# AMN Healthcare Services Inc: Form 10-Q for the period ended Sep 30, 2009

- Company: [AMN Healthcare Services Inc](/companies/amn.md) (CIK 1142750)
- Form: 10-Q
- Filed: 2009-10-30
- Accepted by EDGAR: Oct 30, 2009, 19:59 ET
- Period: 2009-09-30
- Accession: 0001193125-09-218876
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1142750/000119312509218876/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1142750/000119312509218876/

## Management's discussion and analysis

As filed, 45,679 characters.

The following discussion should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements and the notes thereto and other financial information included elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, 2008. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” See “Special Note Regarding Forward-Looking Statements.” We undertake no obligation to update the forward-looking statements in this filing. References in this filing to “AMN Healthcare,” the “Company,” “we,” “us” and “our” refer to AMN Healthcare Services, Inc. and its wholly owned subsidiaries.

### Overview

We are the nation’s leading provider of comprehensive healthcare staffing and management services. As a leading provider of travel nurse and allied staffing services, locum tenens (temporary physician staffing) and physician permanent placement services, we recruit and place healthcare professionals on assignments of variable lengths and in permanent positions with clients throughout the United States, who range from acute-care hospitals and physician practice groups to other healthcare settings, including rehabilitation centers, dialysis clinics, pharmacies, home health service providers and ambulatory surgery centers. We also offer a managed services program in which we provide flexible, customized solutions for our clients to manage their multiple clinical vendors, and recruitment process outsourcing services, where we conduct our clients’ recruitment for permanent clinical positions.

We conduct business through three reportable segments: nurse and allied healthcare staffing, locum tenens staffing and physician permanent placement services.

For the three months ended September 30, 2009, we recorded revenue of $166.4 million, as compared to revenue of $315.0 million for the same period in 2008. We recorded a net loss of $(2.0) million for the three months ended September 30, 2009, as compared to net income of $9.5 million for the same period in 2008. For the nine months ended September 30, 2009, we recorded revenue of $615.1 million, as compared to revenue of $921.3 million for the same period in 2008. We recorded a net loss of $(119.5) million, which includes goodwill impairment and restructuring charges of $129.9 million, net of tax, for the nine months ended September 30, 2009, as compared to net income of $26.7 million for the same period in 2008.

Nurse and allied healthcare staffing segment revenues comprised 58% and 69% of total consolidated revenues for the nine months ended September 30, 2009 and 2008, respectively. Through our nurse and allied healthcare staffing segment, we provide hospital and other healthcare facilities with staffing solutions to address anticipated or longer-term staffing requirements. With a core focus on the 13 week travel segment serving acute care facilities, we also offer a broader range of short and long-term assignment lengths, and service a wide range of client facility settings including home healthcare. We also provide managed staffing services, and in 2008, launched our recruitment process outsourcing program, which leverages our expertise and support systems to offer clients a means to replace or complement their existing internal recruitment function for permanent staffing needs.

Locum tenens staffing segment revenues comprised 37% and 27% of total consolidated revenues for the nine months ended September 30, 2009 and 2008, respectively. Through our locum tenens staffing segment, we place physicians of all specialties, as well as dentists, certified registered nurse anesthetists and nurse practitioners, with clients on a temporary basis as independent contractors. These locum tenens physicians and other professionals are used by our healthcare facility and physician practice group clients to fill temporary vacancies created by vacation and leave schedules and to bridge the gap while these clients seek permanent candidates or explore expansion. Our clients represent a diverse group of healthcare organizations throughout the United States, including hospitals, medical groups, occupational medical clinics, individual practitioners, networks, psychiatric facilities, government institutions, and managed care entities. The professionals we place are recruited nationwide and are typically placed on multi-week contracts with assignment lengths ranging from a few days up to one year.

Physician permanent placement services segment revenues comprised 5% and 4% of total consolidated revenues for the nine months ended September 30, 2009 and 2008, respectively. Through our physician permanent placement services segment, we assist hospitals, healthcare facilities and physician practice groups throughout the United States in identifying and recruiting physicians for permanent placement. The physician permanent placement market is expected to have solid long-term growth potential due to the limited supply of candidates and the strong client demand for physicians who have the ability to generate revenue for our clients. Using a distinctive consultative approach, we are paid for our services through a blend of retained search fees and variable fees tied to our performance. Our broad specialty offerings include over 70 specialist and sub-specialist opportunities such as internal medicine, family practice and orthopedic surgery.

