UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
———————
FORM 10-Q
———————
þ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2019March 31, 2020
Or
o☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From _________ to _________
———————
CROSS COUNTRY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
———————
|
| | | | | | | |
Delaware | 0-33169 | 13-4066229 |
(State or other jurisdiction of Incorporation or organization)
| Commission file number
| (I.R.S. Employer Identification Number)
|
5201 Congress Avenue, Suite 100B
Boca Raton, Florida 33487
(Address of principal executive offices)(Zip Code)
(561) 998-2232
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
———————
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, par value $0.0001 per share | CCRN | The NASDAQ Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☒ No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ☒ Yes o☐ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨ ☐ Accelerated filer þ ☒ Non-accelerated filer ¨ ☐ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨ ☐ Emerging growth company o☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ☒
The registrant had outstanding 36,877,02237,460,546 shares of Common Stock, par value $0.0001 per share, as of October 31, 2019.April 30, 2020.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and are subject to the “safe harbor” created by those sections. Forward-looking statements consist of statements that are predictive in nature, depend upon or refer to future events. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “suggests”, "appears", “seeks”, “will”, “could”, and variations of such words and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following: the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, our ability to attract and retain qualified nurses, physicians and other healthcare personnel, costs and availability of short-term housing for our travel healthcare professionals, demand for the healthcare services we provide, both nationally and in the regions in which we operate, the functioning of our information systems, the effect of cyber security risks and cyber incidents on our business, the effect of existing or future government regulation and federal and state legislative and enforcement initiatives on our business, our clients’ ability to pay us for our services, our ability to successfully implement our acquisition and development strategies, including our ability to successfully integrate acquired businesses and realize synergies from such acquisitions, the effect of liabilities and other claims asserted against us, the effect of competition in the markets we serve, our ability to successfully defend the Company, its subsidiaries, and its officers and directors on the merits of any lawsuit or determine its potential liability, if any, and other factors set forth in Item 1.A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed and updated in our Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future resultsand readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.
All references to "the Company", “we”, “us”, “our”, or “Cross Country” in this Quarterly Report on Form 10-Q mean Cross Country Healthcare, Inc., and its consolidated subsidiaries.
CROSS COUNTRY HEALTHCARE, INC.
INDEX
FORM 10-Q
September 30, 2019
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 12,599 | | | $ | 1,032 | |
Accounts receivable, net of allowances of $3,298 in 2020 and $3,219 in 2019 | 164,801 | | | 169,528 | |
| | | |
| | | |
Prepaid expenses | 6,374 | | | 6,097 | |
Insurance recovery receivable | 5,130 | | | 5,011 | |
| | | |
Other current assets | 1,726 | | | 1,689 | |
Total current assets | 190,630 | | | 183,357 | |
Property and equipment, net of accumulated depreciation of $24,078 in 2020 and $23,276 in 2019 | 11,965 | | | 11,832 | |
Operating lease right-of-use assets | 16,263 | | | 16,964 | |
Goodwill | 101,066 | | | 101,066 | |
Trade names, indefinite-lived | 5,900 | | | 5,900 | |
| | | |
Other intangible assets, net | 42,483 | | | 44,957 | |
| | | |
| | | |
| | | |
Other non-current assets | 18,672 | | | 18,298 | |
Total assets | $ | 386,979 | | | $ | 382,374 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 51,095 | | | $ | 45,726 | |
Accrued compensation and benefits | 37,199 | | | 31,307 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Operating lease liabilities - current | 4,965 | | | 4,878 | |
Other current liabilities | 5,743 | | | 3,554 | |
Total current liabilities | 99,002 | | | 85,465 | |
Revolving credit facility | 67,648 | | | 70,974 | |
| | | |
Operating lease liabilities - non-current | 17,992 | | | 19,070 | |
Non-current deferred tax liabilities | 7,555 | | | 7,523 | |
Long-term accrued claims | 27,392 | | | 26,938 | |
| | | |
Contingent consideration | — | | | 4,867 | |
| | | |
Other long-term liabilities | 5,988 | | | 4,037 | |
Total liabilities | 225,577 | | | 218,874 | |
| | | |
Commitments and contingencies | | | |
| | | |
Stockholders' equity: | | | |
Common stock | 4 | | | 4 | |
Additional paid-in capital | 305,935 | | | 305,643 | |
Accumulated other comprehensive loss | (1,318) | | | (1,240) | |
Accumulated deficit | (143,864) | | | (141,775) | |
Total Cross Country Healthcare, Inc. stockholders' equity | 160,757 | | | 162,632 | |
Noncontrolling interest in subsidiary | 645 | | | 868 | |
Total stockholders' equity | 161,402 | | | 163,500 | |
Total liabilities and stockholders' equity | $ | 386,979 | | | $ | 382,374 | |
See accompanying notes to the condensed consolidated financial statements
1
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 9,458 |
| | $ | 16,019 |
|
Accounts receivable, net of allowances of $3,375 in 2019 and $3,705 in 2018 | 170,339 |
| | 166,128 |
|
Prepaid expenses | 3,764 |
| | 6,208 |
|
Insurance recovery receivable | 4,631 |
| | 4,186 |
|
Other current assets | 1,496 |
| | 2,364 |
|
Total current assets | 189,688 |
| | 194,905 |
|
Property and equipment, net of accumulated depreciation of $34,617 in 2019 and $33,476 in 2018 | 11,953 |
| | 13,628 |
|
Operating lease right-of-use assets | 17,796 |
| | — |
|
Goodwill | 101,066 |
| | 101,060 |
|
Trade names, indefinite-lived | 5,900 |
| | 20,402 |
|
Other intangible assets, net | 48,725 |
| | 55,182 |
|
Non-current deferred tax assets | — |
| | 23,750 |
|
Other non-current assets | 18,863 |
| | 18,076 |
|
Total assets | $ | 393,991 |
| | $ | 427,003 |
|
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | |
| | |
|
Accounts payable and accrued expenses | $ | 50,291 |
| | $ | 43,744 |
|
Accrued compensation and benefits | 34,683 |
| | 33,332 |
|
Current portion of long-term debt | — |
| | 5,235 |
|
Operating lease liabilities - current | 4,936 |
| | — |
|
Other current liabilities | 3,578 |
| | 3,075 |
|
Total current liabilities | 93,488 |
| | 85,386 |
|
Long-term debt, less current portion | 70,556 |
| | 77,944 |
|
Operating lease liabilities - non-current | 20,112 |
| | — |
|
Non-current deferred tax liabilities | 7,824 |
| | 95 |
|
Long-term accrued claims | 29,616 |
| | 29,299 |
|
Other long-term liabilities | 8,748 |
| | 16,081 |
|
Total liabilities | 230,344 |
| | 208,805 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Stockholders' equity: | |
| | |
|
Common stock | 4 |
| | 4 |
|
Additional paid-in capital | 304,764 |
| | 303,048 |
|
Accumulated other comprehensive loss | (1,244 | ) | | (1,462 | ) |
Accumulated deficit | (140,631 | ) | | (84,062 | ) |
Total Cross Country Healthcare, Inc. stockholders' equity | 162,893 |
| | 217,528 |
|
Noncontrolling interest in subsidiary | 754 |
| | 670 |
|
Total stockholders' equity | 163,647 |
| | 218,198 |
|
Total liabilities and stockholders' equity | $ | 393,991 |
| | $ | 427,003 |
|
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except per share data)
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| | | | | | | |
Revenue from services | $ | 210,064 | | | $ | 195,171 | | | | | |
Operating expenses: | | | | | | | |
Direct operating expenses | 160,461 | | | 146,917 | | | | | |
Selling, general and administrative expenses | 45,881 | | | 46,036 | | | | | |
Bad debt expense | 539 | | | 270 | | | | | |
Depreciation and amortization | 3,296 | | | 2,984 | | | | | |
| | | | | | | |
| | | | | | | |
Acquisition and integration-related costs | 77 | | | 512 | | | | | |
Restructuring costs | 564 | | | 1,140 | | | | | |
| | | | | | | |
| | | | | | | |
Total operating expenses | 210,818 | | | 197,859 | | | | | |
Loss from operations | (754) | | | (2,688) | | | | | |
Other expenses (income): | | | | | | | |
| | | | | | | |
Interest expense | 867 | | | 1,422 | | | | | |
| | | | | | | |
Loss on early extinguishment of debt | — | | | 360 | | | | | |
Other income, net | (31) | | | (82) | | | | | |
Loss before income taxes | (1,590) | | | (4,388) | | | | | |
Income tax expense (benefit) | 178 | | | (3,012) | | | | | |
| | | | | | | |
| | | | | | | |
Consolidated net loss | (1,768) | | | (1,376) | | | | | |
Less: Net income attributable to noncontrolling interest in subsidiary | 321 | | | 391 | | | | | |
Net loss attributable to common shareholders | $ | (2,089) | | | $ | (1,767) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net loss per share attributable to common shareholders - Basic and Diluted | $ | (0.06) | | | $ | (0.05) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic and Diluted | 35,873 | | | 35,700 | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements
2
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Revenue from services | $ | 209,200 |
| | $ | 200,717 |
| | $ | 607,128 |
| | $ | 615,577 |
|
Operating expenses: | | | |
| | | | |
Direct operating expenses | 158,194 |
| | 149,155 |
| | 456,280 |
| | 456,573 |
|
Selling, general and administrative expenses | 44,407 |
| | 44,086 |
| | 136,387 |
| | 135,004 |
|
Bad debt expense | 588 |
| | 502 |
| | 1,503 |
| | 1,312 |
|
Depreciation and amortization | 2,907 |
| | 2,892 |
| | 9,448 |
| | 8,764 |
|
Acquisition-related contingent consideration | (426 | ) | | 16 |
| | 74 |
| | 449 |
|
Acquisition and integration costs | — |
| | 70 |
| | 311 |
| | 261 |
|
Restructuring costs | 1,607 |
| | 1,351 |
| | 2,884 |
| | 1,979 |
|
Legal settlement charges | — |
| | — |
| | 1,600 |
| | — |
|
Impairment charges | 1,804 |
| | — |
| | 16,306 |
| | — |
|
Total operating expenses | 209,081 |
| | 198,072 |
| | 624,793 |
| | 604,342 |
|
Income (loss) from operations | 119 |
| | 2,645 |
| | (17,665 | ) | | 11,235 |
|
Other expenses (income): | | | |
| | | | |
|
Interest expense | 1,398 |
| | 1,512 |
| | 4,258 |
| | 4,225 |
|
Loss on derivative | 1,284 |
| | — |
| | 1,284 |
| | — |
|
Loss on early extinguishment of debt | 94 |
| | 36 |
| | 508 |
| | 36 |
|
Other income, net | (54 | ) | | (170 | ) | | (212 | ) | | (369 | ) |
(Loss) income before income taxes | (2,603 | ) | | 1,267 |
| | (23,503 | ) | | 7,343 |
|
Income tax expense | 94 |
| | 1,385 |
| | 31,840 |
| | 3,717 |
|
Consolidated net (loss) income | (2,697 | ) | | (118 | ) | | (55,343 | ) | | 3,626 |
|
Less: Net income attributable to noncontrolling interest in subsidiary | 431 |
| | 323 |
| | 1,226 |
| | 886 |
|
Net (loss) income attributable to common shareholders | $ | (3,128 | ) | | $ | (441 | ) | | $ | (56,569 | ) | | $ | 2,740 |
|
| | | | | | | |
Net (loss) income per share attributable to common shareholders - Basic | $ | (0.09 | ) | | $ | (0.01 | ) | | $ | (1.58 | ) | | $ | 0.08 |
|
| | | | | | | |
Net (loss) income per share attributable to common shareholders - Diluted | $ | (0.09 | ) | | $ | (0.01 | ) | | $ | (1.58 | ) | | $ | 0.08 |
|
| | | | | | | |
Weighted average common shares outstanding: | | | |
| | | | |
Basic | 35,865 |
| | 35,594 |
| | 35,797 |
| | 35,682 |
|
Diluted | 35,865 |
| | 35,594 |
| | 35,797 |
| | 35,881 |
|
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMELOSS
(Unaudited, amounts in thousands)
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Consolidated net loss | $ | (1,768) | | | $ | (1,376) | | | | | |
| | | | | | | |
Other comprehensive loss, before income tax: | | | | | | | |
Unrealized foreign currency translation (loss) gain | (78) | | | 72 | | | | | |
Unrealized loss on interest rate contracts | — | | | (350) | | | | | |
Reclassification adjustment to statement of operations | — | | | 12 | | | | | |
| (78) | | | (266) | | | | | |
Taxes on other comprehensive loss: | | | | | | | |
Income tax effect related to unrealized foreign currency translation gain | — | | | 18 | | | | | |
Income tax effect related to unrealized loss on interest rate contracts | — | | | (88) | | | | | |
Income tax effect related to reclassification adjustment to statement of operations | — | | | 3 | | | | | |
| | | | | | | |
| — | | | (67) | | | | | |
Other comprehensive loss, net of tax | (78) | | | (199) | | | | | |
| | | | | | | |
Comprehensive loss | (1,846) | | | (1,575) | | | | | |
Less: Net income attributable to noncontrolling interest in subsidiary | 321 | | | 391 | | | | | |
Comprehensive loss attributable to common shareholders | $ | (2,167) | | | $ | (1,966) | | | | | |
See accompanying notes to the condensed consolidated financial statements
3
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Consolidated net (loss) income | $ | (2,697 | ) | | $ | (118 | ) | | $ | (55,343 | ) | | $ | 3,626 |
|
| | | | | | | |
Other comprehensive income, before income tax: | | | |
| | | | |
|
Unrealized foreign currency translation (loss) gain | (29 | ) | | (94 | ) | | 44 |
| | (184 | ) |
Unrealized (loss) gain on interest rate contracts | (104 | ) | | 203 |
| | (1,078 | ) | | 222 |
|
Reclassification adjustment to statement of operations | 1,284 |
| | 62 |
| | 1,312 |
| | 148 |
|
| 1,151 |
| | 171 |
| | 278 |
| | 186 |
|
Taxes on other comprehensive income: | | | | | | | |
Income tax effect related to foreign currency translation adjustments | 7 |
| | (24 | ) | | 25 |
| | (41 | ) |
Income tax effect related to unrealized (loss) gain on interest rate contracts | (325 | ) | | 51 |
| | (571 | ) | | 56 |
|
Income tax expense related to reclassification adjustment to statement of operations | 86 |
| | 16 |
| | 93 |
| | 38 |
|
Valuation allowance adjustment | 292 |
| | — |
| | 513 |
| | — |
|
| 60 |
| | 43 |
| | 60 |
| | 53 |
|
Other comprehensive income, net of tax | 1,091 |
| | 128 |
| | 218 |
| | 133 |
|
| | | | | | | |
Comprehensive (loss) income | (1,606 | ) | | 10 |
| | (55,125 | ) | | 3,759 |
|
Less: Net income attributable to noncontrolling interest in subsidiary | 431 |
| | 323 |
| | 1,226 |
| | 886 |
|
Comprehensive (loss) income attributable to common shareholders | $ | (2,037 | ) | | $ | (313 | ) | | $ | (56,351 | ) | | $ | 2,873 |
|
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended September 30,March 31, 2020 and 2019 and 2018
(Unaudited, amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
| Shares | | Dollars | | | | | | | | | | |
Balances at December 31, 2019 | 35,871 | | | $ | 4 | | | $ | 305,643 | | | $ | (1,240) | | | $ | (141,775) | | | $ | 868 | | | $ | 163,500 | |
| | | | | | | | | | | | | |
Vesting of restricted stock | 221 | | | — | | | (635) | | | — | | | — | | | — | | | (635) | |
Equity compensation | — | | | — | | | 927 | | | — | | | — | | | — | | | 927 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (78) | | | — | | | — | | | (78) | |
| | | | | | | | | | | | | |
Distribution to noncontrolling shareholder | — | | | — | | | — | | | — | | | — | | | (544) | | | (544) | |
Net (loss) income | — | | | — | | | — | | | — | | | (2,089) | | | 321 | | | (1,768) | |
Balances at March 31, 2020 | 36,092 | | | $ | 4 | | | $ | 305,935 | | | $ | (1,318) | | | $ | (143,864) | | | $ | 645 | | | $ | 161,402 | |
| | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
| Shares | | Dollars | | | | | | | | | | |
Balances at December 31, 2018 | 35,626 | | | $ | 4 | | | $ | 303,048 | | | $ | (1,462) | | | $ | (84,062) | | | $ | 670 | | | $ | 218,198 | |
Exercise of share options | 4 | | | — | | | — | | | — | | | — | | | — | | | — | |
Vesting of restricted stock | 176 | | | — | | | (777) | | | — | | | — | | | — | | | (777) | |
Equity compensation | — | | | — | | | 531 | | | — | | | — | | | — | | | 531 | |
| | | | | | | | | | | | | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | 53 | | | — | | | — | | | 53 | |
Net change in hedging transaction, net of taxes | — | | | — | | | — | | | (252) | | | — | | | — | | | (252) | |
Distribution to noncontrolling shareholder | — | | | — | | | — | | | — | | | — | | | (367) | | | (367) | |
Net (loss) income | — | | | — | | | — | | | — | | | (1,767) | | | 391 | | | (1,376) | |
Balances at March 31, 2019 | 35,806 | | | $ | 4 | | | $ | 302,802 | | | $ | (1,661) | | | $ | (85,829) | | | $ | 694 | | | $ | 216,010 | |
See accompanying notes to the condensed consolidated financial statements
4
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
Shares | | Dollars |
Balances at June 30, 2019 | 35,860 |
| | $ | 4 |
| | $ | 303,795 |
| | $ | (2,335 | ) | | $ | (137,503 | ) | | $ | 727 |
| | $ | 164,688 |
|
Exercise of share options | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Vesting of restricted stock and performance stock awards | 5 |
| | — |
| | (13 | ) | | — |
| | — |
| | — |
| | (13 | ) |
Equity compensation | — |
| | — |
| | 982 |
| | — |
| | — |
| | — |
| | 982 |
|
Foreign currency translation adjustment, net of taxes | — |
| | — |
| | — |
| | (29 | ) | | — |
| | — |
| | (29 | ) |
Net change in hedging transaction, net of taxes | — |
| | — |
| | — |
| | 1,120 |
| | — |
| | — |
| | 1,120 |
|
Distribution to noncontrolling shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | (404 | ) | | (404 | ) |
Net (loss) income | — |
| | — |
| | — |
| | — |
| | (3,128 | ) | | 431 |
| | (2,697 | ) |
Balances at September 30, 2019 | 35,867 |
| | $ | 4 |
| | $ | 304,764 |
| | $ | (1,244 | ) | | $ | (140,631 | ) | | $ | 754 |
| | $ | 163,647 |
|
| | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
Shares | | Dollars |
Balances at June 30, 2018 | 35,606 |
| | $ | 4 |
| | $ | 301,353 |
| | $ | (1,160 | ) | | $ | (63,930 | ) | | $ | 604 |
| | $ | 236,871 |
|
Exercise of share options | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Vesting of restricted stock and performance stock awards | 5 |
| | — |
| | (27 | ) | | — |
| | — |
| | — |
| | (27 | ) |
Equity compensation | — |
| | — |
| | 981 |
| | — |
| | — |
| | — |
| | 981 |
|
Stock repurchase and retirement | (33 | ) | | — |
| | (300 | ) | | — |
| | — |
| | — |
| | (300 | ) |
Foreign currency translation adjustment, net of taxes | — |
| | — |
| | — |
| | (70 | ) | | — |
| | — |
| | (70 | ) |
Net change in hedging transaction, net of taxes | — |
| | — |
| | — |
| | 197 |
| | — |
| | — |
| | 197 |
|
Distribution to noncontrolling shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | (279 | ) | | (279 | ) |
Net (loss) income | — |
| | — |
| | — |
| | — |
| | (441 | ) | | 323 |
| | (118 | ) |
Balances at September 30, 2018 | 35,581 |
| | $ | 4 |
| | $ | 302,007 |
| | $ | (1,033 | ) | | $ | (64,371 | ) | | $ | 648 |
| | $ | 237,255 |
|
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2019 and 2018
(Unaudited, amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
Shares | | Dollars |
Balances at December 31, 2018 | 35,626 |
| | $ | 4 |
| | $ | 303,048 |
| | $ | (1,462 | ) | | $ | (84,062 | ) | | $ | 670 |
| | $ | 218,198 |
|
Exercise of share options | 10 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Vesting of restricted stock and performance stock awards | 231 |
| | — |
| | (801 | ) | | — |
| | — |
| | — |
| | (801 | ) |
Equity compensation | — |
| | — |
| | 2,517 |
| | — |
| | — |
| | — |
| | 2,517 |
|
Foreign currency translation adjustment, net of taxes | — |
| | — |
| | — |
| | 43 |
| | — |
| | — |
| | 43 |
|
Net change in hedging transaction, net of taxes | — |
| | — |
| | — |
| | 175 |
| | — |
| | — |
| | 175 |
|
Distribution to noncontrolling shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | (1,142 | ) | | (1,142 | ) |
Net (loss) income | — |
| | — |
| | — |
| | — |
| | (56,569 | ) | | 1,226 |
| | (55,343 | ) |
Balances at September 30, 2019 | 35,867 |
| | $ | 4 |
| | $ | 304,764 |
| | $ | (1,244 | ) | | $ | (140,631 | ) | | $ | 754 |
| | $ | 163,647 |
|
| | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss, net | | (Accumulated Deficit) Retained Earnings | | Noncontrolling Interest in Subsidiary | | Stockholders’ Equity |
| Shares | | Dollars |
Balances at December 31, 2017 | 35,838 |
