent in healthcare staffing transactions, the possibility of receiving the earn-out decreases as a market tops.
All business owners should know what their valuation and exit alternatives are likely to be at any point in time, have a contingency plan, and begin viewing the business as an asset rather than a place to work. Unless you view your business as a lifestyle business, you should be actively attempting to grow its value.
If you would like to confidentially discuss how we can help you to take advantage of merger & acquisition or exit planning opportunities available at this time, please contact us.