### Management Initiatives

Like many companies in various industries, throughout 2009 we have taken a number of proactive steps to increase operational synergies and to reduce our operating cost structure to reflect the decline in volume and revenue experienced this year. These actions include consolidating offices and reorganizing back office and corporate functions to gain efficiency in operations by centralizing our primary operations in San Diego, California and Irving, Texas. In addition during 2008 and the first half of 2009, we conducted a strategic review of our nursing brand strategy and decided to reduce the number of travel brand identities on which we focus our travel nurse marketing. As a result of these key initiatives, we have recognized total pre-tax restructuring charges in 2009 of approximately $11.3 million.

We have also moved to aggressively reduce our revolving credit facility and notes payable by $69.0 million since December 31, 2008 and with solid cash flow from operations, due in part to reduced number of days sales outstanding (“DSO”), we have improved our working capital and leverage ratios.

### Recent Trends

Within our nurse and allied healthcare staffing segment, our travel nursing business continues to experience significantly lower demand and revenue that began in late 2008 with the deterioration in the general economy and rise in general unemployment. Demand for our services has stabilized in the latter part of the third quarter, but remains at levels below what we have experienced during the past ten years. The reduction in nursing demand has been felt across the industry based on the most recent reports from our public competitors. For our clients, the economic conditions have severely constricted budgets and access to operating capital, lowered permanent staff attrition rates, and increased uncertainty regarding future patient admission levels and the collectability of receivables. These factors have, in turn, reduced demand for our services as hospitals have placed an increased reliance on permanent labor to meet staffing needs. More recent demand has favored nurses who can offer a more specialized skill-set and fulfill a shorter assignment length and these requests are filled quickly.

Within the allied staffing business, continued strength in demand for several supply-constrained therapy disciplines was tempered by a continued weakness in demand for imaging technicians due in large part to lower government reimbursement levels and a strong supply of available technicians.

Locum tenens demand continues to be impacted by changes in radiology reimbursement and is beginning to be impacted by lower demand for certified registered nurse anesthetists (“CRNAs”) as these nurses and clients begin to respond to the general economic conditions in a similar fashion as we see in our nurse and allied healthcare staffing segment. Demand for anesthesiologists and CRNAs is also being impacted by lower demand for anesthesia services due to the overall reduction in elective surgeries. Partially offsetting these declines, dentistry is showing strong growth.

During late 2008 and early 2009, the physician permanent placement business experienced lower demand for services as clients responded to weak economic conditions and budget pressure by pursuing only critical searches and reducing their overall recruiting efforts. In addition, many clients have been attempting to conduct their searches internally or through alternative methods. However, we have more recently seen the demand for permanent physician searches increase and expect this to translate into new placements over the coming months. We continue to expect that as clarity around healthcare reform occurs, we will see demand in permanent placement increase.

### Critical Accounting Principles and Estimates

### Goodwill and Indefinite-lived Intangible Assets

In accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance for goodwill and other intangible assets, we perform annual impairment analyses to assess the recoverability of the goodwill and indefinite-lived intangible assets. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Valuation techniques consistent with the market approach and income approach are used to measure the fair value of each reporting unit. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, and determining appropriate discount rates, growth rates, company control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value.

Due to the economic downturn and our lower market capitalization, we performed interim impairment testing at our reporting unit level during the first quarter of 2009. Our reporting units are our operating segments. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with the reporting unit’s carrying amount, including goodwill. We generally determine the fair value of our reporting units using a combination of the income approach (using discounted future cash flows) and the market valuation approach. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered long-term earnings growth rates for publicly traded peer companies. Future cash flows were discounted to present value by incorporating the present value techniques. Publicly available information regarding the market capitalization of the Company was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the discounted cash flow methodology. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment. During the first step, a control premium and average stock price close to the testing dates were utilized. This control premium is based on detailed analysis that considers appropriate industry, market, economic and other pertinent factors, including indications of such premium from data on recent acquisition transactions. The second step of the goodwill impairment test involved comparing the implied fair value of our reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized in a business combination. As part of the second step of the performed impairment test, we calculated the fair value of certain assets, including tradenames, staffing databases and customer relationships. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the impaired reporting units. The implied fair value of goodwill was measured as the excess of the fair value of the impaired reporting units over the amounts assigned to its assets and liabilities. The impairment loss was measured by the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.