| | $ | 4 |
| | $ | 305,362 |
| | $ | (1,166 | ) | | $ | (67,111 | ) | | $ | 630 |
| | $ | 237,719 |
|
Exercise of share options | 19 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Vesting of restricted stock and performance stock awards | 156 |
| | — |
| | (719 | ) | | — |
| | — |
| | — |
| | (719 | ) |
Equity compensation | — |
| | — |
| | 2,364 |
| | — |
| | — |
| | — |
| | 2,364 |
|
Stock repurchase and retirement | (432 | ) | | — |
| | (5,000 | ) | | — |
| | — |
| | — |
| | (5,000 | ) |
Foreign currency translation adjustment, net of taxes | — |
| | — |
| | — |
| | (143 | ) | | — |
| | — |
| | (143 | ) |
Net change in hedging transaction, net of taxes | — |
| | — |
| | — |
| | 276 |
| | — |
| | — |
| | 276 |
|
Distribution to noncontrolling shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | (868 | ) | | (868 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 2,740 |
| | 886 |
| | 3,626 |
|
Balances at September 30, 2018 | 35,581 |
| | $ | 4 |
| | $ | 302,007 |
| | $ | (1,033 | ) | | $ | (64,371 | ) | | $ | 648 |
| | $ | 237,255 |
|
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 |
Cash flows from operating activities | | | |
Consolidated net loss | $ | (1,768) | | | $ | (1,376) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 3,296 | | | 2,984 | |
| | | |
Provision for allowances | 881 | | | 970 | |
Deferred income tax expense (benefit) | 31 | | | (3,146) | |
Non-cash lease expense | 1,191 | | | 1,254 | |
| | | |
| | | |
| | | |
| | | |
Loss on early extinguishment of debt | — | | | 360 | |
| | | |
Equity compensation | 927 | | | 531 | |
| | | |
Other non-cash costs | 143 | | | 365 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 3,846 | | | 10,400 | |
Prepaid expenses and other assets | (736) | | | (1,477) | |
| | | |
| | | |
Accounts payable and accrued expenses | 11,066 | | | 2,841 | |
Operating lease liabilities | (1,467) | | | (1,399) | |
Other | (248) | | | 480 | |
Net cash provided by operating activities | 17,162 | | | 12,787 | |
| | | |
Cash flows from investing activities | | | |
| | | |
| | | |
Acquisition-related settlements | — | | | (136) | |
| | | |
| | | |
| | | |
Purchases of property and equipment | (962) | | | (1,109) | |
| | | |
| | | |
Net cash used in investing activities | (962) | | | (1,245) | |
| | | |
Cash flows from financing activities | | | |
| | | |
| | | |
Principal payments on Term Loan | — | | | (7,500) | |
| | | |
| | | |
| | | |
Debt issuance costs | — | | | (568) | |
| | | |
| | | |
| | | |
Borrowings under revolving credit facility | 107,274 | | | — | |
Repayments on revolving credit facility | (110,600) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Cash payments to noncontrolling shareholder | (544) | | | (367) | |
| | | |
Other | (729) | | | (860) | |
Net cash used in financing activities | (4,599) | | | (9,295) | |
| | | |
Effect of exchange rate changes on cash | (34) | | | 20 | |
Change in cash and cash equivalents | 11,567 | | | 2,267 | |
Cash and cash equivalents at beginning of period | 1,032 | | | 16,019 | |
Cash and cash equivalents at end of period | $ | 12,599 | | | $ | 18,286 | |
See accompanying notes to the condensed consolidated financial statements
5
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2019 | | 2018 |
Cash flows from operating activities | | | |
Consolidated net (loss) income | $ | (55,343 | ) | | $ | 3,626 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation and amortization | 9,448 |
| | 8,764 |
|
Provision for allowances | 2,554 |
| | 3,658 |
|
Deferred income tax expense | 31,456 |
| | 3,046 |
|
Non-cash lease expense | 3,799 |
| | — |
|
Impairment charges | 16,306 |
| | — |
|
Equity compensation | 2,517 |
| | 2,364 |
|
Other non-cash costs | 962 |
| | 1,454 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | (6,766 | ) | | 2,745 |
|
Prepaid expenses and other assets | 1,483 |
| | (1,145 | ) |
Accounts payable and accrued expenses | 7,797 |
| | (1,675 | ) |
Operating lease liabilities | (4,355 | ) | | — |
|
Other | 1,035 |
| | (1,080 | ) |
Net cash provided by operating activities | 10,893 |
| | 21,757 |
|
| | | |
Cash flows from investing activities | |
| | |
|
Acquisition-related settlements | — |
| | (149 | ) |
Purchases of property and equipment | (2,042 | ) | | (3,405 | ) |
Net cash used in investing activities | (2,042 | ) | | (3,554 | ) |
| | | |
Cash flows from financing activities | |
| | |
|
Principal payments on Term Loan | (12,500 | ) | | (8,750 | ) |
Stock repurchase and retirement | — |
| | (5,000 | ) |
Other | (2,913 | ) | | (1,841 | ) |
Net cash used in financing activities | (15,413 | ) | | (15,591 | ) |
| | | |
Effect of exchange rate changes on cash | 1 |
| | (84 | ) |
| | | |
Change in cash and cash equivalents | (6,561 | ) | | 2,528 |
|
Cash and cash equivalents at beginning of period | 16,019 |
| | 25,537 |
|
Cash and cash equivalents at end of period | $ | 9,458 |
| | $ | 28,065 |
|
CROSS COUNTRY HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
1. | ORGANIZATION AND BASIS OF PRESENTATION |
1. ORGANIZATION AND BASIS OF PRESENTATION
Nature of Business
The accompanying condensed consolidated financial statements include the accounts of Cross Country Healthcare, Inc. and its direct and indirect wholly-owned subsidiaries (collectively, the Company). The condensed consolidated financial statements include all assets, liabilities, revenue, and expenses of Cross Country Talent Acquisition Group, LLC, which is controlled by the Company but not wholly-owned. The Company records the ownership interest of the noncontrolling shareholder as noncontrolling interest in subsidiary. All intercompany transactions and balances 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 accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20182019 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The December 31, 20182019 condensed consolidated balance sheet included herein was derived from the December 31, 20182019 audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation on the condensed consolidated balance sheetsstatements of operations and statements of cash flows, and as presented in Note 3 - Revenue RecognitionCustomer Contracts and Note 1311 - Segment Data.
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Management has assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the current global outbreak of Coronavirus (COVID-19) using information that is reasonably available to the Company at the time. Significant estimates and assumptions are used for, but not limited to: (1) the valuation of accounts receivable; (2) goodwill, trade names, and other intangible assets; (3) other long-lived assets; (4) share-based compensation; (5) accruals for health, workers’ compensation, and professional liability claims; (6) valuation of deferred tax assets; (7) purchase price allocation; (8) fair value of the interest rate swap agreement; (9) legal contingencies; (10) contingent considerations; (11)(8) income taxes; and (12)(9) sales and other non-income tax liabilities. Accrued insurance claims and reserves include estimated settlements from known claims and actuarial estimates for claims incurred but not reported. Based on current assessment of these estimates there was not a material impact to the Company's consolidated financial statements as of and for the quarter ended March 31, 2020. However, as additional information becomes available to the Company, its future assessment of these estimates, including management's expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact the Company's consolidated financial statements in future reporting periods. Actual results could differ from those estimates.
Restructuring Costs
The Company considers restructuring activities to be programs whereby it fundamentally changes its operations, such as closing and consolidating facilities, reducing headcount, and realigning operations in response to changing market conditions. As a result, restructuring costs on the consolidated statements of operations primarily include employee termination costs and lease-related exit costs.
Effective January 1, 2019, in conjunction with the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), described below, certain office locations that the Company vacated in connection with restructuring activities were included in the measurement of its beginning operating lease liabilities. Previous accruals related to these locations of $0.3 million have been presented as a reduction to the operating lease right-of-use assets on the condensed consolidated balance sheets.
Reconciliation of the employee termination costs and lease-related exit costs beginning and ending liability balance is presented below:
|
| | | | | | | |
| Employee Termination Costs | | Lease-Related Exit Costs |
| (amounts in thousands) |
Balance at January 1, 2019 | $ | 556 |
| | $ | 127 |
|
Charged to restructuring costs | 1,104 |
| | — |
|
Payments | (373 | ) | | (62 | ) |
Balance at March 31, 2019 | 1,287 |
| | 65 |
|
Charged to restructuring costs | 137 |
| | — |
|
Payments | (592 | ) | | (22 | ) |
Balance at June 30, 2019 | 832 |
| | 43 |
|
Charged to restructuring costs | 238 |
| | 1,310 |
|
Payments | (615 | ) | | (75 | ) |
Balance at September 30, 2019 | $ | 455 |
| | $ | 1,278 |
|
| | | | | | | | | | | |
| | | |
| Employee Termination Costs | | Lease-Related Exit Costs |
| (amounts in thousands) | | |
Balance at January 1, 2020 | $ | 386 | | | $ | 1,223 | |
Charged to restructuring costs (a) | 212 | | | — | |
Payments | (292) | | | (56) | |
Balance at March 31, 2020 | $ | 306 | | | $ | 1,167 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
________________
(a) Aside from what is presented in the table above, restructuring costs in the condensed consolidated statements of operations for the three months ended March 31, 2020 also include $0.2 million of legal entity reorganization costs and $0.2 million of ongoing lease costs related to the Company's strategic reduction in its real estate footprint which are included as operating lease liabilities - current and non-current in our condensed consolidated balance sheets.
Recently Adopted Accounting Pronouncements
As of the beginning of the second quarter of 2019,Effective January 1, 2020, the Company early adopted ASU No. 2018-15, Intangibles2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - GoodwillChanges to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).benefits. The Company has adopted this guidance prospectively to all implementation costs incurred after the date of adoption with no material impact on its condensed consolidated financial statements.
Effective January 1, 2019,As of the beginning of the first quarter of 2020, the Company adopted ASU No. 2016-02, Leases2016-13, Financial Instruments - Credit Losses (Topic 842)326), Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires that,the use of a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. The guidance requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as lessee, leases, as defined by the standard, are to be recognized on the balance sheet as right-of-use assets and as lease liabilities. The Company elected not to apply the recognition requirements to short-term leases (leases with terms of twelve months or less), and to apply the transition method, which is applied prospectively, measuring and recognizing the initial right-of-use asset and liability at January 1, 2019, without revising comparative period information or disclosure. In addition, the Company elected the package of transition provisions available for expired or existing contracts, which allowed the Company to forego assessment of: (1) whether contracts are or contain leases; (2) lease classification; and (3) initial direct costs. Consistent with current accounting, all of the Company's existing leases identified under ASC 840 will be treated as operating leases.beginning of the first reporting period in which it is effective. The Company has also electedadopted this guidance using the practical expedientmodified retrospective approach related to not separate non-lease components from the lease componentsits accounts receivable, resulting in no cumulative adjustment to which they relate,retained earnings and instead account for each as a single lease component, for all ofno material impact on its underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
As of the later of January 1, 2019 or each lease’s respective commencement date, the Company recorded lease liabilities equal to the present value of its remaining minimum lease payments and right-of-use assets equal to the corresponding lease liability adjusted for any prepaid or accrued lease payments and the remaining balance of lease incentives received. At the transition date, the right-of-use asset and total lease liabilities were $22.0 million and $28.6 million, respectively. The difference between the right-of-use asset and lease liabilities is due to the derecognition of accrued lease payments of $7.2 million, previously included in other current and non-current liabilities, and prepaid rent of $0.6 million, previously included in prepaid expenses.condensed consolidated financial statements. See Note 103 - Leases.Customer Contracts.
3. REVENUE RECOGNITIONCUSTOMER CONTRACTS
The Company's revenues from customer contracts are generated from temporary staffing services and other services, areservices. Revenue is disaggregated by segment in the following table. Sales and usage-based taxes are excluded from revenue.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended March 31, 2020 | | | | | | |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) | | | | | | |
Temporary Staffing Services | $ | 184,949 | | | $ | 17,160 | | | $ | — | | | $ | 202,109 | |
Other Services | 3,284 | | | 1,021 | | | 3,650 | | | 7,955 | |
Total | $ | 188,233 | | | $ | 18,181 | | | $ | 3,650 | | | $ | 210,064 | |
| | | | | | | |
| Three Months ended March 31, 2019 | | | | | | |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) | | | | | | |
Temporary Staffing Services | $ | 172,662 | | | $ | 15,154 | | | $ | — | | | $ | 187,816 | |
Other Services | 2,975 | | | 1,005 | | | 3,375 | | | 7,355 | |
Total | $ | 175,637 | | | $ | 16,159 | | | $ | 3,375 | | | $ | 195,171 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months ended September 30, 2019 |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 181,640 |
| | $ | 19,236 |
| | $ | — |
| | $ | 200,876 |
|
Other Services | 3,334 |
| | 1,171 |
| | 3,819 |
| | 8,324 |
|
Total | $ | 184,974 |
| | $ | 20,407 |
| | $ | 3,819 |
| | $ | 209,200 |
|
| | | | | | | |
| Three Months ended September 30, 2018 |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 172,825 |
| | $ | 19,643 |
| | $ | — |
| | $ | 192,468 |
|
Other Services | 3,120 |
| | 1,515 |
| | 3,614 |
| | 8,249 |
|
Total | $ | 175,945 |
| | $ | 21,158 |
| | $ | 3,614 |
| | $ | 200,717 |
|
| | | | | | | |
| Nine Months ended September 30, 2019 |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 532,036 |
| | $ | 51,217 |
| | $ | — |
| | $ | 583,253 |
|
Other Services | 9,362 |
| | 3,377 |
| | 11,136 |
| | 23,875 |
|
Total | $ | 541,398 |
| | $ | 54,594 |
| | $ | 11,136 |
| | $ | 607,128 |
|
| | | | | | | |
| Nine Months ended September 30, 2018 |
| Nurse And Allied Staffing | | Physician Staffing | | Search | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 529,662 |
| | $ | 59,816 |
| | $ | — |
| | $ | 589,478 |
|
Other Services | 9,826 |
| | 4,236 |
| | 12,037 |
| | 26,099 |
|
Total | $ | 539,488 |
| | $ | 64,052 |
| | $ | 12,037 |
| | $ | 615,577 |
|
Accounts Receivable, net
The timing of revenue recognition, billings, and collections results in billed and unbilled accounts receivable includes estimatedfrom our customers which are classified as accounts receivable on the condensed consolidated balance sheets and are presented net of allowances for doubtful accounts and sales allowances. Estimated revenue for the Company's employees', subcontracted employees', and independent contractors’ time worked but not yet invoiced. At September 30, 2019billed at March 31, 2020 and December 31, 2018, the Company's estimate of amounts that had been worked but had not been invoiced2019 totaled $45.8$44.7 million and $44.1$46.1 million, respectively, and are included inrespectively.
The allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Accounts receivable are written off against the allowance for doubtful accounts when the Company determines amounts are no longer collectible. Judgment is required in the estimation of the allowance and the Company evaluates the collectability of its accounts receivable and contract assets based on a combination of factors. The Company bases its allowance for doubtful account estimates on its historical write-off experience, current conditions, an analysis of the aging of outstanding receivable and customer payment patterns, and specific reserves for customers in adverse condition adjusted for current expectations for the customers or industry. Based on the Company's condensed consolidated balance sheets.
4. ACQUISITIONS
Advantage RN
Effective July 1, 2017,information currently available, the Company acquired allalso considered current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.
The opening balance of the assets of Advantage RN, LLC and its subsidiaries (collectively, Advantage)allowance for cash consideration of $86.6 million, net of cash acquired. The total purchase price of $88.0 million was subjectdoubtful accounts is reconciled to a net working capital reduction of $0.6 million at the closing and an additional $0.8 million was received during the third quarter of 2017balance for expected credit losses as the final adjustment for net working capital. Additionally, $0.6 million of the purchase price was deferred as of the closing and was due to the seller within 20 months, less any Cobra and healthcare payments incurred by the Company on behalf of the seller. The Company incurred approximately $0.5 million in COBRA expenses since the Advantage acquisition and, in February 2019, released to the seller the remaining liability of $0.1 million. follows:
Included in the amount paid at closing were two escrow accounts, the first was $14.5 million which related to tax liabilities and the second was $7.5 million which was to cover any post-close liabilities. On July 28, 2017, $7.3 million related to the tax liabilities was released from escrow, leaving a balance of $7.2 million. On April 3, 2019, $4.3 million related to the tax liabilities was disbursed to pay taxes and the remaining $2.9 million was released from escrow to the seller. In the first quarter of 2019, $7.0 million related to the post-close liabilities was released from escrow, leaving a balance of $0.5 million to cover pending post-close liabilities.
Mediscan
On October 30, 2015, the Company completed the acquisition of all of the membership interests of New Mediscan II, LLC, Mediscan Diagnostic Services, LLC, and Mediscan Nursing Staffing, LLC (collectively, Mediscan). In connection with the Mediscan acquisition, the Company assumed contingent purchase price liabilities for a previously acquired business that are payable annually based on specific performance criteria for the years 2016 through 2019. Payments related to the years 2016 through 2018 were limited to $0.3 million annually and 2019 is uncapped. During each of the nine months ended September 30, 2019 and 2018, the Company paid $0.3 million related to the years 2018 and 2017. As of September 30, 2019, the fair value of the remaining obligations was estimated at $7.5 million and is included in other current and other long-term liabilities on the condensed consolidated balance sheets. See Note 11 - Fair Value Measurements.
| | | | | |
5.Allowance for Doubtful Accounts | COMPREHENSIVE INCOME(amounts in thousands) |
Balance at January 1, 2020 | $ | 2,406 | |
Bad Debt Expense | 539 | |
Write-Offs, net of Recoveries | (349) | |
Balance at March 31, 2020 | $ | 2,596 | |
In addition to the allowance for doubtful accounts, the Company maintains a sales allowance for billing-related adjustments which may arise in the ordinary course and adjustments to the reserve are recorded as contra-revenue. The balance of this allowance as of March 31, 2020 and December 31, 2019 was $0.7 million and $0.8 million, respectively.
4. COMPREHENSIVE LOSS
Total comprehensive income (loss)loss includes net income or loss, foreign currency translation adjustments, and net change in derivative transactions, net of any related deferred taxes if applicable.and valuation allowance. Certain of the Company’s foreign subsidiaries use their respective local currency as their functional currency. In accordance with the Foreign Currency Matters Topic of the FASB ASC,assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. Income statement items are translated at the average exchange rates for the period. The cumulative impact of currency fluctuations related to the balance sheet translation is included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets and was an unrealized loss of $1.2 million at September 30, 2019 and $1.3 million at March 31, 2020 and December 31, 2018. In the third quarter of 2019, as a result of the recognition of an unrealized loss on the termination of the Company's interest rate swap agreement, the balance in other comprehensive loss was reversed. As of December 31, 2018, the cumulative impact of net changes in derivative instruments was a loss of $0.2 million. See Note 9 - Derivative.2019.
The income tax impact related to components of other comprehensive (loss) incomeloss for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 is reflected on the condensed consolidated statements of comprehensive (loss) income. During the second quarter of 2019, the Company established a valuation allowance on its deferred tax assets. As a result, the first quarter's tax impact recorded through other comprehensive income was reversed.loss.
The following table sets forth the components of the numerator and denominator for the computation of the basic and diluted earnings per share: | | | | Three Months Ended | |
| | March 31, | |
| | 2020 | | 2019 | |
| | | | | | | | | | | | | (amounts in thousands, except per share data) | |
| Three Months Ended | | Nine Months Ended | |
September 30, | | September 30, | |
2019 | | 2018 | | 2019 | | 2018 | |
| (amounts in thousands, except per share data) | |
Numerator: | | | | | | | | Numerator: | | |
Net (loss) income attributable to common shareholders - Basic and Diluted | $ | (3,128 | ) | | $ | (441 | ) | | $ | (56,569 | ) | | $ | 2,740 |
| |
| Net loss attributable to common shareholders - Basic and Diluted | | Net loss attributable to common shareholders - Basic and Diluted | $ | (2,089) | | | $ | (1,767) | | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | Denominator: | | |
Weighted average common shares - Basic | 35,865 |
| | 35,594 |
| | 35,797 |
| | 35,682 |
| Weighted average common shares - Basic | 35,873 | | | 35,700 | | |
Effect of diluted shares: | | | | | | | | Effect of diluted shares: | | |
Share-based awards | — |
| | — |
| | — |
| | 199 |
| Share-based awards | — | | | — | | |
| Weighted average common shares - Diluted | 35,865 |
| | 35,594 |
| | 35,797 |
| | 35,881 |
| Weighted average common shares - Diluted | 35,873 | | | 35,700 | | |
| | | | | | | | | | | | |
Net (loss) income per share attributable to common shareholders - Basic | $ | (0.09 | ) | | $ | (0.01 | ) | | $ | (1.58 | ) | | $ | 0.08 |
| |
| | | | | | | | |
Net (loss) income per share attributable to common shareholders - Diluted | $ | (0.09 | ) | | $ | (0.01 | ) | | $ | (1.58 | ) | | $ | 0.08 |
| |
| Net loss per share attributable to common shareholders - Basic and Diluted | | Net loss per share attributable to common shareholders - Basic and Diluted | $ | (0.06) | | | $ | (0.05) | | |
|
For the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, no tax benefits were assumed in the weighted average share calculation due to the Company's net operating loss position.
Due to the net loss for the three and nine months ended September 30,March 31, 2020 and 2019, 454,920 and the three months ended September 30, 2018, 317,905, 177,449, and 130,96597,184 shares, respectively, were excluded from diluted weighted average shares.
7.6. GOODWILL, TRADE NAMES, AND OTHER INTANGIBLE ASSETS
The Company had the following acquired intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (amounts in thousands) | | | | | | | | | | |
Intangible assets subject to amortization: | | | | | | | | | | | |
Databases | $ | 30,530 | | | $ | 13,032 | | | $ | 17,498 | | | $ | 30,530 | | | $ | 12,269 | | | $ | 18,261 | |
Customer relationships | 49,758 | | | 27,447 | | | 22,311 | | | 49,758 | | | 26,596 | | | 23,162 | |
Non-compete agreements | 320 | | | 177 | | | 143 | | | 320 | | | 161 | | | 159 | |
Trade names | 4,500 | | | 1,969 | | | 2,531 | | | 4,500 | | | 1,125 | | | 3,375 | |
Other intangible assets, net | $ | 85,108 | | | $ | 42,625 | | | $ | 42,483 | | | $ | 85,108 | | | $ | 40,151 | | | $ | 44,957 | |
| | | | | | | | | | | |
Intangible assets not subject to amortization: | | | | | | | | | | | |
Trade names, indefinite-lived | | | | | $ | 5,900 | | | | | | | $ | 5,900 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (amounts in thousands) |
Intangible assets subject to amortization: | | | | | | | | | | | |
Databases | $ | 30,530 |
| | $ | 11,506 |
| | $ | 19,024 |
| | $ | 30,530 |
| | $ | 9,216 |
| | $ | 21,314 |
|
Customer relationships | 49,758 |
| | 25,771 |
| | 23,987 |
| | 49,758 |
| | 23,296 |
| | 26,462 |
|
Non-compete agreements | 320 |
| | 145 |
| | 175 |
| | 320 |
| | 97 |
| | 223 |
|
Trade names | 7,700 |
| | 2,161 |
| | 5,539 |
| | 8,879 |
| | 1,696 |
| | 7,183 |
|
Other intangible assets, net | $ | 88,308 |
| | $ | 39,583 |
| | $ | 48,725 |
| | $ | 89,487 |
| | $ | 34,305 |
| | $ | 55,182 |
|
Intangible assets not subject to amortization: | |
| | |
| | |
| | |
| | |
| | |
|
Trade names, indefinite-lived | |
| | |
| | $ | 5,900 |
| | |
| | |
| | $ | 20,402 |
|
As of September 30, 2019,March 31, 2020, estimated annual amortization expense is as follows:
| | | | | |
Years Ending December 31: | (amounts in thousands) |
2020 | $ | 7,214 | |
2021 | 6,105 | |
2022 | 6,028 | |
2023 | 5,926 | |
2024 | 5,289 | |
Thereafter | 11,921 | |
| $ | 42,483 | |
|
| | | |
Years Ending December 31: | (amounts in thousands) |
2019 | $ | 1,791 |
|
2020 | 7,056 |
|
2021 | 6,848 |
|
2022 | 6,772 |
|
2023 | 6,669 |
|
Thereafter | 19,589 |
|
| $ | 48,725 |
|
Trade namesThe Company tests reporting units’ goodwill and other intangible assets with indefinite lives for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The Company performs quarterly qualitative assessments of significant events and circumstances such as reporting units’ historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors, including COVID-19, and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting units or intangible assets is less than their carrying value. If indicators of impairments are identified a quantitative impairment test is performed.
As part of evolving
In its go-to-market strategy, in the secondfourth quarter of 2019 testing, the Company began eliminating certain brands across alldetermined that the estimated fair value of its segments. The Company’s rebranding efforts resulted in a $14.5 million write-off ofreporting units and its indefinite-lived trade names related to its Nurse and Allied Staffing business segment, which is presented as impairment charges on the condensed consolidated statements of operations. In addition, certain finite-lived trade names were accelerated, which resulted in additional amortization expense related to the Company'sname exceeded their respective values for Nurse and Allied Staffing and Physician Staffing business segments of $0.1 million and $0.5 million, respectively, during the quarter ended June 30, 2019, and $0.3 million related towith significant cushions. The Company’s Search reporting unit, however, had less than 20% excess fair value over its Physician Staffing business segment during the quarter ended September 30, 2019. There was no additional amortization expense for Nurse and Allied Staffing in the quarter ended September 30, 2019.carrying amount.
Goodwill
As of September 30, 2019,March 31, 2020, the Company performed a qualitative assessment of each of its reporting units and determined it was not more likely than not that the fair value of its reporting units dropped below their carrying value. As a result, management concluded that no impairment testing was warranted as of September 30, 2019. AlthoughAlthough management believes that the Company's current estimates and assumptions are reasonable and supportable, including its assumptions on the impact and timing related to COVID-19, there can be no assurance that the estimates and assumptions mademanagement used for purposes of the impairment testingits qualitative assessment as of March 31, 2020 will prove to be accurate predictions of future performance.
As a result ofperformance, leaving the Company merging its permanent search recruitment brands into its Search segment in the second quarter of 2019, $2.4 million of goodwill was reassigned to its Search reporting unit, from Nurse and Allied Staffing. in particular, at risk for future impairments.
As of September 30, 2019,March 31, 2020, goodwill by reporting segment was: $86.4 million for Nurse and Allied Staffing, $2.8 million for Physician Staffing, and $11.9 million for Search, totaling $101.1 million. See Note 13 - Segment Data.
8. DEBT
The Company's long-term debt consisted of the following:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Principal | | Debt Issuance Costs | | Principal | | Debt Issuance Costs |
| (amounts in thousands) |
Term Loan, interest 5.4% and 4.8% at September 30, 2019 and December 31, 2018, respectively | $ | 71,376 |
| | $ | (820 | ) | | $ | 83,876 |
| | $ | (697 | ) |
Less current portion | — |
| | — |
| | (5,235 | ) | | — |
|
Long-term debt | $ | 71,376 |
| | $ | (820 | ) | | $ | 78,641 |
| | $ | (697 | ) |
AmendedFor its long-lived assets and Restated Senior Credit Facility
On September 30, 2019,definite-lived intangible assets, the Company entered into a Third Amendment (Third Amendment) to its Amended and Restated Credit Agreement dated August 1, 2017 that modifiedreviews for impairment whenever events or changes in circumstances indicate the following: (1) reduced the Aggregate Revolving Commitments from $75.0 million to $65.0 million on the effective date, to $55.0 million on October 31, 2019, to $45.0 million on November 30, 2019, and to $35.0 million on December 31, 2019; (2) reduced the Lettercarrying amount may not be recoverable. As of Credit sublimit from $35.0 million to $25.0 million; (3) changed the maximum Consolidated Net Leverage Ratio from 4.25:1:00 to 4.60:1:00 for the period ending September 30, 2019; and (4) changed the minimum Consolidated Fixed Charge Coverage Ratio from 1.50:1.00 to 1.10:1.00 for the period ending September 30, 2019. The Company was in compliance with the covenants contained in the Amended and Restated Credit Agreement as of September 30, 2019.
On March 29, 2019, the Company entered into a Second Amendment (Second Amendment) to its Amended and Restated Credit Agreement that, among other administrative changes, modified the following: (1) changed the financial leverage ratio from Consolidated Total Leverage to Consolidated Net Leverage and permitted a maximum Consolidated Net Leverage Ratio of 4.60:1.00 for the periods of December 31, 2018 through June 30, 2019, 4.25:1:00 for the period ending September 30, 2019, 4.00:1.00 for the period ending December 31, 2019, 3.75:1.00 for the period ending March 31, 2020, 3.50:1.00 for the period ending June 30, 2020, 3.25:1.00 for the period ending September 30, 2020, and maintained 3.00:1:00 for the periods thereafter and as adjusted pursuant to a Specified and Qualified Permitted Acquisition (as defined therein); (2) the Applicable Margin definition was revised to: modify Level V to be greater than or equal to 3.00:1.00 but less than 3.50:1.00; added an additional Level VI if the Consolidated Net Leverage is greater than or equal to 3.50:1.00 but less than 4.00:1.00; and added an additional Level VII if Consolidated Net Leverage Ratio is greater than 4.00:1.00. The added Levels VI and VII resulted in an increase in the Applicable Margin for borrowing from their respective prior Levels by 25 basis points for each and an increase of 5 basis points to the Commitment Fee for each; (3) added an additional financial covenant for the quarters ending March 31, 2019 through and including the quarter ending December 31, 2019, that requires the Consolidated Asset Coverage Ratio to be no less than 1.10:1.00; and (4) lowered the Aggregate Revolving Commitments from $115.0 million to $75.0 million through the exercise of a $40 million Optional Reduction.
Both amendments were treated as modifications. As a result, debt issuance costs were written off and included as loss on early extinguishment of debt on the consolidated condensed statement of operations. In addition, fees paid in connection with the Second Amendment of $0.6 million in the first six months of 2019, as well as $0.1 million paid in fees in the third quarter of 2019 in connection with the Third Amendment, were included as debt issuance costs associated with the revolving credit facility and as a reduction to the carrying amount of the term loan and were expected to be amortized to interest expense over the remaining term of the arrangement.
On March 29, 2019 and June 28, 2019, the Company made optional prepaymentsperformed a qualitative assessment of $7.5 millionits trade names and $5.0 million, respectively, on its Term Loan, which have been allocated to the next consecutive scheduled quarterly payments resulting in the next seven and a portion of the eighth payment being prepaid. The Company had the right at any time and from time to time to prepay any borrowing, in whole or in part, without premium or penalty, by giving written notice (or telephonic notice promptly confirmed in writing). The Company was required to prepay its Term Loan and Revolving Credit Facility under certain circumstances
including from net cash proceeds from asset sales or dispositions in excess of certain thresholds, as well as from net cash proceeds from the issuance of certain debt by the Company.
As of September 30, 2019, the aggregate scheduled maturities of the term loan were as follows:
|
| | | |
| Term Loan |
| (amounts in thousands) |
Through Years Ending December 31: | |
2019 | $ | — |
|
2020 | — |
|
2021 | 5,386 |
|
2022 | 65,990 |
|
2023 | — |
|
Thereafter | — |
|
Total | $ | 71,376 |
|
Subject to the terms of the Amended and Restated Credit Agreement, the Company paid interest on: (i) each Base Rate Loan at the Base Rate (as defined therein) plus the Applicable Margin in effect from time to time, (ii) each LIBOR Index Rate Loan at the One Month LIBOR Index Rate (as defined therein) plus the Applicable Margin in effect from time to time, and (iii) each Eurodollar Loan at the Adjusted LIBOR for the applicable Interest Period (as defined therein) in effect for such Loan plus the Applicable Margin in effect from time to time. The Applicable Margin, as of any date, was a percentage per annum determined by reference to the applicable Consolidated Net Leverage Ratio (as defined by the agreement) in effect on such date.
As of September 30, 2019, the Amended Term Loan and Amended Revolving Credit Facility bore interest at a rate equal to One Month LIBOR plus 3.25%. The interest rate was subject to an increase of 2.00% if an event of default exists under the Amended and Restated Credit Agreement. The Company was required to pay a commitment fee on the average daily unused portion of the Amended Revolving Credit Facility, based on the Applicable Margin which is 0.50% as of September 30, 2019. During the three months ended March 31, 2018, the Company entered into an interest rate swap to reduce its exposure to fluctuations in the interest rates associated with its debt, which was effective April 2, 2018. The Company terminated its interest rate swap agreement on September 26, 2019. See Note 9 - Derivative.
The Amended and Restated Credit Agreement contained customary representations, warranties, and affirmative covenants. The Amended and Restated Credit Agreement also contained customary negative covenants, subject to some exceptions, on: (i) indebtedness and preferred equity; (ii) liens; (iii) fundamental changes; (iv) investments; (v) restricted payments; and (vi) sale ofother intangible assets and certain other restrictive agreements. The Amended and Restateddetermined it was not more likely than not that their carrying value may not be recoverable.
7. DEBT
2019 ABL Credit Agreement also contained customary events of default, such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of the Company’s business.
The obligations under the Amended and Restated Credit Agreement were guaranteed by all of the Company’s domestic wholly-owned subsidiaries and are secured by a first-priority security interest in the Collateral (as defined therein).
As of September 30, 2019, the Company had $20.6 million letters of credit outstanding, which related to the Company’s workers’ compensation and professional liability insurance policies.
ABL Loan Agreement October 2019
OnEffective October 25, 2019, the Company terminated its commitments under its prior senior credit facility entered into in August 2017 (defined below) and entered into an ABL Credit Agreement (Loan Agreement). The Loan Agreement provides for a new $120.0 millionfive-year revolving senior secured asset-based credit facility (the ABL) and terminated its commitments under its Amended and Restated Credit Agreement.
The initial amounts drawn on the new ABL included funds to repay its then outstanding borrowings of $75.4 million under its prior Amended and Restated Credit Agreement and $1.3 million for the payment of fees, expenses, and accrued interest, as well as to backstop $21.2 million for outstanding letters of credit, leaving $21.4 million of borrowing availability. The refinancing is treated as extinguishment of debt, and, as a result, the Company expects to recognize an additional loss on early extinguishment of debt(ABL) in the fourth quarteraggregate principal amount of 2019 of approximately $1.4up to $120.0 million related to the write-off of debt issuance costs.
The ABL provides for a five-year revolving credit facility,(as described below), including a sublimit for swing loans up to $15.0 million and a $35.0 million sublimit for standby letters of credit.
Availability of the ABL commitments is subject to a borrowing base of up to 85% of secured eligible accounts receivable, subject to adjustment at certain quality levels, plus an amount of supplemental availability, initially equal to $16.9 million, and reducing over time in accordance with the terms of the definitive loan agreement for the ABL (the Loan Agreement),Agreement, minus customary reserves, and subject to customary adjustments. As of the closing, the amount of the borrowing base was $119.3 million. Revolving loans and letters of credit issued under the Loan Agreement reduce availability under the ABL on a dollar-for-dollar basis. Availability under the ABL will be used for general corporate purposes. Additionally, the facility contains an uncommitted accordion provision to increase the amount of the facility by an additional $30.0 million.
Borrowings At March 31, 2020, availability under the ABL generally bearwas $119.0 million and the Company had $67.6 million of borrowings drawn, as well as $19.6 million of letters of credit outstanding related to workers' compensation and professional liability policies, leaving $31.8 million available for borrowing. The balances drawn are presented as revolving credit facility on the condensed consolidated balance sheets and as of March 31, 2020 and December 31, 2019 had a weighted average interest at a variable rate of 3.49% and 4.23%, respectively.
As of March 31, 2020, the interest rate spreads and fees under the Loan Agreement were based on either LIBOR orplus 2.00% for the revolving portion of the borrowing base and LIBOR plus 4.00% on the Supplemental Availability. The Base Rate plus an applicable margin,(as defined by the Loan Agreement) margins would have been 1.00% and 3.00%, respectively, for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on the Company’s excess availability under the revolving credit facility. In addition, the facility is subject to an unused line fee, letter of credit fees, and an administrative fee. The unused line fee is 0.375% of the average daily unused portion of the revolving credit facility.
The Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum fixed charge coverage ratio. The Company was in compliance with this covenant as of March 31, 2020. Obligations under the ABL are secured by substantially all the assets of the borrowers and guarantors, under the ABL, subject to customary exceptions.
Prior Senior Credit Facility
The Loan Agreement also contains customary events of default. If an event of default under the Loan Agreement occurs and is continuing, then the administrative agent or the requisite lenders may declare any outstanding obligations under the Loan Agreement to be immediately due and payable. In addition, if the Company or any of its subsidiaries becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, than any outstanding obligations under the Loan Agreement will automatically become due and payable.