During the first quarter of 2009, we completed the first step and a preliminary second step of our goodwill impairment testing and determined that the fair values of certain reporting units were lower than their respective carrying values. The decrease in value was due to the depressed equity market value and lower projected near term growth rates in the healthcare staffing industry that rapidly deteriorated in the first quarter, lowering the anticipated growth trend used for goodwill impairment testing. We recognized a preliminary pre-tax goodwill impairment charge of approximately $173.0 million during the first quarter of 2009.

During the second quarter of 2009, we finalized the valuation of our identified tangible and intangible assets and liabilities for purposes of determining the implied fair value of its goodwill and any resulting goodwill impairment with no additional impairment charges recorded.

We also recorded a pre-tax impairment charge of $2.7 million related to an indefinite-lived intangible asset in our nurse and allied healthcare staffing segment as of March 31, 2009. This charge was also included in impairment charges on the condensed consolidated statement of operations for the nine months ended September 30, 2009.

Our other critical accounting principles and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission.

### Results of Operations

The following table sets forth, for the periods indicated, certain condensed consolidated statements of operations data as a percentage of our revenue. Our results of operations include three reportable segments: (1) nurse and allied healthcare staffing; (2) locum tenens staffing; and (3) physician permanent placement services. Our historical results are not necessarily indicative of our results of operations to be expected in the future.

| Consolidated Statements of Operations: | Three Months Ended September 30, 2009 | 2008 | Nine Months Ended September 30, 2009 | 2008 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of revenue | 72.6 | 74.3 | 73.5 | 73.8 |
| Gross profit | 27.4 | 25.7 | 26.5 | 26.2 |
| Selling, general and administrative | 22.2 | 19.1 | 20.3 | 19.0 |
| Restructuring charges | 3.7 | — | 1.8 | — |
| Impairment charges | — | — | 28.6 | — |
| Depreciation and amortization | 2.1 | 1.2 | 1.7 | 1.2 |
| Income (loss) from operations | (0.6) | 5.4 | (25.9) | 6.0 |
| Interest expense, net | 1.2 | 0.8 | 1.0 | 0.9 |
| Income (loss) before income taxes | (1.8) | 4.6 | (26.9) | 5.1 |
| Income tax expense (benefit) | (0.6) | 1.6 | (7.5) | 2.2 |
| Net income (loss) | (1.2)% | 3.0% | (19.4)% | 2.9% |

### Comparison of Results for the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008

***Revenue.*** Revenue decreased 47%, to $166.4 million for the three months ended September 30, 2009 from $315.0 million for the same period in 2008, primarily due to a decrease in the average number of temporary healthcare professionals on assignment in the nurse and allied healthcare staffing segment.

Nurse and allied healthcare staffing segment revenue decreased 62%, to $82.1 million for the three months ended September 30, 2009 from $217.1 million for the same period in 2008. Of the $135.0 million decrease,

$135.4 million was attributable to a decrease in the average number of temporary healthcare professionals on assignment, which was partially offset by an increase in the average bill rates charged to hospital and healthcare facilities.

Locum tenens staffing segment revenue decreased 11%, to $75.5 million for the three months ended September 30, 2009 from $85.3 million for the same period in 2008. Of the $9.8 million decrease, $8.1 million was attributable to a decrease in the number of days filled by healthcare professionals during the three months ended September 30, 2009 and $1.7 million was attributable to a mix shift to our lower bill rate specialties.

Physician permanent placement services segment revenue decreased 31%, to $8.7 million for the three months ended September 30, 2009 from $12.6 million for the same period in 2008. The decrease was primarily attributable to a decrease in the number of active searches and placements during the three months ended September 30, 2009.

***Cost of Revenue.*** Cost of revenue decreased 48%, to $120.7 million for the three months ended September 30, 2009 from $234.0 million for the same period in 2008. The decrease was primarily due to a decrease in the average number of temporary healthcare professionals on assignment.

Nurse and allied healthcare staffing segment cost of revenue decreased 63%, to $62.1 million for the three months ended September 30, 2009 from $166.0 million for the same period in 2008. Of the $103.9 million decrease, $103.5 million decrease was attributable to the decrease in the average number of temporary healthcare professionals on assignment and $0.4 million decrease was attributable primarily to a decrease in direct costs per healthcare professional.

Locum tenens staffing segment cost of revenue decreased 12%, to $54.9 million for the three months ended September 30, 2009 from $62.7 million for the same period in 2008. The decrease was primarily attributable to a decrease in the number of days filled by healthcare professionals and a mix shift to our lower pay rate specialists.