9. DERIVATIVE
The Company had a prior senior credit facility that included a revolver and term loan. The term loan was payable in quarterly installments and the Company had the right at any time to prepay borrowings in whole or in part, without premium or penalty. In the first quarter of 2019, the Company made an interest rate swap agreement that, at initiation, effectively fixed the interest rate on 50% of the amortizing balance of the Company’s term debt, exclusive of the credit spreadoptional prepayment on the debt. The interest rate swap agreement requiredterm loan of $7.5 million.
Also in the first quarter of 2019, the Company amended its prior senior credit facility to pay a fixed rate toreduce the respective counterparty of 2.627% per annum on an amortizing notional amount corresponding withcommitment under the initial term loan payment schedule, and to receive from the respective counterparty, interest payments based on the applicable notional amounts and 1 month USD LIBOR, with no exchanges of notional amounts. As of December 31, 2018, the interest rate swaprevolving credit facility, among other changes. The amendment was treated as a cash flow hedgemodification and the fees of $0.6 million paid to its fair valuelenders were classified as debt issuance costs.
As a result of the reduction in borrowing capacity under the revolving credit facility, as well as the reduction in the term loan due to the prepayment in the three months ended March 31, 2019, $0.4 million of debt issuance costs were written off. The amount of the write-off is reflected as loss on early extinguishment of debt on the condensed consolidated statements of operations.
Note Payable
On October 30, 2015, the Company completed the acquisition of all of the membership interests of New Mediscan II, LLC, Mediscan Diagnostic Services, LLC, and Mediscan Nursing Staffing, LLC (collectively, Mediscan). In connection with the Mediscan acquisition, the Company assumed contingent purchase price liabilities for a $0.2previously acquired business that were payable annually based on certain performance criteria for the years 2016 through 2019, and a second performance criteria related to 2019 payable in three equal installments. Pursuant to the asset purchase agreement, once the earnout amount related to the second performance criteria for 2019 was determined, a note payable documenting the remaining principal and interest was specified as part of the settlement. In the first quarter of 2020, the total earnout amount related to both 2019 performance criterion of $7.4 million liabilitywas determined, and $0.1 million was paid by the Company. Pursuant to the note payable, the first
installment of $2.4 million will be paid in the second quarter of 2020, the second installment of $2.4 million is payable on January 31, 2021, and the third installment of $2.5 million is to be paid, together with interest at a rate of 2% per annum, accruing from April 1, 2020, on January 31, 2022. As of March 31, 2020, the current portion of the note payable in the amount of $4.9 million is included in other current liabilities and the long-term portion of $2.4 million is included in other long-term liabilities on the condensed consolidated balance sheets.
The Company anticipated entering into the new asset-based credit facility that closed in October 2019 (See Note 8 - Debt). In contemplation of that, the Company terminated its interest rate swap agreement by making a cash payment of $1.3 million on September 26, 2019, which is included in net cash provided by operating activities on the condensed consolidated statement of cash flows. As the forecasted interest payments related to the swap were no longer expected to occur, the unrealized amount of loss that had accumulated in other comprehensive loss was recognized resulting in a $1.3 million loss in the third quarter of 2019, included in loss on derivative on the condensed consolidated statement of operations.
8. LEASES
The Company has lease contracts related to the rental of office space, housing for its healthcare professionals on assignments, and other equipment rentals. The Company's lease population included in the recognition of its beginning right-of-use asset and lease liabilities under the Leases Topic of the FASB ASC is substantially related to the rental of office space. The Company enters into lease agreements as lessee for the rental of office space for both its corporate and branch locations that may include options to extend or terminate early. Many of these real estate leases require variable payments of property taxes, insurance, and common area maintenance, in addition to base rent. The variable portion of these lease payments is not included in the right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expense in selling, general and administrative expense on the condensed consolidated statement of operations. These leases do not include residual value guarantees, covenants, or other restrictions. Certain of the leases have provisions for free rent months during the lease term and/or escalating rent payments. In addition,payments and, particularly for the Company’s longer-term leases for its corporate offices, it has received incentives to enter into the leases such as receiving up to a specified dollar amount to construct tenant improvements. These lease incentives resulted in deferred rent credits. Upon adoption of the Leases Topic of the FASB ASC, these deferred rent credits reduced the beginning operating right-of-use asset recognized and, consistent with the prior guidance will be recognized as a reduction to future rent expense over the expected remaining term of the respective leases.leases do not include residual value guarantees, covenants, or other restrictions.
The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at lease commencement. Lease liabilities are measured based on the present value of the total lease payments not yet paid discounted based on its incremental borrowing rate, as the rate implicit in the lease is not determinable. Its incremental borrowing rate is estimated based on what it would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. As such, the Company estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. Right-of-use assets are measured based on the corresponding lease liability adjusted for: (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs, and (iii) tenant incentives under the lease. Rent expense commences when the lessor makes the underlying asset available to us. The Company does not assume renewals or early terminations unless it is reasonably certain to exercise these options at commencement. For short-term leases, rent expense is recognized in the condensed consolidated statements of operations on a straight-line basis over the lease term.
The table below presents the lease-related assets and liabilities included on the condensed consolidated balance sheets:
| | Classification on Condensed Consolidated Balance Sheets: | September 30, 2019 | Classification on Condensed Consolidated Balance Sheets: | March 31, 2020 | | December 31, 2019 |
| (amounts in thousands) | | (amounts in thousands) | |
Operating lease right-of-use assets | $ | 17,796 |
| Operating lease right-of-use assets | $ | 16,263 | | | $ | 16,964 | |
Operating lease liabilities - current | $ | 4,936 |
| Operating lease liabilities - current | $ | 4,965 | | | $ | 4,878 | |
Operating lease liabilities - non-current | $ | 20,112 |
| Operating lease liabilities - non-current | $ | 17,992 | | | $ | 19,070 | |
|
| | |
Weighted-average remaining lease term | 4.9 years |
|
Weighted average discount rate (a) | 6.26 | % |
| | | | | | | | | | | |
Weighted-average remaining lease term | 4.5 years | | 4.7 years |
Weighted average discount rate | 6.23 | % | | 6.26 | % |
________________
| |
(a) | Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. |
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities (which do not include short-term leases) recorded on the condensed consolidated balance sheets as of September 30, 2019:March 31, 2020:
| | | | | |
Years Ending December 31: | (amounts in thousands) |
2020 | $ | 4,582 | |
2021 | 6,121 | |
2022 | 5,205 | |
2023 | 4,757 | |
2024 | 3,382 | |
Thereafter | 2,487 | |
Total minimum lease payments | 26,534 | |
Less: amount of lease payments representing interest | (3,577) | |
Present value of future minimum lease payments | 22,957 | |
Less: current lease obligations | (4,965) | |
Non-current lease obligations | $ | 17,992 | |
|
| | | |
Years Ending December 31: | (amounts in thousands) |
2019 | $ | 1,254 |
|
2020 | 6,775 |
|
2021 | 5,924 |
|
2022 | 5,042 |
|
2023 | 4,696 |
|
Thereafter | 5,869 |
|
Total minimum lease payments | 29,560 |
|
Less: amount of lease payments representing interest | (4,512 | ) |
Present value of future minimum lease payments | 25,048 |
|
Less: current lease obligations | (4,936 | ) |
Non-current lease obligations | $ | 20,112 |
|
12
Future minimum lease payments, as of December 31, 2018, associated with non-cancelable operating lease agreements with terms of one year or more are as follows:
|
| | | |
Years Ending December 31: | (amounts in thousands) |
2019 | $ | 7,451 |
|
2020 | 6,287 |
|
2021 | 5,407 |
|
2022 | 4,857 |
|
2023 | 4,700 |
|
Thereafter | 5,893 |
|
Total minimum lease payments | $ | 34,595 |
|
Other Information
The table below provides information regarding supplemental cash flows:
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 |
| (amounts in thousands) | | |
Supplemental Cash Flow Information: | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,835 | | | $ | 1,845 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 500 | | | $ | 300 | |
|
| | | |
| Nine Months Ended |
| September 30, 2019 |
| (amounts in thousands) |
Supplemental Cash Flow Information: | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 5,619 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 872 |
|
The components of lease expense are as follows:
| | | | | | | | Three Months Ended | |
| Three Months Ended | Nine Months Ended | | March 31, | |
| September 30, 2019 | | 2020 | | 2019 | |
| (amounts in thousands) | | (amounts in thousands) | |
Amounts Included in Condensed Consolidated Statements of Operations: | | Amounts Included in Condensed Consolidated Statements of Operations: | | |
Operating lease expense | $ | 1,646 |
| $ | 5,038 |
| Operating lease expense | $ | 1,523 | | | $ | 1,694 | | |
Short-term lease expense | $ | 2,124 |
| $ | 6,232 |
| Short-term lease expense | $ | 1,845 | | | $ | 2,159 | | |
Variable and other lease costs | $ | 598 |
| $ | 1,975 |
| Variable and other lease costs | $ | 574 | | | $ | 718 | | |
Operating lease expense, short-term lease expense, and variable and other lease costs are included in selling, general and administrative expenses, and direct operating expenses, onand restructuring costs in the Company's condensed consolidated statements of operations, depending on the nature of the leased asset. In the third quarter of 2019, the Company ceased use of several facilities and is in the process of seeking to sublet some of the space where possible. The decision and change in the use of space resulted in a right-of-use asset impairment charge of $1.2 million, presented as impairment charges on the condensed consolidated statements of operations. See Note 11 - Fair Value Measurements.
As of September 30, 2019,March 31, 2020, the Company does not have any material operating leases which have not yet commenced. The Company has an immaterial amount of finance lease contracts related to other equipment rentals which are not included in the above disclosures.
| |
11. | FAIR VALUE MEASUREMENTS |
9. FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Items Measured at Fair Value on a Recurring Basis:
The Company’s financial assets/liabilities required to be measured on a recurring basis were its: (1) deferred compensation asset included in other non-current assets; (2) deferred compensation liability included in other long-term liabilities; (3) interest rate swap agreement included in other current and other long-term liabilities; and (4)(3) contingent consideration liabilities included inas other current liabilities and other long-term liabilities.contingent consideration on its condensed consolidated balance sheets.
Deferred compensation—The Company utilizes Level 1 inputs to value its deferred compensation assets and liabilities. The Company’s deferred compensation assets and liabilities are measured using publicly available indices, as per the plan documents.
Interest rate swap agreement—The Company utilized Level 2 inputs to value its interest rate swap agreement through the date of its termination. See Note 8 - Debt and Note 9 - Derivative.
Contingent consideration liabilities—Potential earnout payments related to the acquisition of Mediscan arewere contingent upon meeting certain performance requirements through 2019. The long-term portion of these liabilities has been included in other long-term liabilities,contingent consideration, and the short-term portion is included in other current liabilities on the condensed consolidated balance sheets. The Company utilized Level 3 inputs to value these contingent consideration liabilities as significant unobservable inputs were used in the calculation of their fair value. The Mediscan contingent consideration liability had been measured at fair value through June 30, 2019 using a discounted cash flow model in a Monte Carlo simulation setting, utilizing significant unobservable inputs, including the expected volatility of the acquisitions' gross profits and an estimated discount rate commensurate with the risks of the expected gross profit stream. As of September 30,December 31, 2019, due to the end of the earnout period, approaching, the Company measured the fair value of the liability based on the expected payout. See Note 4 - Acquisitions.
payout related to its Mediscan acquisition. In the first quarter of 2020, the total earnout amounts related to 2019 of $7.4 million was determined, and $0.1 million was paid by the Company. The fair value of contingent considerationremaining $7.3 million was documented as a subordinated promissory note payable and the associatedis included in other current and other long-term liabilities will be adjusted to fair value at each reporting date until actual settlement occurs, with the changes in fair value and related accretion reflected as acquisition-related contingent consideration on the condensed consolidated statements of operations. Significant increases (decreases) in the volatility or in any of the probabilities of success, or decreases (increases) in the discount rate would result in a significantly higher (lower)balance sheets which is not measured at fair value respectively, and commensurate changes to these liabilities.on a recurring basis. See Note 7 - Debt.
The table which follows summarizes the estimated fair value of the Company’s financial assets and liabilities measured on a recurring basis:
Fair Value Measurements
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| | | |
| | | |
| | | |
| (amounts in thousands) | | |
Financial Assets: | | | |
(Level 1) | | | |
Deferred compensation asset | $ | 719 | | | $ | 830 | |
Financial Liabilities: | | | |
(Level 1) | | | |
Deferred compensation liability | $ | 1,768 | | | $ | 2,216 | |
| | | |
| | | |
(Level 3) | | | |
Contingent consideration liabilities | $ | — | | | $ | 7,300 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (amounts in thousands) |
Financial Assets: | | | |
(Level 1) | | | |
Deferred compensation asset | $ | 723 |
| | $ | — |
|
Financial Liabilities: | |
(Level 1) | |
| | |
|
Deferred compensation liability | $ | 2,019 |
| | $ | 1,725 |
|
(Level 2) | | | |
Interest rate swaps | $ | — |
| | $ | 234 |
|
(Level 3) | | | |
Contingent consideration liabilities | $ | 7,484 |
| | $ | 7,689 |
|
The opening balances of contingent consideration liabilities are reconciled to the closing balances for fair value measurements of these liabilities categorized within Level 3 of the fair value hierarchy are as follows:
| | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | | | |
| 2020 | | 2019 | | |
| (amounts in thousands) | | | | |
Balance at beginning of period | $ | 7,300 | | | $ | 7,689 | | | |
| | | | | |
| | | | | |
Payments | (100) | | | (100) | | | |
Accretion expense | — | | | 247 | | | |
Valuation adjustment | 77 | | | — | | | |
Reclassification to other current and long-term liabilities | (7,277) | | | — | | | |
Balance at end of period | $ | — | | | $ | 7,836 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | |
| Contingent Consideration |
| Liabilities |
| (amounts in thousands) |
December 31, 2018 | $ | 7,689 |
|
Payments | (100 | ) |
Valuation adjustment | 247 |
|
March 31, 2019 | 7,836 |
|
Valuation adjustment | 253 |
|
June 30, 2019 | 8,089 |
|
Payments | (179 | ) |
Valuation adjustment | (426 | ) |
September 30, 2019 | $ | 7,484 |
|
Items Measured at Fair Value on a Non-Recurring Basis:
The Company's non-financial assets, such as goodwill, trade names, other intangible assets, right-of-use assets, and property and equipment, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
During an evaluation of goodwill, trade names, and other intangible assets during the fourth quarter of 2018, the carrying value of goodwill and trade names in the Physician Staffing reporting unit exceeded their fair values. As a result, the Company recorded impairment charges that incorporated fair value measurements based on Level 3 inputs.
In the second quarter of 2019, the Company eliminated certain of its brands as part of a rebranding strategy. and as a result, recorded impairment charges of $14.5 million related to its trade names in Nurse and Allied Staffing. See Note 76 - Goodwill, Trade Names, and Other Intangible Assets.
In the third quarter of 2019, the Company ceased use of several facilities and is in the process of seeking to sublet some of the space where possible. The decision and change in the use of space resulted in a right-of-use asset impairment charge of $1.2 million. This loss was determined by comparing the fair value of the impacted right-of-use assets to the carrying value of the
assets as of the impairment measurement date, in accordance with the Property, Plant and Equipment Topic of the FASB ASC. The fair value of the right-of-use asset was based on the estimated sublease income for the space taking into consideration the time period it will take to obtain a subtenant, the applicable discount rate, and the sublease rate. Furthermore, the Company wrote-off a total of $0.6 million of leasehold improvements and other property and equipment related to these locations. The measurement of the right-of-use asset impairments, using the assumptions described, is a level 3 measurement.
Impairment charges on the condensed consolidated statement of operations include impairment of the trade names, the right-of-use assets, leasehold improvements, and property and equipment, and totaled $16.3 million for the nine months ended September 30, 2019.
Other Fair Value Disclosures:
Financial instruments not measured or recorded at fair value in the accompanying condensed consolidated balance sheets consist of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses, and short and long-term debt.expenses. The estimated fair value of accounts receivable and accounts payable and accrued expenses approximate their carrying amount due to the short-term nature of these instruments. The estimated fairCompany’s note payable is included in other current and long-term liabilities on the condensed consolidated balance sheets. Due to its relatively short-term nature, the carrying value of the note payable approximates its fair value. The carrying amount of the Company's debt was calculated using a discounted cash flow analysisSenior Secured Asset-Based Loan approximates fair value because the interest rates are variable and appropriate valuation methodologies using Level 2 inputs from availablereflective of market information.rates.
The carrying amounts and estimated fair value of the Company’s significant financial instruments that were not measured at fair value are as follows:
| | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | | December 31, 2019 | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial Liabilities: | | | (amounts in thousands) | | | Financial Liabilities: | | | (amounts in thousands) | | | |
(Level 2) | |
| | |
| | |
| | |
| (Level 2) | | | | | | | |
Term Loan, net | $ | 70,556 |
| | $ | 71,400 |
| | $ | 83,179 |
| | $ | 81,800 |
| |
| Note Payable | | Note Payable | $ | 7,277 | | | $ | 7,277 | | | $ | — | | | $ | — | |
Senior Secured Asset-Based Loan | | Senior Secured Asset-Based Loan | $ | 67,648 | | | $ | 67,648 | | | $ | 70,974 | | | $ | 70,974 | |
|
Concentration of Credit Risk:
The Company has invested its excess cash in highly-rated overnight funds and other highly-rated liquid accounts. The Company is exposed to credit risk associated with these investments, as the cash balances typically exceed the current Federal Deposit Insurance Corporation (FDIC) limit of $250,000. The Company minimizes its credit risk relating to these positions by monitoring the financial condition of the financial institutions involved and by primarily conducting business with large, well established financial institutions and diversifying its counterparties.
The Company generally does not require collateral and mitigates its credit risk by performing credit evaluations and monitoring at-risk accounts. The allowance for doubtful accounts represents the Company’s estimate of uncollectible receivables based on a review of specific accounts and the Company’s historical collection experience. See Note 2 - Summary of Significant Accounting Policies. The Company writes off specific accounts based on an ongoing review of collectability as well as past experience with the customer. TheThe Company’s contract terms typically require payment between 15 to 60 days from the date of invoice and are considered past due based on the particular negotiated contract terms. Overall, based on the large number of customers in differing geographic areas, primarily throughout the United States and its territories, the Company believes the concentration of credit risk is limited.
12.10.STOCKHOLDERS’ EQUITY
Stock Repurchase Program
During the ninethree months ended September 30,March 31, 2020 and 2019, the Company did not0t repurchase any shares of its Common Stock. During the nine months ended September 30, 2018,As of March 31, 2020, the Company repurchased and retired 432,439 shares of its Common Stock for $5.0 million, at an average market price of $11.54 per share, under an authorized share repurchase program.
As of September 30, 2019, the Company hashad 510,004 shares of Common Stock under the current share repurchase program available to repurchase, subject to certain conditions in the Company's Amended and Restated Credit Agreement.
Share-Based Payments
The following table summarizes restricted stock awards and performance stock awards activity issued under the 2017 Plan for the ninethree months ended September 30, 2019:March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Awards | | | | Performance Stock Awards | | |
| Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Target Shares | | Weighted Average Grant Date Fair Value |
Unvested restricted stock awards, January 1, 2020 | 996,794 | | | $ | 8.54 | | | 364,557 | | | $ | 9.66 | |
Granted | 703,611 | | | $ | 6.74 | | | 286,415 | | | $ | 6.74 | |
Vested | (315,809) | | | $ | 8.63 | | | — | | | $ | — | |
Forfeited | (7,685) | | | $ | 7.89 | | | (63,235) | | | $ | 14.36 | |
Unvested restricted stock awards, March 31, 2020 | 1,376,911 | | | $ | 7.43 | | | 587,737 | | | $ | 7.73 | |
|
| | | | | | | | | | | | | |
| Restricted Stock Awards | | Performance Stock Awards |
| Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Target Shares | | Weighted Average Grant Date Fair Value |
Unvested restricted stock awards, January 1, 2019 | 589,120 |
| | $ | 12.00 |
| | 365,149 |
| | $ | 12.35 |
|
Granted | 837,099 |
| | $ | 7.06 |
| | 192,939 |
| | $ | 7.06 |
|
Vested | (331,395 | ) | | $ | 11.66 |
| | — |
| | $ | — |
|
Forfeited | (84,515 | ) | | $ | 9.26 |
| | (189,619 | ) | | $ | 12.25 |
|
Unvested restricted stock awards, September 30, 2019 | 1,010,309 |
| | $ | 8.52 |
| | 368,469 |
| | $ | 9.64 |
|
Restricted stock awards granted under the Company’s 2017 Plan entitle the holder to receive, at the end of a vesting period, a specified number of shares of the Company’s common stock. Share-based compensation expense is measured by the market value of the Company’s stock on the date of grant. The shares vest ratably over a three year period ending on the anniversary date of the grant, and vesting is subject to the employee's continuing employment. There is no partial vesting and any unvested portion is forfeited. Pursuant to the 2017 Plan, the number of target shares that are issued for performance-based stock awards are determined based on the level of attainment of the targets. In the first quarter of 2020, it was determined that the performance stock awards that were granted in 2017 were not earned and, accordingly, those shares were forfeited.
During the three and nine months ended September 30, 2019, $1.0March 31, 2020, $0.9 million and $2.5 million, respectively, was included in selling, general and administrative expenses related to share-based payments, and a net of 5,233 and 230,986221,492 shares respectively, of Common Stock were issued upon the vesting of restricted stock.
During the three and nine months ended September 30, 2018, $1.0March 31, 2019, $0.5 million and $2.4 million, respectively, was included in selling, general and administrative expenses related to share-based payments, and a net of 5,460 and 155,914176,436 shares respectively, of Common Stock were issued upon the vesting of restricted stock.
11. SEGMENT DATA
In accordance with the Segment Reporting Topic of the FASB ASC, the Company reports three3 business segments – Nurse and Allied Staffing, Physician Staffing, and Search. The Company manages and segments its business based on the services it offers to its customers as described below:
| |
● | Nurse and Allied Staffing – Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added total talent solutions including: temporary and permanent placement of travel and local branch-based nurse and allied professionals, MSP services, education healthcare services, and outsourcing services. Its clients include: public and private acute-care and non-acute care hospitals, government facilities, public schools and charter schools, outpatient clinics, ambulatory care facilities, physician practice groups, retailers, and many other healthcare providers throughout the United States.
|
| |
● | Physician Staffing – Physician Staffing provides physicians in many specialties, as well as certified registered nurse anesthetists, nurse practitioners, and physician assistants as independent contractors on temporary assignments throughout the United States at various healthcare facilities, such as acute and non-acute care facilities, medical group practices, government facilities, and managed care organizations.
|
| |
● | Search – Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as recruitment process outsourcing.
|
● Nurse and Allied Staffing – Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added total talent solutions including: temporary and permanent placement of travel and local branch-based nurse and allied professionals, MSP services, education healthcare services, and outsourcing services. Its clients include: public and private acute-care and non-acute care hospitals, government facilities, public schools and charter schools, outpatient clinics, ambulatory care facilities, physician practice groups, retailers, and many other healthcare providers throughout the United States.
● Physician Staffing – Physician Staffing provides physicians in many specialties, as well as certified registered nurse anesthetists, nurse practitioners, and physician assistants as independent contractors on temporary assignments throughout the United States at various healthcare facilities, such as acute and non-acute care facilities, medical group practices, government facilities, and managed care organizations.
● Search – Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as recruitment process outsourcing.
The Company’s managementCompany evaluates performance of each segment primarily based on revenue and contribution income. The Company defines contribution income as income or loss from operations before depreciation and amortization, acquisition and integrationintegration-related costs, acquisition-related contingent consideration, restructuring costs, legal settlement charges, impairment charges, and corporate overhead. Contribution income is a financial measure used by managementthe Company when assessing segment performance
and is provided in accordance with the Segment Reporting Topic of the FASB ASC. The Company’s managementCompany does not evaluate, manage, or measure
performance of segments using asset information; accordingly, total asset information by segment is not prepared or disclosed. The information in the following table is derived from the segments’ internal financial information as used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
Information on operating segments and areconciliation to incomeloss from operations for the periods indicated are as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| September 30, | | September 30, | | March 31, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | |
| (amounts in thousands) | | (amounts in thousands) | |
Revenue from services: | |
| | | | | | | Revenue from services: | | | | | |
Nurse and Allied Staffing | $ | 184,974 |
| | $ | 175,945 |
| | $ | 541,398 |
| | $ | 539,488 |
| Nurse and Allied Staffing | $ | 188,233 | | | $ | 175,637 | | |
Physician Staffing | 20,407 |
| | 21,158 |
| | 54,594 |
| | 64,052 |
| Physician Staffing | 18,181 | | | 16,159 | | |
Search | 3,819 |
| | 3,614 |
| | 11,136 |
| | 12,037 |
| Search | 3,650 | | | 3,375 | | |
| $ | 209,200 |
| | $ | 200,717 |
| | $ | 607,128 |
| | $ | 615,577 |
| | $ | 210,064 | | | $ | 195,171 | | |
| | | | | | | | | | | | |
Contribution income (loss): | | | | | | | | Contribution income (loss): | | |
Nurse and Allied Staffing | $ | 16,097 |
| | $ | 16,507 |
| | $ | 46,504 |
| | $ | 50,064 |
| Nurse and Allied Staffing | $ | 14,157 | | | $ | 14,296 | | |
Physician Staffing | 811 |
| | 1,307 |
| | 1,724 |
| | 4,190 |
| Physician Staffing | 631 | | | 405 | | |
Search | 78 |
| | 97 |
| | (526 | ) | | 833 |
| Search | (335) | | | (423) | | |
| 16,986 |
| | 17,911 |
| | 47,702 |
| | 55,087 |
| | 14,453 | | | 14,278 | | |
| | | | | | | | | |
Corporate overhead | 10,975 |
| | 10,937 |
| | 34,744 |
| | 32,399 |
| |
Corporate overhead (a) | | Corporate overhead (a) | 11,270 | | | 12,330 | | |
Depreciation and amortization | 2,907 |
| | 2,892 |
| | 9,448 |
| | 8,764 |
| Depreciation and amortization | 3,296 | | | 2,984 | | |
Acquisition-related contingent consideration | (426 | ) | | 16 |
| | 74 |
| | 449 |
| |
Acquisition and integration costs | — |
| | 70 |
| | 311 |
| | 261 |
| |
| Acquisition and integration-related costs | | Acquisition and integration-related costs | 77 | | | 512 | | |
Restructuring costs | 1,607 |
| | 1,351 |
| | 2,884 |
| | 1,979 |
| Restructuring costs | 564 | | | 1,140 | | |
Legal settlement charges | — |
| | — |
| | 1,600 |
| | — |
| |
Impairment charges | 1,804 |
| | — |
| | 16,306 |
| | — |
| |
Income (loss) from operations | $ | 119 |
| | $ | 2,645 |
| | $ | (17,665 | ) | | $ | 11,235 |
| |
| Loss from operations | | Loss from operations | $ | (754) | | | $ | (2,688) | | |
_______________
(a) Corporate overhead includes unallocated executive leadership and other centralized corporate functional support costs such as finance, IT, legal, human resources, and marketing, as well as public company expenses and corporate-wide projects (initiatives).
In the second quarter of 2019, the Company merged its permanent search recruitment brands. As a result, for the three and nine months ended September 30, 2018,March 31, 2019, $0.4 million and $1.3 million of revenue respectively, and less than $0.1 million and $0.1 million of contribution income respectively, were reclassified from Nurse and Allied Staffing to Search to conform to the current period presentation.
14.12. CONTINGENCIES
Legal Proceedings
From time to time, the Company is involved in various litigation, claims, investigations, and other proceedings that arise in the ordinary course of its business. These matters primarily relate to employee-related matters that include individual and collective claims, professional liability, tax, and payroll practices. The Company establishes reserves when available information indicates that a loss is probable and an amount or range of loss can be reasonably estimated. These assessments are performed at least quarterly and are based on the information available to management at the time and involve a significant management judgment to determine the probability and estimated amount of potential losses, if any. Based on the available information considered in its reviews, the Company adjusts its loss contingency accruals and its disclosures as may be required. Actual outcomes or losses may differ materially from those estimated by the Company's current assessments, including available insurance recoveries, which would impact the Company's profitability. Adverse developments in existing litigation claims or legal proceedings involving the Company or new claims could require management to establish or increase litigation reserves or enter into unfavorable settlements or satisfy judgments for monetary damages for amounts in excess of current reserves, which could adversely affect the Company's financial results. In the second quarter of 2019, the Company recorded $1.6 million in legal settlement charges related to the resolution of a medical malpractice lawsuit, as well as a 2019 California wage and hour class action settlement agreement which remains subject to court approval. The Company believes the outcome of any outstanding loss contingencies as of September 30, 2019March 31, 2020 will not have a material adverse effect on its business, financial condition, results of operations or cash flows. In October 2019, the Company received a grand jury subpoena directed to Advantage On Call whose assets were purchased by Cross Country Healthcare, Inc. in 2017. The subpoena appears to relate to an investigation of home healthcare services and healthcare staffing services. The Company is cooperating with the investigation.
Sales and Other State Non-Income Tax Liabilities
The Company's sales and other state non-income tax filings are subject to routine audits by authorities in the jurisdictions where it conducts business in the United States which may result in assessments of additional taxes. The Company accrues sales and other non-income tax liabilities based on the Company's best estimate of its probable liability utilizing currently available information and interpretation of relevant tax regulations. Non-incomeGiven the nature of the Company's business, significant subjectivity exists as to both whether sales and other state non-income taxes can be assessed on its activity and how the sales tax will ultimately be measured by the relevant jurisdictions. The Company makes a determination for each reporting period whether the estimates for sales and other non-income taxes in certain states should be revised. The expense is included in selling, general and administrative expenses on itsin the Company's condensed consolidated statements of operations and the liability is reflected in sales tax payable within other current liabilities as of September 30, 2019March 31, 2020 and December 31, 2018, on2019, in its condensed consolidated balance sheets.
13. INCOME TAXES
For the three and nine months ended September 30, 2019,March 31, 2020, the Company calculated its effective tax rate based on year-to-date results pursuantas opposed to the Income Taxes Topic ofthree months ended March 31, 2019, whereby the FASB ASC, as opposed toCompany calculated its effective tax rate estimating its annual effective tax rate. For the three and nine months ended September 30, 2018, the Company estimated its annual effective tax rate and applied that rate to year-to-date results. The Company’s effective tax rate for the three and nine months ended September 30, 2019March 31, 2020 was negative 3.6% and negative 135.5%, respectively, including the impact of11.2% which included immaterial discrete items. Excluding discrete items, the Company’s effective tax rate for the three and nine months ended September 30, 2019 was a negative 7.0% and 2.6%, respectively. The Company's effective tax rate for the three months ended September 30,March 31, 2019 was 68.6% including the impact of discrete items and 73.8% excluding discrete items. As a result of the Company's valuation allowance on substantially all of its domestic deferred tax assets, income tax expense for the three months ended March 31, 2020 was primarily impacted by international and state taxes whiletaxes. The Company did not maintain a material valuation allowance during the effectivethree months ended March 31, 2019 and, as a result, income tax rateexpense for the ninethree months ended September 30,March 31, 2019 was primarily impacted by the additional valuation allowance, impairmentnon-deductibility of indefinite-lived intangibles,certain per diem expenses, the officers' compensation limitation, and international and state taxes.
InThe Coronavirus Aid, Relief and Economic Security Act, also known as the second quarterCARES Act, was signed into law on March 27, 2020. Among other things, the CARES Act provided for an immediate refund of 2019, management assessedAlternative Minimum Tax credits as compared to the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company's existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2019. On the basis of this evaluation,2017 Tax Act’s scheduled refunds through 2021. Accordingly, an additional $0.3 million is presented as a current income tax receivable within other current assets in the condensed consolidated balance sheets as of March 31, 2020.
As of March 31, 2020 and December 31, 2019, the Company had a valuation allowance of $36.0 million$37.3 million. The valuation allowance was recorded ($35.8 million of which was recorded as income tax expense and $0.2 million as a reduction of other comprehensive income) to reduce the portion of theagainst all domestic deferred tax asset that isassets not more likely than not to be realized.
The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. As of September 30, 2019 and December 31, 2018, the Company had valuation allowances of $37.7 million and $1.2 million, respectively. The September 30, 2019 valuation allowance applied to all domestic deferred tax assets other than certain deferred tax assets expected to be realized. The December 31, 2018 valuation allowance applied to the uncertainty of the realization of certain state net operating losses.
As of September 30, 2019,March 31, 2020, the Company had approximately $0.7 million of unrecognized tax benefits included in other current liabilities and other long-term liabilities, ($5.7$6.3 million, net of deferred taxes, which would affect the effective tax rate if recognized).
recognized. During the three months ended September 30, 2019, the Company reduced its unrecognized tax benefits by $0.9 million related to statute of limit expirations and a change in expected tax resolutions, the majority of which was offset by valuation allowance. For the
nine months ended September 30, 2019,March 31, 2020, the Company had gross decreasesincreases of $0.1$0.3 million to its current year unrecognized tax benefits related to federal and state tax provisions.issues.
The tax years 2012 through 20182019 remain open to examination by certain taxing jurisdictions to which the Company is subject to tax.tax, other than certain states in which the statute of limitations has been extended.
16.14. RELATED PARTY TRANSACTIONS
The Company provides services to entities which are affiliated with certain members of the Company’s Board of Directors. Management believes such services were conducted on terms equivalent to those prevailing in an arm's-length transaction. Revenue related to these transactions was $0.1 million for both the three and nine months ended September 30, 2019, and less than $0.1 million for both the three and nine months ended September 30, 2018. Accounts receivable due from these entities at September 30, 2019 and December 31, 2018 was less than $0.1 million.
The Company has a 68% ownership interest in Cross Country Talent Acquisition Group, LLC, a joint venture between the Company and a hospital system. The Company generated revenue providing staffing services to the hospital system of $6.3 million and $18.2$5.6 million for both the three and nine months ended September 30, 2019, respectively,March 31, 2020 and $5.4 million and $14.5 million for the three and nine months ended September 30, 2018, respectively.2019. At September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company had a receivable balance of $2.9$2.2 million and $2.8$1.7 million, respectively, and a payable balance of $0.4$0.3 million and $0.3$0.5 million, respectively.
SubsequentThe Company has entered into an arrangement for digital marketing services provided by a firm that is related to Mr. Clark, the Company's acquisitionCo-Founder and Chief Executive Officer. Mr. Clark is a minority shareholder in the firm's parent company and is a member of Mediscan on October 30, 2015, Mediscan continuedthe parent company's Board of Directors. The terms of the arrangement are equivalent to operate at premises owned,those prevailing in part,an arm's-length transaction and have been approved by the founding membersCompany through its related party process. The digital marketing firm manages a limited number of Mediscan. Thedigital publishers covering various Company paidbrands for a monthly management fee. During the three months ended March 31, 2020, the Company incurred less than $0.1 million and $0.3 million, respectively, in rent expense forexpenses related to these premises for the three and nine months ended September 30, 2018. fees.
In the fourthfirst quarter of 2018,2020, the Company vacatedentered into a note payable related to contingent consideration assumed as part of a prior period acquisition. The payees of the premises.note are controlled by an employee of the sellers who remained with the Company. The note payable has a balance of $7.3 million at March 31, 2020. See Note 7 - Debt.
17.15. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018,On March 12, 2020, the FASB issued ASU No. 2018-13, Fair Value Measurement2020-04, Reference Rate Reform (Topic 820)848), Disclosure Framework - ChangesFacilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. When elected, the Disclosure Requirementsoptional expedients for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.contract modifications must be applied consistently for all eligible contracts or transactions. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. As of March 31, 2020, the Company is not impacted by this guidance; however, it will continue to assess the potential impact on its debt contracts and future hedging relationships, if applicable, through the effective period.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for allIncome Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019,2020, and should be applied either prospectivelyon a prospective, retrospective, or retrospectivelymodified retrospective basis depending on the nature of the disclosure. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delayamendment. Early adoption of the additional disclosures until their effective date.amendments is permitted. The Company is currently in the process of evaluating this standard and expects to adopt the full provisionsstandard in its first quarter of 2020.2021.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected based on historical experience, current conditions, and reasonable supportable forecasts. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted no sooner than the first quarter of 2019. A modified retrospective approach is required for all investments, except debt securities for which an other-than-temporary impairment had been recognized prior to the effective date, which will require a prospective transition approach and should be applied either prospectively or retrospectively depending on the nature of the disclosure. The Company is currently in the process of evaluating this standard and expects to adopt the full provisions in its first quarter of 2020.
18. SUBSEQUENT EVENTS
In October 2019, the Company's senior credit facility was replaced by a new $120.0 million senior secured asset-based credit facility (ABL). The ABL provides for a five-year revolving credit facility, including a sublimit for swing loans up to $15.0 million and a $35.0 million sublimit for standby letters of credit. Availability under the ABL is subject to a borrowing base, which was $119.3 million at closing. See Note 8 - Debt.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of the following Management’s Discussion and Analysis (MD&A) is to help facilitate the understanding of significant factors influencing the quarterly operating results, financial condition, and cash flows of the Company. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events, or uncertainties that may impact future results. This discussion supplements the detailed information presented in the condensed consolidated financial statementsMD&A is provided as a supplement to, and notes thereto which should be read in conjunction with, the consolidated financial statements and related notes contained in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.2019, our financial statements and the accompanying notes to our financial statements, as well as the Item 1A. Risk Factors contained herein.
Business Overview
We provide healthcare staffing, recruiting and total talent management services, including strategic workforce solutions, tocontingent staffing, permanent placement and other consultative services for healthcare clients. We recruit and place highly qualified healthcare professionals in virtually every specialty and area of expertise. Our diverse client base includes both clinical and nonclinical settings, servicing acute care hospitals, physician practice groups, outpatient and ambulatory-care centers, nursing facilities, both public schools and charter schools, rehabilitation and sports medicine clinics, government facilities, and homecare. Through our customers through anational staffing teams and network of 65 office locations, throughout the United States. Our services include placingwe offer our workforce solutions and we are able to place clinicians on travel and per diem assignments, local short-term contracts and permanent positions. In addition, we offer flexibleOur workforce management solutions to our customers including:include managed service programs (MSP)(MSPs), education healthcare, as well aselectronic medical record (EMR) transition staffing, recruitment process outsourcing (RPO), internal resource pool (IRP), and other outsourcing and value-addedconsultative services as described in Item 1. Business in our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, we2019. By utilizing our various solutions, clients are able to better plan their personnel needs, talent acquisition and management processes, strategically flex and balance their workforce, access quality healthcare personnel, and provide both retained and contingent placement servicescontinuity of care for healthcare executives, physicians, and other healthcare professionals.improved patient outcomes.
We manage and segment our business based on the nature of the services we offer to our customers. As a result, in accordance with the Segment Reporting Topic of the FASB ASC, we report three business segments – Nurse and Allied Staffing, Physician Staffing, and Search.