Physician permanent placement services segment cost of revenue decreased 30%, to $3.7 million for the three months ended September 30, 2009 from $5.3 million for the same period in 2008 primarily due to reduced direct marketing cost and lower recruiter headcount.

***Gross Profit.*** Gross profit decreased 44%, to $45.6 million for the three months ended September 30, 2009 from $81.1 million for the same period in 2008, representing gross margins of 27.4% and 25.7%, respectively. The increase in gross margin was due to our nurse and allied healthcare staffing segment decreasing in proportion to our higher margin locum tenens staffing and physician permanent placement services segments. Gross margin by reportable segment for the three months ended September 30, 2009 and 2008 was 24.4% and 23.6% for nurse and allied healthcare staffing, 27.2% and 26.6% for locum tenens staffing and 57.7% and 57.5% for physician permanent placement services, respectively.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses decreased 39%, to $36.9 million for the three months ended September 30, 2009 from $60.3 million for the same period in 2008. The decrease was primarily due to lower employee and office related expenses as a result of cost-reduction actions taken throughout 2009 and a benefit of $1.5 million due to the settlement with the selling shareholders of The MHA Group, Inc. (“MHA”). Included in selling, general and administrative expenses is unallocated corporate overhead of $3.7 million and $8.2 million for the three months ended September 30, 2009 and 2008, respectively. Excluding unallocated corporate overhead, selling, general and administrative expenses by reportable segment were $17.1 million and $32.8 million for nurse and allied healthcare staffing, $13.1 million and $15.3 million for locum tenens staffing and $3.0 million and $4.0 million for physician permanent placement services, for the three months ended September 30, 2009 and 2008, respectively.

***Restructuring Charges.*** During the first three quarters of 2009, the Company implemented strategic branding and consolidation initiatives resulting in termination benefits and lease liabilities. Restructuring charges of $6.2 million were recorded for the three months ended September 30, 2009, of which $5.1 million was for the nurse and allied healthcare staffing segment and $1.1 million was for the physician permanent placement services segment.

***Depreciation and Amortization Expenses.*** Amortization expense was $1.2 million for each of the three month periods ended September 30, 2009 and 2008. Depreciation expense decreased to $2.3 million for the three months ended September 30, 2009 from $2.6 million for the same period in 2008, with the decrease primarily attributable to certain fixed assets being fully depreciated during the three months ended September 30, 2009.

***Interest Expense, Net.*** Interest expense, net, was $2.1 million for the three months ended September 30, 2009 as compared to $2.6 million for the same period in 2008. The decrease was primarily attributable to a $80.7 million reduction in debt outstanding from September 30, 2008 to September 30, 2009.

***Income Tax Expense.*** We recorded an income tax benefit of $1.1 million for the three months ended September 30, 2009 as compared to income tax expense of $5.0 million for the same period in 2008. The effective income tax rates for the three months ended September 30, 2009 and 2008, were 35.3% and 34.4%, respectively. The change in the effective income tax rate was primarily attributable to the goodwill impairment charges recorded during the nine months ended September 30, 2009, a portion of which was permanently nondeductible for tax purposes, and an increase in the Company’s unrecognized tax benefits.

### Comparison of Results for the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

***Revenue.*** Revenue decreased 33%, to $615.1 million for the nine months ended September 30, 2009 from $921.3 million for the same period in 2008, primarily due to a decrease in the average number of temporary healthcare professionals on assignment in the nurse and allied healthcare staffing segment.

Nurse and allied healthcare staffing segment revenue decreased 44%, to $357.1 million for the nine months ended September 30, 2009 from $636.4 million for the same period in 2008. Of the $279.3 million decrease, $281.9 million was attributable to a decrease in the average number of temporary healthcare professionals on assignment, and $1.3 million was attributable to one less billing day during the period. These decreases were partially offset by an increase in the average bill rates charged to hospital and healthcare facility clients.

Locum tenens staffing segment revenue decreased 7%, to $229.4 million for the nine months ended September 30, 2009 from $245.6 million for the same period in 2008. Of the $16.2 million decrease, $13.1 million was attributable to a decrease in the number of days filled by healthcare professionals during the nine months ended September 30, 2009, and $3.1 million was attributable to a mix shift to our lower bill rate specialties.

Physician permanent placement services segment revenue decreased 27%, to $28.6 million for the nine months ended September 30, 2009 from $39.3 million for the same period in 2008. The decrease was primarily attributable to a decrease in the number of active searches and placements during the nine months ended September 30, 2009.