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● | Nurse and Allied Staffing – Nurse and Allied Staffing represented approximately 88% of our total revenue in the third quarter of 2019. Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added total talent solutions including: temporary and permanent placement of travel and local branch-based nurse and allied professionals, MSP services, education healthcare services, and outsourcing services.
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● Nurse and Allied Staffing – Nurse and Allied Staffing represented approximately 89% of our total revenue in the first quarter of 2020. The Nurse and Allied Staffing segment provides workforce solutions and traditional staffing, including temporary and permanent placement of travel nurses and allied professionals, as well as per diem and contract nurses and allied personnel. We also staff healthcare personnel and substitute teachers in public and charter schools. We provide flexible workforce solutions to our healthcare clients through diversified offerings designed to meet their unique needs, including: MSP, optimal workforce solutions (OWS), EMR, IRP and consulting services.
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● | Physician Staffing – Physician Staffing represented approximately 10% of our total revenue in the third quarter of 2019. Physician Staffing provides physicians in many specialties, as well as certified registered nurse anesthetists, nurse practitioners, and physician assistants as independent contractors on temporary assignments throughout the United States.
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● | Search – Search represented approximately 2% of our total revenue in the third quarter of 2019. Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as RPO.
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● Physician Staffing – Physician Staffing represented approximately 9% of our total revenue in the first quarter of 2020. Physician Staffing provides physicians in many specialties, as well as certified registered nurse anesthetists, nurse practitioners, and physician assistants as independent contractors on temporary assignments throughout the United States.
● Search – Search represented approximately 2% of our total revenue in the first quarter of 2020. Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as RPO.
Summary of Operations
For the quarter ended September 30, 2019,March 31, 2020, revenue from services increased 4%8% year-over-year to $209.2$210.1 million, primarily due to a higher volume of travel nurse staffing, and higher average bill rates. The increase in revenue was partially offset by revenue declines in our local staffing and education healthcare services primarily driven primarily by higher volumes.the changing landscape in March from the COVID-19 pandemic. Profitability in the first quarter was impacted by higher compensation$0.6 million of restructuring costs, which drove lower bill-pay spreads. Profitability$0.7 million of accelerated amortization expense in the third quarter was also impacted by restructuring activities that resulted in additional restructuring chargesconnection with our rebranding initiative, and $0.5 million of $1.6 million and impairment charges of $1.8 million, primarilycosts incurred related to leased space we expect to sublease. In addition, we recognized a loss on derivative for the early termination of an interest rate swap of $1.3 million in anticipation of the expected refinancing of our senior credit facility in the fourth quarter.applicant tracking system replacement. Net loss attributable to common shareholders was $3.1$2.1 million, or a loss of $0.09$0.06 per share.
For the ninethree months ended September 30, 2019,March 31, 2020, we generated cash flow from operating activities of $10.9$17.2 million and made optional debt prepaymentsrepaid a net of $12.5$3.3 million on our Term Loan.senior-secured asset-based credit facility (ABL). Due to the uncertainty from COVID-19, as a precautionary measure we opted to hold more cash than we might have otherwise. As of September 30, 2019,March 31, 2020, we had $9.5$12.6 million of cash and cash equivalents, and availability under the ABL of $119.0 million, with $67.6 million of borrowings drawn under our ABL, and $19.6 million of undrawn letters of credit outstanding, leaving $31.8 million available for borrowing.
COVID Response
Early in March, we experienced an increase in demand for crisis assignments from our customers as a principal balanceresult of $71.4 million outstandingthe COVID-19 pandemic impacting the U.S. Beginning in March and continuing into the second quarter, we have placed more than a thousand nurses on COVID-19 assignments with the majority going to our MSP partners in hot spots such as New York and Washington. As these assignments typically require higher compensation to the healthcare professionals, we have seen higher than normal average bill rates. Since late in the first quarter, the Company has experienced both positive and negative impacts on its business including a significant number of crisis assignments as well as the cancellation of non-COVID-19 assignments by
certain facilities due to low census and deferred elective procedures. Additionally, since mid-March 2020, schools have remained closed and as a result we are seeing a sharp decline in revenue from our education business that is being partially offset by teletherapy services for the same clients. Overall, demand remains volatile, as orders initially surged due to the crisis needs, and have since trended downward as clients have reduced their contingent labor based on their unique situations.
As part of our COVID-19 response, we established a cross-functional crisis team with representation from all parts of our business to ensure rapid response to our customers’ needs. As a result of the mandated shelter in place orders, our more than 1,600 employees were successfully able to work from home with minimal disruption. Generally, travel has been suspended and we have altered the way we communicate through the increased use of videoconferencing. Our response to this pandemic has helped us identify better ways to execute our client-facing and back-office operations which we expect to benefit from as we move forward.
While the impact on the first quarter was not considered significant for us, indications are that our second quarter’s results will be subject to more volatility. Due to the uncertainty across the healthcare industry, we are unable to predict the overall impact on our Term Loan,business for the second quarter. As the country resumes normal operations as part of the phased in recovery, however, we expect demand for these services to rebound in the second quarter. We are proactively working with our customers to address their crisis needs, as well as to plan for the recovery of their normal operations.
We believe our liquidity remains high as we have taken steps to preserve cash, ending the quarter with cash of $12.6 million and there were no amounts drawn$31.8 million available for borrowing. In addition, we do not expect the future impacts of COVID-19 to have a significant impact on our ability to maintain compliance with our financial covenants under our revolving credit facility. In October 2019,
We had a very successful experience with our senior credit facility was replaced by a new $120.0 million senior secured asset-based credit facility (ABL). See Note 8 - Debtemployees working remotely while the shelter in place orders remain in effect with minimal disruption. We believe the combination of the successful first quarter launch of Cross Country Marketplace, our proprietary on-demand staffing platform, and the ability of our employees to efficiently work remotely will allow us to greatly reduce our condensed consolidated financial statements.office footprint throughout the country. We also remain on target for full implementation of our applicant tracking system in the third quarter of 2020, which we believe will create further efficiencies. Finally, we continue to evaluate our cost structure and have taken steps in the second quarter to realize additional cost savings through further centralization and automation efforts.
Refer to Item 1A. Risk Factors for further discussion about potential additional risks and uncertainties.
See Results of Operations, Segment Results, and Liquidity and Capital Resources sections that follow for further information.
Operating Metrics
We evaluate our financial condition by tracking operating metrics and financial results specific to each of our segments. Key operating metrics include hours worked, days filled, number of FTEs, revenue per FTE, and revenue per day filled. Other operating metrics include number of open orders, candidate applications, contract bookings, length of assignment, bill and pay rates, and renewal and fill rates, number of active searches, and number of placements. These operating metrics are representative of trends that assist management in evaluating business performance. Some of the segment financial results analyzed include revenue, operating expenses, and contribution income. In addition, we monitor cash flow as well as operating and leverage ratios to help us assess our liquidity needs.
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Business Segment | Business Measurement |
Nurse and Allied Staffing | FTEs represent the average number of Nurse and Allied Staffing contract personnel on a full-time equivalent basis. |
| Average revenue per FTE per day is calculated by dividing the Nurse and Allied Staffing revenue per FTE by the number of days worked in the respective periods. Nurse and Allied Staffing revenue also includes revenue from the permanent placement of nurses.
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Physician Staffing | Days filled is calculated by dividing the total hours invoiced during the period, including an estimate for the impact of accrued revenue, by 8 hours. |
| Revenue per day filled is calculated by dividing revenue as reported by days filled for the period presented. |
Results of Operations
The following table summarizes, for the periods indicated, selected condensed consolidated statements of operations data expressed as a percentage of revenue. Our historical results of operations are not necessarily indicative of future operating results.
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Revenue from services | 100.0 | % | | 100.0 | % | | | | |
Direct operating expenses | 76.4 | | | 75.3 | | | | | |
Selling, general and administrative expenses | 21.8 | | | 23.6 | | | | | |
Bad debt expense | 0.3 | | | 0.1 | | | | | |
Depreciation and amortization | 1.6 | | | 1.5 | | | | | |
| | | | | | | |
| | | | | | | |
Acquisition and integration-related costs | — | | | 0.2 | | | | | |
Restructuring costs | 0.3 | | | 0.6 | | | | | |
| | | | | | | |
| | | | | | | |
Loss from operations | (0.4) | | | (1.3) | | | | | |
| | | | | | | |
Interest expense | 0.4 | | | 0.7 | | | | | |
| | | | | | | |
Loss on early extinguishment of debt | — | | | 0.2 | | | | | |
Other income, net | — | | | — | | | | | |
Loss before income taxes | (0.8) | | | (2.2) | | | | | |
Income tax expense (benefit) | — | | | (1.5) | | | | | |
| | | | | | | |
| | | | | | | |
Consolidated net loss | (0.8) | | | (0.7) | | | | | |
Less: Net income attributable to noncontrolling interest in subsidiary | 0.2 | | | 0.2 | | | | | |
Net loss attributable to common shareholders | (1.0) | % | | (0.9) | % | | | | |
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue from services | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Direct operating expenses | 75.6 |
| | 74.3 |
| | 75.1 |
| | 74.2 |
|
Selling, general and administrative expenses | 21.2 |
| | 22.0 |
| | 22.5 |
| | 21.9 |
|
Bad debt expense | 0.3 |
| | 0.3 |
| | 0.2 |
| | 0.2 |
|
Depreciation and amortization | 1.4 |
| | 1.4 |
| | 1.6 |
| | 1.4 |
|
Acquisition-related contingent consideration | (0.2 | ) | | — |
| | — |
| | 0.1 |
|
Acquisition and integration costs | — |
| | — |
| | — |
| | 0.1 |
|
Restructuring costs | 0.8 |
| | 0.7 |
| | 0.5 |
| | 0.3 |
|
Legal settlement charges | — |
| | — |
| | 0.3 |
| | — |
|
Impairment charges | 0.8 |
| | — |
| | 2.7 |
| | — |
|
Income (loss) from operations | 0.1 |
| | 1.3 |
| | (2.9 | ) | | 1.8 |
|
Interest expense | 0.7 |
| | 0.8 |
| | 0.7 |
| | 0.7 |
|
Loss on derivative | 0.6 |
| | — |
| | 0.2 |
| | — |
|
Loss on early extinguishment of debt | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Other income, net | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
(Loss) income before income taxes | (1.3 | ) | | 0.6 |
| | (3.9 | ) | | 1.2 |
|
Income tax expense | — |
| | 0.7 |
| | 5.2 |
| | 0.6 |
|
Consolidated net (loss) income | (1.3 | ) | | (0.1 | ) | | (9.1 | ) | | 0.6 |
|
Less: Net income attributable to noncontrolling interest in subsidiary | 0.2 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
|
Net (loss) income attributable to common shareholders | (1.5 | )% | | (0.2 | )% | | (9.3 | )% | | 0.4 | % |
Comparison of Results for the Three Months Ended September 30, 2019March 31, 2020 compared to the Three Months Ended September 30, 2018March 31, 2019
| | | Three Months Ended September 30, | | Three Months Ended March 31, | |
| | | | | Increase (Decrease) | | Increase (Decrease) | | | Increase (Decrease) | | Increase (Decrease) |
| 2019 | | 2018 | | $ | | % | | 2020 | | 2019 | | $ | | % |
| (Amounts in thousands) | | (Amounts in thousands) | |
Revenue from services | $ | 209,200 |
| | $ | 200,717 |
| | $ | 8,483 |
| | 4.2 | % | Revenue from services | $ | 210,064 | | | $ | 195,171 | | | $ | 14,893 | | | 7.6 | % |
Direct operating expenses | 158,194 |
| | 149,155 |
| | 9,039 |
| | 6.1 | % | Direct operating expenses | 160,461 | | | 146,917 | | | 13,544 | | | 9.2 | % |
Selling, general and administrative expenses | 44,407 |
| | 44,086 |
| | 321 |
| | 0.7 | % | Selling, general and administrative expenses | 45,881 | | | 46,036 | | | (155) | | | (0.3) | % |
Bad debt expense | 588 |
| | 502 |
| | 86 |
| | 17.1 | % | Bad debt expense | 539 | | | 270 | | | 269 | | | 99.6 | % |
Depreciation and amortization | 2,907 |
| | 2,892 |
| | 15 |
| | 0.5 | % | Depreciation and amortization | 3,296 | | | 2,984 | | | 312 | | | 10.5 | % |
Acquisition-related contingent consideration | (426 | ) | | 16 |
| | (442 | ) | | NM |
| |
Acquisition and integration costs | — |
| | 70 |
| | (70 | ) | | (100.0 | )% | |
| Acquisition and integration-related costs | | Acquisition and integration-related costs | 77 | | | 512 | | | (435) | | | (85.0) | % |
Restructuring costs | 1,607 |
| | 1,351 |
| | 256 |
| | 18.9 | % | Restructuring costs | 564 | | | 1,140 | | | (576) | | | (50.5) | % |
Impairment charges | 1,804 |
| | — |
| | 1,804 |
| | 100.0 | % | |
Income from operations | 119 |
| | 2,645 |
| | (2,526 | ) | | (95.5 | )% | |
| Loss from operations | | Loss from operations | (754) | | | (2,688) | | | 1,934 | | | 71.9 | % |
Interest expense | 1,398 |
| | 1,512 |
| | (114 | ) | | (7.5 | )% | Interest expense | 867 | | | 1,422 | | | (555) | | | (39.0) | % |
Loss on derivative | 1,284 |
| | — |
| | 1,284 |
| | 100.0 | % | |
| Loss on early extinguishment of debt | 94 |
| | 36 |
| | 58 |
| | 161.1 | % | Loss on early extinguishment of debt | — | | | 360 | | | (360) | | | (100.0) | % |
Other income, net | (54 | ) | | (170 | ) | | 116 |
| | 68.2 | % | Other income, net | (31) | | | (82) | | | 51 | | | 62.2 | % |
(Loss) income before income taxes | (2,603 | ) | | 1,267 |
| | (3,870 | ) | | (305.4 | )% | |
Income tax expense | 94 |
| | 1,385 |
| | (1,291 | ) | | (93.2 | )% | |
Loss before income taxes | | Loss before income taxes | (1,590) | | | (4,388) | | | 2,798 | | | 63.8 | % |
Income tax expense (benefit) | | Income tax expense (benefit) | 178 | | | (3,012) | | | 3,190 | | | 105.9 | % |
| Consolidated net loss | (2,697 | ) | | (118 | ) | | (2,579 | ) | | NM |
| Consolidated net loss | (1,768) | | | (1,376) | | | (392) | | | (28.5) | |
Less: Net income attributable to noncontrolling interest in subsidiary | 431 |
| | 323 |
| | 108 |
| | 33.4 | % | Less: Net income attributable to noncontrolling interest in subsidiary | 321 | | | 391 | | | (70) | | | (17.9) | % |
Net loss attributable to common shareholders | $ | (3,128 | ) | | $ | (441 | ) | | $ | (2,687 | ) | | (609.3 | )% | Net loss attributable to common shareholders | $ | (2,089) | | | $ | (1,767) | | | $ | (322) | | | (18.2) | % |
NM - Not meaningful
Revenue from services
Revenue from services increased 4.2%7.6%, to $209.2$210.1 million for the three months ended September 30, 2019,March 31, 2020, as compared to $200.7$195.2 million for the three months ended September 30, 2018, primarily driven byMarch 31, 2019, reflecting higher revenue from Nurse and Allied Staffinggrowth in all three segments. Revenue for the three months ended March 31, 2020 was negatively impacted by COVID-19 due to an increasesuspended services resulting from school closures and, to a lesser extent, volume declines in volume.local staffing. See further discussion in Segment Results.
Direct operating expenses
Direct operating expenses are comprised primarily of field employee compensation and independent contractor expenses, housing expenses, travel expenses, and related insurance expenses. Direct operating expenses increased $9.0$13.5 million or 6.1%9.2%, to $158.2$160.5 million for the three months ended September 30, 2019,March 31, 2020, as compared to $149.2$146.9 million for the three months ended September 30, 2018.March 31, 2019. As a percentage of total revenue, direct operating expenses increased to 75.6%76.4% compared to 74.3%75.3% in the prior year period primarily due to higher compensationaverage pay rates rising faster than bill rates in Nurse and Allied Staffing driving a lower bill-pay spread..
Selling, general and administrative expenses
Selling, general and administrative expenses increased 0.7%decreased 0.3%, to $44.4$45.9 million for the three months ended September 30, 2019,March 31, 2020, as compared to $44.1$46.0 million for the three months ended September 30, 2018.March 31, 2019. As a percentage of total revenue, selling, general and administrative expenses decreased to 21.2%21.8% for the three months ended September 30, 2019March 31, 2020 as compared to 22.0%23.6% for the three months ended September 30, 2018.March 31, 2019, primarily as a result of improved operating leverage.
Depreciation and amortization expense
Depreciation and amortization expense was$2.9 million for both the three months ended September 30, 2019 and 2018. The accelerationMarch 31, 2020 increased to $3.3 million as compared to $3.0 million for the three months ended March 31, 2019. Amortization expense increased due to accelerated amortization of amortization on the trade names related toin our PhysicianNurse and Allied Staffing business segment, associated with our rebranding initiatives. As a percentage of revenue,
depreciation and amortization expense was offset by lower depreciation expense due to write-offs1.6% for the three months ended March 31, 2020 and fully amortized property1.5% for the three months ended March 31, 2019.
Acquisition and equipment. See Note 7 - Goodwill, Trade Names,integration-related costs
Acquisition and Other Intangible Assets to our condensed consolidated financial statements.
Acquisition-related contingent consideration
Acquisition-related contingent consideration includesintegration-related costs include costs for prior acquisitions, costs incurred for potential transactions, and accretion and valuation adjustments on our contingent consideration liabilities, substantiallyliability related to the Mediscan acquisition, andacquisition. In the first quarter of 2020, the final earnout amount related to the contingent consideration was a benefit of $0.4 million for the three months ended September 30, 2019 and less than $0.1 million for the three months ended September 30, 2018.determined. See Note 117 - Fair Value Measurements to our condensed consolidated financial statements.Debt.
Restructuring costs
Restructuring costs were primarily comprised of employee termination costs, ongoing lease costs related to the Company's strategic reduction of its real estate footprint, and lease-related exitreorganization costs as part of our planned cost savings initiatives, and totaled $1.6 million and $1.4$0.6 million during the three months ended September 30, 2019 and 2018, respectively.
Impairment charges
March 31, 2020. During the three months ended September 30,March 31, 2019, restructuring costs totaled $1.1 million and were primarily comprised of severance costs incurred in connection with our restructuring activities we ceased using leased space which resulted in an evaluation of related long-lived assets pursuant to the Property, Plant and Equipment Topic of the FASB ASC. The evaluation resulted in impairment charges related to our right-of-use assets of $1.2cost savings initiatives.
Interest expense
Interest expensewas $0.9 million and $0.6 million of impairment related to property and equipment. There were no similar charges for the three months ended September 30, 2018.
Interest expense
Interest expensewasMarch 31, 2020 as compared to $1.4 million for the three months ended September 30,March 31, 2019, as compareddue to $1.5 million for the three months ended September 30, 2018. The impact of lower average borrowings was offset byand a higherlower effective rate. The effective interest rate on our term loan borrowings increased to 6.4%was 4.4% for the three month period ended September 30, 2019March 31, 2020 compared to 5.3%5.8% for the three months ended September 30, 2018.March 31, 2019.