***Cost of Revenue.*** Cost of revenue decreased 34%, to $451.8 million for the nine months ended September 30, 2009 from $680.2 million for the same period in 2008. The decrease was primarily due to a decrease in the average number of temporary healthcare professionals on assignment.

Nurse and allied healthcare staffing segment cost of revenue decreased 44%, to $271.6 million for the nine months ended September 30, 2009 from $483.5 million for the same period in 2008. Of the $211.9 million decrease, $214.2 million was attributable to a decrease in the average number of temporary healthcare professionals on assignment and $1.0 million was attributable to one less pay day during the period. These decreases were partially offset by a $3.0 million net increase in direct costs per healthcare professional, primarily related to higher health insurance claims, and a $0.3 million increase due to a shift in the mix of temporary healthcare professionals working on flat rate contracts to hours and days worked contracts.

Locum tenens staffing segment cost of revenue decreased 7%, to $168.6 million for the nine months ended September 30, 2009 from $180.8 million for the same period in 2008. The decrease was primarily attributable to a decrease in the number of days filled by healthcare professionals and a mix shift to our lower pay rate specialties.

Physician permanent placement services segment cost of revenue decreased 27%, to $11.6 million for the nine months ended September 30, 2009 from $15.9 million for the same period in 2008 primarily due to reduced direct marketing cost and lower recruiter headcount.

***Gross Profit.*** Gross profit decreased 32%, to $163.3 million for the nine months ended September 30, 2009 from $241.1 million for the same period in 2008, representing gross margins of 26.5% and 26.2%, respectively. The increase in gross margin was due to our nurse and allied healthcare staffing segment decreasing in proportion to our higher margin locum tenens staffing and physician permanent placement services segments. Gross margin by reportable segment for the nine months ended September 30, 2009 and 2008 was 23.9% and 24.0% for nurse and allied healthcare staffing, 26.5% and 26.4% for locum tenens staffing and 59.5% and 59.6% for physician permanent placement services, respectively.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses decreased 29%, to $124.9 million for the nine months ended September 30, 2009 from $175.5 million for the same period in 2008. The decrease was primarily due to lower employee and office related expenses as a result of cost-reduction actions taken throughout 2009, a benefit of $1.5 million due to the settlement with the selling shareholders of MHA as well as a $3.5 million actuarial based reduction in the professional liability reserve recorded in the second quarter. Included in selling, general and administrative expenses is unallocated corporate overhead of $15.5 million and $24.4 million for the nine months ended September 30, 2009 and 2008, respectively. Excluding unallocated corporate overhead, selling, general and administrative expenses by reportable segment were $60.8 million and $92.9 million for nurse and allied healthcare staffing, $38.9 million and $46.0 million for locum tenens staffing and $9.7 million and $12.2 million for physician permanent placement services for the nine months ended September 30, 2009 and 2008, respectively.

***Restructuring Charges.*** During 2009, the Company began implementing strategic branding and consolidation initiatives resulting in termination benefits and lease liabilities. Restructuring charges of $11.3 million were recorded for the nine months ended September 30, 2009, of which $9.0 million was for nurse and allied healthcare staffing, $0.4 million for locum tenens staffing and $1.9 million for physician permanent placement services.

***Impairment Charges.*** Due to the continued economic downturn and our lower market capitalization, we performed interim impairment testing during the first quarter of 2009. We determined that the fair values of certain reporting units were lower than their respective carrying values. The decrease in value was due to the depressed equity market values and lower projected near term growth rates in the healthcare staffing industry that rapidly deteriorated in the first quarter, lowering the anticipated growth trend used for goodwill impairment testing. Estimated impairment charges related to goodwill and indefinite-lived intangibles were $175.7 million for the three months ended March 31, 2009, as compared to $0 for the same period in 2008. Estimated impairment charges by reportable segment recorded during the first quarter of 2009 were $143.5 million for nurse and allied healthcare staffing and $32.2 million for locum tenens staffing, respectively. During the second quarter of 2009, we finalized the fair value of our identified tangible and intangible assets and liabilities for purposes of determining the implied fair value of our goodwill and any resulting goodwill impairment with no additional impairment charges recorded.

***Depreciation and Amortization Expenses.*** Amortization expense increased slightly to $3.6 million for the nine months ended September 30, 2009 from $3.5 million for the same period in 2008. Depreciation expense decreased to $6.8 million for the nine months ended September 30, 2009 from $7.4 million for the same period in 2008, with the decrease primary attributable to certain fixed assets have been fully depreciated during the nine months ended September 30, 2009.