Loss on derivativeearly extinguishment of debt
Loss on derivativeearly extinguishment of debt was $1.3$0.4 million for the three months ended September 30,March 31, 2019, which was paidrelating to terminatethe write-off of
debt issuance costs in connection with a reduction in borrowing capacity under the revolving credit facility, and an interest rate hedge related tooptional
principal prepayment of $7.5 million made on our term loan that was subsequently refinanced in Octoberthe first quarter of 2019. There were no similar charges for the three months ended September 30, 2018.March 31, 2020.
Loss on early extinguishment of debt
Loss on early extinguishment of debt of $0.1 million for the three months ended September 30, 2019 related to write-offs of debt issuance costs resulting from a reduction in borrowing capacity on our revolving credit facility. Loss on early extinguishment of debt was not material for the three months ended September 30, 2018 and related to the optional prepayment of $5.0 million made on our Amended Term Loan on September 28, 2018.
Income tax expense
Income tax expense totaled $0.1was $0.2 million for the three months ended September 30, 2019, compared to $1.4 million forMarch 31, 2020, including immaterial discrete items. For the three months ended September 30, 2018. IncomeMarch 31, 2019, we recorded an income tax benefit of $3.0 million, including the impact of discrete items, and $3.2 million excluding discrete items. As a result of the Company’s valuation allowance on substantially all of its domestic deferred tax assets, income tax expense for the three months ended September 30, 2019March 31, 2020 was primarily impacted by international and state taxes. IncomeThe Company did not maintain a material valuation allowance during the three months ended March 31, 2019 and as a result, income tax expense for the three months ended September 30, 2018March 31, 2019 was primarily impacted by the non-deductibility of certain per diem expenses, the officers’ compensation limitation, and international and state taxes. See Note 1513 - Income Taxes to our condensed consolidated financial statements.
Comparison of Results for the Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| | | | | Increase (Decrease) | | Increase (Decrease) |
| 2019 | | 2018 | | $ | | % |
| (Amounts in thousands) |
Revenue from services | $ | 607,128 |
| | $ | 615,577 |
| | $ | (8,449 | ) | | (1.4 | )% |
Direct operating expenses | 456,280 |
| | 456,573 |
| | (293 | ) | | (0.1 | )% |
Selling, general and administrative expenses | 136,387 |
| | 135,004 |
| | 1,383 |
| | 1.0 | % |
Bad debt expense | 1,503 |
| | 1,312 |
| | 191 |
| | 14.6 | % |
Depreciation and amortization | 9,448 |
| | 8,764 |
| | 684 |
| | 7.8 | % |
Acquisition-related contingent consideration | 74 |
| | 449 |
| | (375 | ) | | (83.5 | )% |
Acquisition and integration costs | 311 |
| | 261 |
| | 50 |
| | 19.2 | % |
Restructuring costs | 2,884 |
| | 1,979 |
| | 905 |
| | 45.7 | % |
Legal settlement charges | 1,600 |
| | — |
| | 1,600 |
| | 100.0 | % |
Impairment charges | 16,306 |
| | — |
| | 16,306 |
| | 100.0 | % |
(Loss) income from operations | (17,665 | ) | | 11,235 |
| | (28,900 | ) | | (257.2 | )% |
Interest expense | 4,258 |
| | 4,225 |
| | 33 |
| | 0.8 | % |
Loss on derivative | 1,284 |
| | — |
| | 1,284 |
| | 100.0 | % |
Loss on early extinguishment of debt | 508 |
| | 36 |
| | 472 |
| | NM |
|
Other income, net | (212 | ) | | (369 | ) | | 157 |
| | 42.5 | % |
(Loss) income before income taxes | (23,503 | ) | | 7,343 |
| | (30,846 | ) | | (420.1 | )% |
Income tax expense | 31,840 |
| | 3,717 |
| | 28,123 |
| | 756.6 | % |
Consolidated net (loss) income | (55,343 | ) | | 3,626 |
| | (58,969 | ) | | NM |
|
Less: Net income attributable to noncontrolling interest in subsidiary | 1,226 |
| | 886 |
| | 340 |
| | 38.4 | % |
Net (loss) income attributable to common shareholders | $ | (56,569 | ) | | $ | 2,740 |
| | $ | (59,309 | ) | | NM |
|
NM - Not meaningful
Revenue from services
Revenue from services decreased 1.4%, to $607.1 million for the nine months ended September 30, 2019, as compared to $615.6 million for the nine months ended September 30, 2018, due to lower volume in our Physician Staffing and Search businesses, partially offset by an increase in volume in our Nurse and Allied Staffing business. See further discussion in Segment Results.
Direct operating expenses
Direct operating expenses decreased $0.3 million or 0.1%, to $456.3 million for the nine months ended September 30, 2019, as compared to $456.6 million for the nine months ended September 30, 2018. As a percentage of total revenue, direct operating expenses increased to 75.1% compared to 74.2% in the prior year period primarily due to a lower bill-pay spread in our Nurse and Allied staffing business.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 1.0%, to $136.4 million for the nine months ended September 30, 2019, as compared to $135.0 million for the nine months ended September 30, 2018, due to higher healthcare costs, consulting and other professional service fees, and candidate attraction-related expenses, partially offset by our cost savings initiatives. The main driver for the increase in consulting fees was related to costs incurred in connection with the replacement of our applicant
tracking system for our travel nurse business. As a percentage of total revenue, selling, general and administrative expenses increased to 22.5% for the nine months ended September 30, 2019 as compared to 21.9% for the nine months ended September 30, 2018.
Depreciation and amortization expense
Depreciation and amortization expenseincreased to$9.4 million for the nine months ended September 30, 2019 from $8.8 million for the nine months ended September 30, 2018. The increase is due to accelerated amortization of trade names of $0.9 million associated with our rebranding initiatives, partly offset by lower depreciation expense related to fully amortized assets that have not been replaced. See Note 7 - Goodwill, Trade Names, and Other Intangible Assets and Note 11 - Fair Value Measurements to our condensed consolidated financial statements.
Acquisition-related contingent consideration
Acquisition-related contingent consideration for the nine months ended September 30, 2019 was $0.1 million and included accretion and valuation adjustments on our contingent consideration liabilities related to the Mediscan acquisition. Acquisition-related contingent consideration for the nine months ended September 30, 2018 was $0.4 million and substantially related to the Mediscan acquisition. In the third quarter of 2018, we determined that the contingent consideration earnout for USR would not be achieved and the entire liability was reversed. See Note 11 - Fair Value Measurements to our condensed consolidated financial statements.
Acquisition and integration costs
Acquisition and integration costs was $0.3 million for both the nine months ended September 30, 2019 and 2018, and related to prior acquisitions. These costs also included expenses incurred for potential transactions for the nine months ended September 30, 2019.
Restructuring costs
Restructuring costs were primarily comprised of employee termination costs and lease-related exit costs, and totaled $2.9 million and $2.0 million during the nine months ended September 30, 2019 and 2018, respectively.
Legal settlement charges
Legal settlement charges totaled $1.6 million during the nine months ended September 30, 2019 and related to the resolution of a medical malpractice lawsuit, as well as a California wage and hour class action settlement agreement. There were no similar charges for the nine months ended September 30, 2018.
Impairment charges
During the three months ended September 30, 2019, in connection with our restructuring activities we ceased using leased space which resulted in an evaluation of related long-lived assets pursuant to the Property, Plant and Equipment Topic of the FASB ASC. The evaluation resulted in impairment charges related to our right-of-use assets of $1.2 million and $0.6 million of impairment related to property and equipment. In addition, as part of evolving our go-to-market strategy, in the second quarter of 2019, we eliminated certain brands across all of our segments as part of our rebranding initiatives and, as a result, $14.5 million of indefinite-lived trade names related to Nurse and Allied Staffing were written off as impairment charges. There were no similar charges for the nine months ended September 30, 2018. See Note 7 - Goodwill, Trade Names, and Other Intangible Assets and Note 11 - Fair Value Measurements to our condensed consolidated financial statements.
Interest expense
Interest expensewas $4.3 million for the nine months ended September 30, 2019, as compared to $4.2 million for the nine months ended September 30, 2018. The effective interest rate on our term loan borrowings increased to 6.2% for the nine month period ended September 30, 2019 compared to 4.9% for the nine months ended September 30, 2018. The impact of higher average interest rates was partly offset by lower average borrowings in the nine months ended September 30, 2019 due to optional debt prepayments on the Term Loan. See Note 8 - Debt to our condensed consolidated financial statements.
Loss on derivative
Loss on derivative was $1.3 million for the nine months ended September 30, 2019, which was paid to terminate an interest rate hedge related to our term loan that was subsequently refinanced in October 2019. There were no similar charges for the nine months ended September 30, 2018.
Loss on early extinguishment of debt
Loss on early extinguishment of debt of $0.5 million for the nine months ended September 30, 2019 related to write-offs of debt issuance costs resulting from a reduction in borrowing capacity on our revolving credit facility, as well as optional debt prepayments of $12.5 million made on our Term Loan. Loss on early extinguishment of debt was not material for the nine months ended September 30, 2018 and related to the optional prepayment of $5.0 million made on our Amended Term Loan on September 28, 2018.
Income tax expense
Income tax expense totaled $31.8 million and $3.7 million for the nine months ended September 30, 2019 and 2018, respectively. Income tax expense for the nine months ended September 30, 2019 included $35.8 million of additional valuation allowance recorded as a discrete item, and was also impacted by international and state taxes as well as the impairment of indefinite-lived intangibles. Income tax expense for the nine months ended September 30, 2018 was primarily impacted by the non-deductibility of certain per diem expenses, the officers’ compensation limitation, and international and state taxes.
Segment Results
Information on operating segments and a reconciliation to (loss) income from operations for the periods indicated are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (amounts in thousands) | | | | | | |
Revenue from services: | | | | | | | | |
Nurse and Allied Staffing | $ | 188,233 | | | $ | 175,637 | | | | | |
Physician Staffing | 18,181 | | | 16,159 | | | | | |
Search | 3,650 | | | 3,375 | | | | | |
| $ | 210,064 | | | $ | 195,171 | | | | | |
| | | | | | | |
Contribution income (loss): | | | | | | | |
Nurse and Allied Staffing | $ | 14,157 | | | $ | 14,296 | | | | | |
Physician Staffing | 631 | | | 405 | | | | | |
Search | (335) | | | (423) | | | | | |
| 14,453 | | | 14,278 | | | | | |
| | | | | | | |
Corporate overhead | 11,270 | | | 12,330 | | | | | |
Depreciation and amortization | 3,296 | | | 2,984 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Acquisition and integration-related costs | 77 | | | 512 | | | | | |
Restructuring costs | 564 | | | 1,140 | | | | | |
| | | | | | | |
| | | | | | | |
Loss from operations | $ | (754) | | | $ | (2,688) | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (amounts in thousands) |
Revenue from services: | |
| | | | |
| | |
|
Nurse and Allied Staffing | $ | 184,974 |
| | $ | 175,945 |
| | $ | 541,398 |
| | $ | 539,488 |
|
Physician Staffing | 20,407 |
| | 21,158 |
| | 54,594 |
| | 64,052 |
|
Search | 3,819 |
| | 3,614 |
| | 11,136 |
| | 12,037 |
|
| $ | 209,200 |
| | $ | 200,717 |
| | $ | 607,128 |
| | $ | 615,577 |
|
| | | | | | | |
Contribution income (loss): | | | | | | | |
Nurse and Allied Staffing | $ | 16,097 |
| | $ | 16,507 |
| | $ | 46,504 |
| | $ | 50,064 |
|
Physician Staffing | 811 |
| | 1,307 |
| | 1,724 |
| | 4,190 |
|
Search | 78 |
| | 97 |
| | (526 | ) | | 833 |
|
| 16,986 |
| | 17,911 |
| | 47,702 |
| | 55,087 |
|
| | | | | | | |
Corporate overhead | 10,975 |
| | 10,937 |
| | 34,744 |
| | 32,399 |
|
Depreciation and amortization | 2,907 |
| | 2,892 |
| | 9,448 |
| | 8,764 |
|
Acquisition-related contingent consideration | (426 | ) | | 16 |
| | 74 |
| | 449 |
|
Acquisition and integration costs | — |
| | 70 |
| | 311 |
| | 261 |
|
Restructuring costs | 1,607 |
| | 1,351 |
| | 2,884 |
| | 1,979 |
|
Legal settlement charges | — |
| | — |
| | 1,600 |
| | — |
|
Impairment charges | 1,804 |
| | — |
| | 16,306 |
| | — |
|
Income (loss) from operations | $ | 119 |
| | $ | 2,645 |
| | $ | (17,665 | ) | | $ | 11,235 |
|
In the second quarter of 2019, the Company merged its permanent search recruitment brands. As a result, for the three and nine
months ended September 30, 2018, certainMarch 31, 2019, $0.4 million of revenue and $0.1 million of contribution income amounts were reclassified from Nurse and
Allied Staffing to Search to conform to the current period presentation. See Note 13 - Segment Data to our condensed consolidated financial statements.
Certain statistical data for our business segments for the periods indicated are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | March 31, | | | | Percent |
| 2020 | | 2019 | | Change | | Change |
| | | | | | | |
Nurse and Allied Staffing statistical data: | | | | | | | |
FTEs | 7,145 | | | 7,017 | | | 128 | | | 1.8 | % |
| | | | | | | |
Average Nurse and Allied Staffing revenue per FTE per day | $ | 290 | | | $ | 278 | | | 12 | | | 4.3 | % |
| | | | | | | |
Physician Staffing statistical data: | | | | | | | |
Days filled | 10,199 | | | 10,280 | | | (81) | | | (0.8) | % |
Revenue per day filled | $ | 1,783 | | | $ | 1,572 | | | 211 | | | 13.4 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| Three Months Ended | | | | |
| September 30, | | September 30, | | | | Percent |
| 2019 | | 2018 | | Change | | Change |
| | | | | | | |
Nurse and Allied Staffing statistical data: | | | | | | | |
FTEs | 7,083 |
| | 6,953 |
| | 130 |
| | 1.9 | % |
Average Nurse and Allied Staffing revenue per FTE per day | $ | 284 |
| | $ | 275 |
| | 9 |
| | 3.3 | % |
| | | | | | | |
Physician Staffing statistical data: | | | | | | | |
Days filled | 11,675 |
| | 13,375 |
| | (1,700 | ) | | (12.7 | )% |
Revenue per day filled | $ | 1,748 |
| | $ | 1,582 |
| | 166 |
| | 10.5 | % |
| | | | | | | |
| Nine Months Ended | | | | |
| September 30, | | September 30, | | | | Percent |
| 2019 | | 2018 | | Change | | Change |
| | | | | | | |
Nurse and Allied Staffing statistical data: (a) | | | | | | | |
FTEs | 7,039 |
| | 7,187 |
| | (148 | ) | | (2.1 | )% |
Average Nurse and Allied Staffing revenue per FTE per day | $ | 282 |
| | $ | 275 |
| | 7 |
| | 2.5 | % |
| | | | | | | |
Physician Staffing statistical data: (a) | | | | | | | |
Days filled | 32,709 |
| | 41,611 |
| | (8,902 | ) | | (21.4 | )% |
Revenue per day filled | $ | 1,669 |
| | $ | 1,539 |
| | 130 |
| | 8.4 | % |
See definition of Business Measurement under the Operating Metrics section of our Management's Discussion and Analysis.
Segment Comparison - Three Months Ended September 30, 2019March 31, 2020 compared to the Three Months Ended September 30, 2018March 31, 2019
Nurse and Allied Staffing
Revenue from Nurse and Allied Staffing increased $9.1$12.6 million, or 5.1%7.2%, to $185.0$188.2 million for the three months ended September 30, 2019,March 31, 2020, compared to $175.9$175.6 million for the three months ended September 30, 2018,March 31, 2019, primarily due to higher volume and demand in travel staffing, partly related to anthe continued increase in demandthe number of FTEs and average bill rates throughout the quarter. Revenue for the three months ended March 31, 2020 was negatively impacted by COVID-19 due to suspended services resulting from our MSPs,school closures and, modest price increases.to a lesser extent, volume declines in local staffing.
Contribution income from Nurse and Allied Staffing decreased $0.4$0.1 million or 2.5%1.0%, to $16.1$14.2 million for the three months ended September 30, 2019,March 31, 2020, compared to $16.5$14.3 million for the three months ended September 30, 2018, primarily due to a lower bill-pay spread.March 31, 2019. As a percentage of segment revenue, contribution income margin was 8.7%7.5% for the three months ended September 30, 2019,March 31, 2020, compared to 9.4%8.1% for the three months ended September 30, 2018.March 31, 2019.
The average number of Nurse and Allied Staffing FTEs on contract during the three months ended September 30, 2019March 31, 2020 increased 1.9%1.8% from the three months ended September 30, 2018.March 31, 2019, reflecting an increase in travel nurse staffing partially offset by local staffing. The average Nurse and Allied Staffing revenue per FTE per day increased 3.3%4.3%, reflecting higher average bill rates.rates related to increased pricing.
Physician Staffing
Revenue from Physician Staffing decreased $0.8increased $2.0 million, or 3.5%12.5%, to $20.4$18.2 million for the three months ended September 30, 2019,March 31, 2020, compared to $21.2$16.2 million for the three months ended September 30, 2018,March 31, 2019, primarily due to a lower number of days filled, partially offset by higher bill rates primarily due to mix. Revenue and days filledmix as well as one additional day in the third quarter of 2019 increased 13.2% and 8.6%, respectively, from the second quarter of 2019.quarter.
Contribution income from Physician Staffing decreased $0.5increased $0.2 million, or 37.9%55.8% to $0.8$0.6 million for the three months ended September 30, 2019,March 31, 2020, compared to $1.3$0.4 million for the three months ended September 30, 2018.March 31, 2019. As a percentage of segment
revenue, contribution income was 4.0%3.5% for the three months ended September 30, 2019,March 31, 2020, compared to 6.2%2.5% for the three months ended September 30, 2018, primarilyMarch 31, 2019, driven by higher revenue and lower revenue.selling, general and administrative expenses.
Total days filled for Physician Staffing for the three months ended September 30, 2019March 31, 2020 were 11,67510,199 as compared with 13,37510,280 in the prior year. Revenue per day filled was $1,748$1,783 as compared with $1,582$1,572 in the prior year, due to a shift in the mix of business.
Search
Revenue from Search increased $0.2$0.3 million, or 5.7%8.1%, to $3.8$3.7 million for the three months ended September 30, 2019,March 31, 2020, compared to $3.6$3.4 million for the three months ended September 30, 2018,March 31, 2019, due to an increase in executive search and RPO revenue, partially offset by declines in physician placements.search.
Contribution incomeloss from Search was $0.1$0.3 million for both the three months ended September 30, 2019 and 2018.March 31, 2020, compared to contribution loss of $0.4 million for the three months ended March 31, 2019.
Corporate Overhead
Corporate overhead includes unallocated executive leadership and other centralized corporate functional support costs such as finance, IT, legal, human resources, and marketing, as well as public company expenses and corporate-wide projects (initiatives). Corporate overhead increaseddecreased to $11.0$11.3 million for the three months ended September 30, 2019,March 31, 2020, from $10.9$12.3 million for the three months ended September 30, 2018.March 31, 2019, due to lower consulting and other professional service fees, as well as the impact of our cost savings initiatives. As a percentage of consolidated revenue, corporate overhead was 5.2% for the three months ended September 30, 2019 and 5.4% for the three months ended September 30, 2018.
Segment Comparison - Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018
NurseMarch 31, 2020 and Allied Staffing
Revenue from Nurse and Allied Staffing increased $1.9 million, or 0.4%, to $541.4 million6.3% for the ninethree months ended September 30, 2019, compared to $539.5 million for the nine months ended September 30, 2018, primarily due to higher average bill rates partly offset by lower volume. Volume declines in local staffing were partially offset by increases in travel allied and education healthcare staffing. Our bill rates benefited from a higher mix of premium rate business.March 31, 2019.
Contribution income from Nurse and Allied Staffing decreased $3.6 million or 7.1%, to $46.5 million for the nine months ended September 30, 2019, compared to $50.1 million for the nine months ended September 30, 2018, primarily due to a lower bill-pay spread in travel nurse and travel allied. As a percentage of segment revenue, contribution income margin was 8.6% for the nine months ended September 30, 2019, compared to 9.3% for the nine months ended September 30, 2018.
The average number of Nurse and Allied Staffing FTEs on contract during the nine months ended September 30, 2019 decreased 2.1% from the nine months ended September 30, 2018. The average Nurse and Allied Staffing revenue per FTE per day increased 2.5%, reflecting higher average bill rates.
Physician Staffing
Revenue from Physician Staffing decreased $9.5 million, or 14.8%, to $54.6 million for the nine months ended September 30, 2019, compared to $64.1 million for the nine months ended September 30, 2018, primarily due to a lower number of days filled, partially offset by higher bill rates due to mix.
Contribution income from Physician Staffing decreased $2.5 million, or 58.9% to $1.7 million for the nine months ended September 30, 2019, compared to $4.2 million for the nine months ended September 30, 2018. As a percentage of segment revenue, contribution income was 3.2% for the nine months ended September 30, 2019, compared to 6.5% for the nine months ended September 30, 2018, driven by lower revenue, partially offset by lower selling, general and administrative expenses.
Total days filled for Physician Staffing for the nine months ended September 30, 2019 were 32,709 as compared with 41,611 in the prior year. Revenue per day filled was $1,669 as compared with $1,539 in the prior year, due to a shift in the mix of business.
Search
Revenue from Search decreased $0.9 million, or 7.5%, to $11.1 million for the nine months ended September 30, 2019, compared to $12.0 million for the nine months ended September 30, 2018, due to a decline in physician searches, partly offset by an increase in executive search placements.
Contribution loss from Search for the nine months ended September 30, 2019 was $0.5 million, compared to income for the nine months ended September 30, 2018 of $0.8 million.
Corporate Overhead
Corporate overhead increased to $34.7 million for the nine months ended September 30, 2019, from $32.4 million for the nine months ended September 30, 2018, primarily due to higher consulting and other professional service fees, partly offset by the impact of our cost savings initiatives. The higher consulting fees are related to the project to replace our applicant tracking system for our travel nurse business. As a percentage of consolidated revenue, corporate overhead was 5.7% for the nine months ended September 30, 2019 and 5.3% for the nine months ended September 30, 2018.
Transactions with Related Parties
See Note 1614 - Related Party Transactions to our condensed consolidated financial statements.
Liquidity and Capital Resources
At September 30, 2019,March 31, 2020, we had $9.5$12.6 million in cash and cash equivalents and $71.4$67.6 million of principal balance onborrowings drawn under our Term Loan outstanding.senior secured asset-based revolving credit facility. Working capital decreased by $13.3$6.3 million to $96.2$91.6 million as of September 30, 2019,March 31, 2020, compared to $109.5$97.9 million as of December 31, 2018.2019. As of September 30, 2019,March 31, 2020, our days' sales outstanding, net of amounts owed to subcontractors, was 5856 days representing a 42 day improvement from December 31, 2018.2019.
Our operating cash flow constitutes our primary source of liquidity, and historically, has been sufficient to fund our working capital, capital expenditures, internal business expansion, and debt service, including our commitments as described in the Commitments table which follows. Wein our Form 10-K for the year ended December 31, 2019. Although there is uncertainty related to the anticipated impact of COVID-19 on our future results, we expect to meet our future needs for working capital, capital expenditures, internal business expansion, and debt service from a combination of cash on hand, operating cash flows, and funds available through the revolving loan portion of our Amended and Restated Credit Agreement.ABL. See debt discussion which follows.
Net cash provided by operating activities was $10.9$17.2 million in the ninethree months ended September 30, 2019,March 31, 2020, compared to $21.8$12.8 million in the ninethree months ended September 30, 2018,March 31, 2019, primarily due to lowerstronger collections and the timing of payments.disbursements.
Net cash used in investing activities was $2.0$1.0 million in the ninethree months ended September 30, 2019,March 31, 2020, compared to $3.6$1.2 million in the ninethree months ended September 30, 2018.March 31, 2019. Net cash used in both periods was for capital expenditures, and for acquisition-related settlements in the nine months ended September 30, 2018. Capital expenditures in the nine months ended September 30, 2019 were primarily related to the project to replace our applicant tracking system for our travel nurse business.staffing and for acquisition-related settlements in the three months ended March 31, 2019.
Net cash used in financing activities during the ninethree months ended September 30, 2019March 31, 2020 was $15.4$4.6 million, compared to $15.6$9.3 million during the ninethree months ended September 30, 2018.March 31, 2019. During the ninethree months ended September 30,March 31, 2020, we used cash to repay our ABL of $3.3 million, $0.6 million for income taxes on share-based compensation, $0.6 million for noncontrolling shareholder payments, and $0.1 million of contingent consideration. During the three months ended March 31, 2019, we used cash to make an optional debt prepaymentsprincipal prepayment on our term loan of $12.5$7.5 million and paid $2.9$0.6 million for other financing activities. During the nine months ended September 30, 2018, wein debt issuance related to an amendment to our prior senior credit facility. We also used cash to repurchase and retire $5.0 million in shares of Common Stock, repay $8.8 million on our Term Loan, and pay $1.8$0.8 million for other financing activities.income taxes on share-based compensation, $0.3 million for noncontrolling shareholder payments, and $0.1 million of contingent consideration.
Debt
Amended and Restated Senior2019 ABL Credit FacilityAgreement
DuringAt March 31, 2020, availability under the first and second quarters of 2019, we made optional debt prepayments of $7.5ABL was $119.0 million and $5.0 million, respectively, on the term loan portion of our Amended and Restated Credit Facility. In addition, in the first quarter and on September 30, 2019, respectively, we entered into a Second Amendment and Third Amendment to our Amended and Restated Credit Facility. We were in compliance with the covenants related to the Amended and Restated Credit Agreement as of September 30, 2019.
As of September 30, 2019, the Applicable Margin, as defined in the Amended and Restated Credit Agreement, was 3.25% for Eurodollar Loans and LIBOR Index Rate Loans and 2.25% for Base Rate Loans. As of September 30, 2019, we had $71.4$67.6 million principal balance on the Amended Term Loan and $20.6of borrowings drawn, as well as $19.6 million inof letters of credit outstanding. See Note 8 - Debt to our condensed consolidated financial statements.
ABL Loan Agreement October 2019
In October 2019, our Amended and Restated Senior Credit Facility was replaced by a new $120.0 million senior secured asset-based credit facility (ABL). The ABL provides for a five-year revolving credit facility, including a sublimit for swing loans up to $15.0 million and a $35.0 million sublimit for standby letters of credit. Availability under the ABL is subject to a borrowing base, which was $119.3 million at closing,outstanding, leaving $21.4$31.8 million available for borrowing.
BorrowingsAs of March 31, 2020, the interest rate spreads and fees under the ABL generally bear interest at a variable rateLoan Agreement were based on either LIBOR orplus 2.00% for the revolving portion of the borrowing base and LIBOR plus 4.00% on the Supplemental Availability. The Base Rate plus an applicable margin,(as defined by the Loan Agreement) margins would have been 1.00% and 3.00%, respectively, for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on the Company’sour excess availability under the revolving credit facility. In addition, the facility is subject to an unused fee, letter of credit fees, and an administrative fee. The effective rate on borrowings at close was 3.9%.Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum fixed charge coverage ratio. We were in compliance with the fixed charge coverage ratio covenant as of March 31, 2020.
Stockholders’ Equity
See Note 12 - Stockholders' Equity to our condensed consolidated financial statements.
Commitments and Off-Balance Sheet Arrangements
As of September 30, 2019,March 31, 2020, we do not have any off-balance sheet arrangements.
The following table reflects our contractual obligations and other Our commitments as of September 30, 2019:
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Commitments | | Total | | Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| | (Unaudited, amounts in thousands) |
Term Loan (a) | | $ | 71,376 |
| | $ | — |
| | $ | — |
| | $ | 5,386 |
| | $ | 65,990 |
| | $ | — |
| | $ | — |
|
Interest on debt (b) | | 13,463 |
| | 1,437 |
| | 4,772 |
| | 4,684 |
| | 2,570 |
| | — |
| | — |
|
Contingent consideration (c) | | 7,565 |
| | — |
| | 2,495 |
| | 2,535 |
| | 2,535 |
| | — |
| | — |
|
Operating lease obligations (d) | | 29,560 |
| | 1,254 |
| | 6,775 |
| | 5,924 |
| | 5,042 |
| | 4,696 |
| | 5,869 |
|
| | $ | 121,964 |
| | $ | 2,691 |
| | $ | 14,042 |
| | $ | 18,529 |
| | $ | 76,137 |
| | $ | 4,696 |
| | $ | 5,869 |
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_______________
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(a) | Under our Amended and Restated Credit Agreement, we are required to comply with certain financial covenants. Our inability to comply with the required covenants or other provisions could result in default under our amended credit facilities. In the event of any such default and our inability to obtain a waiver of the default, all amounts outstanding under the Amended Credit Facilities could be declared immediately due and payable. As of September 30, 2019, we are in compliance with the covenants contained in the Amended and Restated Credit Agreement. |
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(b) | Interest on debt represents payments due through maturity for our Term Loan, calculated using the October 1, 2019 applicable LIBOR and margin rate totaling 5.3%. |
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(c) | The contingent consideration represents the estimated payments due to the seller related to the Mediscan acquisition, including accretion. See Note 4 - Acquisitions to our condensed consolidated financial statements. We have included the payments in the table based on our best estimates of the amounts and dates when the contingencies may be resolved. |
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(d) | Represents future minimum lease payments associated with operating lease agreements with original terms of more than one year. |
In October 2019, our senior credit facility was replaced by a new $120.0 million senior secured asset-based credit facility (ABL).over the next five years did not change materially from December 31, 2019. See Note 8 - Debt to our condensed consolidated financial statements.
See Note 1412 - Contingencies to our condensed consolidated financial statements.
In addition to the above disclosed contractual obligations, we have accrued uncertain tax positions, pursuant to the Income Taxes Topic of the FASB ASC, of $5.7 million at September 30, 2019. Based on the uncertainties associated with the settlement
of these items, we are unable to make reasonably reliable estimates of the period of potential settlements, if any, with the taxing authorities.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC, other than the adoption of ASU No. 2014-09, Leases2016-13, Financial Instruments -
Credit Losses (Topic 842) 326), Measurement of Credit Losses on Financial Instruments as discussed in Note 2 - Summary of Significant Accounting Policies and Note 103 - LeasesCustomer Contracts to our condensed consolidated financial statements.
Recent Accounting Pronouncements
See Note 1715 - Recent Accounting Pronouncements to our condensed consolidated financial statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our primary marketWe have been exposed to interest rate risk exposureassociated with regardour debt instruments which have had interest based on variable rates. As of March 31, 2020, we are exposed to financial instruments relates to changesthe risk of fluctuation in interest rates relating to our ABL Credit Agreement (ABL) entered into on our term loan which hadOctober 25, 2019. Our ABL charges us interest at a variable interest rate. rate based on either LIBOR or Base Rate (as defined) plus an applicable margin.
In March 2018, we entered into an interest rate swap agreement, which initially fixed the interest rate on 50% of the amortizing balance on our term debt. The interest rate swap qualified as a cash flow hedge in accordance with the Derivatives and Hedging Topic of the FASB ASC and the resulting changes in fair value of the interest rate swap were recorded to other comprehensive (loss) income and reclassified to interest expense over the life of the term debt. In September 2019, in anticipation of entering into a new senior secured asset-based credit facility,the ABL, we terminated our interest rate swap agreement. See Note 9 - Derivative to our condensed consolidated financial statements.
Excluding the impact of our interest rate swap agreement, aA 1% change in interest rates on our term loanvariable rate debt would have resulted in interest expense fluctuating approximately $0.8$0.2 million for both the ninethree months ended September 30, 2019. After consideringMarch 31, 2020 and 2019, excluding the impact of the interest rate swap agreement. Considering the effect of our interest rate swap agreement in a 1% change in interest rates on our variable rate debt would resulthave resulted in approximately $0.3$0.1 million change in interest expense for the ninethree months ended September 30,March 31, 2019. In October 2019, we refinanced our term loan by entering into a new senior secured asset-based credit facility (ABL). We expect to continue to be exposed to the risk of fluctuation in interest rates under the ABL as borrowings will bear interest at a variable rate. See Note 87 - Debt to our condensed consolidated financial statements.
Refer to our Form 10-K Item 1A. Risk Factors under "The interest rates under our ABL Credit Agreement may be impacted by the phase-out of the London Interbank Offered Rate (LIBOR)" for discussion of the interest rate risk related to the potential phase-out of LIBOR in 2021.
Other Risks
There have been no material changes to our other exposures as disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2018.2019.
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, communicated to management, including the Chief Executive Officer and the Chief Financial Officer, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports required under the Exchange Act of 1934, as amended, is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding any required disclosure.
There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On January 1, 2019, we adopted ASC 842, Leases. We implemented internal controls and we are utilizing a new lease accounting information system to enable the preparation of financial information as part of the adoption. There were no significant changeshave not experienced any material impact to our internal controlcontrols over financial reporting despite the fact that most of our employees are working remotely due to the adoption ofCOVID-19 pandemic. We are continually monitoring and assessing the new standard.
COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in various litigation, claims, investigations, and other proceedings that arise in the ordinary course of its business. These matters primarily relate to employee-related matters that include individual and collective claims, professional liability, tax, and payroll practices. The Company establishes reserves when available information indicates that a loss is probable and an amount or range of loss can be reasonably estimated. These assessments are performed at least quarterly and are based on the information available to management at the time and involve a significant management judgment to determine the probability and estimated amount of potential losses, if any. Based on the available information considered in its reviews, the Company adjusts its loss contingency accruals and its disclosures as may be required. Actual outcomes or losses may differ materially from those estimated by the Company's current assessments, including available insurance recoveries, which would impact its profitability. Adverse developments in existing litigation claims or legal proceedings involving the Company or new claims could require it to establish or increase litigation reserves or enter into unfavorable settlements or satisfy judgments for monetary damages for amounts in excess of current reserves, which could adversely affect its financial results. In the second quarter of 2019, the Company recorded $1.6 million in legal settlement charges related to the resolution of a medical malpractice lawsuit, as well as a 2019 California wage and hour class action settlement agreement which remains subject to court approval. The Company believes the outcome of any outstanding loss contingencies as of September 30, 2019March 31, 2020 will not have a material adverse effect on its business, financial condition, results of operations or cash flows. In October 2019, the Company received a grand jury subpoena directed to Advantage On Call whose assets were purchased by Cross Country Healthcare, Inc.the Company in 2017. The subpoena appears to relate to an investigation of home healthcare services and healthcare staffing services. The Company is cooperating with the investigation.
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ITEM 1A. | ITEM 1A. RISK FACTORS |
The below Risk Factor
In addition to the other information set forth in this report, careful consideration should be considered along with our Risk Factors as previously disclosed given to the factors discussed in Item 1A, “Risk Factors”in our Form 10-K for the year ended December 31, 2018.2019, all of which could materially affect our business, financial condition or future results. The risks described herein and therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. The below Risk Factor has been updated to reflect the heightened impact of the COVID-19 pandemic since we filed our Annual Report on Form 10-K for the year ended December 31, 2019. As described herein, the COVID-19 pandemic may adversely affect our business and financial results and may also have the effect of exacerbating many of the other risks described in this section and in the “Risk Factors”section of our Annual Report on Form 10-K for the year ended December 31, 2019.
Our operations and financial results have been and may continue to be negatively affected by the current ongoing COVID-19 pandemic and could be materially harmed by COVID-19 or the emergence and effects related to any other pandemics, epidemics, or other public health crisis.
Our operations and financial results have been and may continue to be adversely affected by the ongoing COVID-19 pandemic and changes in national or global economic conditions related thereto.
During the COVID-19 pandemic, certain of our healthcare professionals have been exposed, diagnosed and or quarantined as a result of the virus. If, as a result of such risks, our healthcare professionals do not want to, or are not able to provide services, it could negatively impact our supply and ability to provide staffing services to our customers. In addition, patients have canceled or deferred elective procedures or otherwise avoided medical treatment resulting in reduced census at our hospital customers. Additionally, healthcare facilities, such as ambulatory surgi-centers and other outpatient facilities, have been shut down temporarily. This has resulted in the cancellation of certain of our healthcare professionals (e.g. operating room nurses, physical therapists, surgeons, advanced practitioners, and many others) working at those facilities or under contract to provide services at those facilities in the future. In addition, the normal operations of our healthcare facility customers may be disrupted and impacted in ways that are difficult to predict and their financials could be adversely affected. This would not just negatively impact our staffing and workforce solutions business, but would also have an adverse effect on our search businesses (contingent, permanent, and retained) as healthcare customers may delay making decisions for executives, physicians, nurses, and other full-time staff. In addition to the negative impact on demand from our hospital and healthcare facility customers, school closures in the wake of the COVID-19 pandemic have had an adverse impact on our school staffing.
The interest rates underfinancial impact to our Amendedhealthcare customers from COVID-19 or any other pandemic, epidemic, outbreak of an infectious disease or other public health crisis may also impact their ability to pay for our services timely or altogether, including invoices for services provided prior to such an event that were in process. Such a failure to pay for our services timely or altogether would have an impact on our collections, resulting in a negative financial impact on our Company.
Finally, while we have disaster plans in place for all of our locations and Restated Credit Agreement may be impacted bywe are able to operate remotely, the phase-outpotential continuation of the London Interbank Offered Rate (“LIBOR”).
LIBORCOVID-19 pandemic, or the emergence of another pandemic, epidemic, or outbreak is the basic rate of interest useddifficult to predict and could adversely affect our operations. In particular, our operations are headquartered in lending between banks on the London interbank marketSouth Florida and is widely usedif our employees are working remotely as a reference for setting the interest rates on loans globally. We generally use LIBOR asresult of a reference rate to calculate interest under our Amendedpublic health crisis during hurricane season and Restated Credit Agreement. In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. Whetherelectricity, wi-fi and other resources are temporarily restricted or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. If LIBOR ceases to exist, we will need to agree upon a replacement reference rate with the banks underavailable, it could negatively impact our Amendedoperations and Restated Credit Agreement and related hedging agreement, and amend the agreements accordingly. The new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out.financial results.
ITEM 6. EXHIBITS
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ITEM 6.No. | EXHIBITS | Description |
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No. | | Description |
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10.1 # | | |
*31.1 | | |
10.2 # | | |
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*31.1 | | |
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*31.2 | | |
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**32.1 | | |
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**32.2 | | |
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**101.INS | | XBRL Instance Document |
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**101.SCH | | XBRL Taxonomy Extension Schema Document |
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**101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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**101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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**101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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**101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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#104 | | Represents a management contract or compensatory plan or arrangementCover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* | | Filed herewith |
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* | | Filed herewith |
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** | | Furnished herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| CROSS COUNTRY HEALTHCARE, INC. | |
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Date: May 7, 2020 | CROSS COUNTRY HEALTHCARE, INC. |
By: | | |
Date: November 5, 2019 | By: | /s/ William J. Burns |
| | William J. Burns Executive Vice President & Chief Financial Officer (Principal Accounting and Financial Officer)
|