***Interest Expense, Net.*** Interest expense, net, was $6.6 million for the nine months ended September 30, 2009 as compared to $8.0 million for the same period in 2008. The decrease was primarily attributable to a $80.7 million reduction in debt outstanding from September 30, 2008 to September 30, 2009.

***Income Tax Expense.*** We recorded an income tax benefit of $46.1 million for the nine months ended September 30, 2009 as compared to income tax expense of $20.0 million for the same period in 2008, reflecting effective income tax rates of 27.8% and 42.7% for these periods, respectively. The change in the effective income tax rate was primarily attributable to the goodwill impairment charges recorded during the nine months ended September 30, 2009, a portion of which was permanently nondeductible for tax purposes, and an increase in our unrecognized tax benefits.

### Liquidity and Capital Resources

Historically, our primary liquidity requirements have been for acquisitions, working capital requirements and debt service under our credit facility. We have funded these requirements through internally generated cash flow and funds borrowed under our credit facility. At September 30, 2009, $77.3 million was outstanding under the Term Loan portion of our credit facility with $54.2 million of remaining available credit under the secured revolver portion of this facility.

We believe that cash generated from operations and available borrowings under our revolving credit facility will be sufficient to fund our operations for the next 12 months. We intend to finance future acquisitions either with cash provided from operations, borrowing under our revolving credit facility, bank loans, debt or equity offerings, or some combination of the foregoing, but the significant disruptions in the global financial markets may prevent us from obtaining debt or equity financing on acceptable terms, if at all. The following discussion provides further details of our liquidity and capital resources.

#### Operating Activities:

Net cash provided by operations during the nine months ended September 30, 2009 was $93.2 million, compared to $49.9 million for the nine months ended September 30, 2008. The increase in net cash provided by operations was primarily driven by a decrease in accounts receivable as a result of lower sales and strong collection efforts, which was partially offset by a decrease in accrued compensation and benefits during the nine months ended September 30, 2009. DSO decreased 4 days from 57 days at December 31, 2008 to 53 days at September 30, 2009. The decrease was a result of reduced accounts receivable at September 30, 2009 due to strong collection efforts and in part to lower sales during the quarter. DSO was 56 days at September 30, 2008.

#### Investing Activities:

We used $6.4 million in cash during the nine months ended September 30, 2009 for investing activities, of which, $3.2 million was for capital expenditures, $2.2 million was a portion of the cash holdback paid to the selling shareholders in our acquisition of the assets of Platinum Select Staffing, and $1.0 million was a portion of the cash holdback paid to the selling shareholders in our acquisition of MHA. During the nine months ended September 30, 2008, $46.4 million was used for investing activities, of which $30.8 million was used for the acquisition of Platinum Select and $8.5 million was a portion of the cash holdback paid to the selling shareholders in our acquisition of MHA, with the balance used for capital expenditures. We continue to have a relatively low capital investment requirement and we expect our future capital expenditure requirements to be similar to those during the nine months ended September 30, 2009.

#### Financing Activities:

Net cash used in financing activities during the nine months ended September 30, 2009 was $75.5 million, primarily due to paying down our outstanding revolver and notes payable during the period. During the nine months ended September 30, 2008, cash used in financing activities was $14.0 million, mainly used to repurchase our common stock. At September 30, 2009 and December 31, 2008, we had zero and $31.5 million, respectively, outstanding under the revolving credit facility.

The borrowing capacity under our revolving credit facility is reduced by outstanding standby letters of credit. As of September 30, 2009, we maintained outstanding standby letters of credit totaling $20.8 million as collateral in relation to various requirements including our professional liability insurance, workers compensation insurance agreements and our corporate office lease agreement. At September 30, 2009, there was $54.2 million of remaining available credit under the secured revolver portion of our credit facility.

We are required to maintain a maximum leverage ratio, based on EBITDA, which excludes non-cash charges such as impairment charges, and funded indebtedness as defined in the Credit Agreement, as of the end of each fiscal quarter. We are also required to maintain a minimum fixed charge coverage ratio, based on EBITDA and debt and cash interest payments as defined in the Credit Agreement, as of the end of each fiscal quarter of not less than 1.25x for the fiscal quarter ending September 30, 2009 and thereafter. We are also subject to limitations on the amount of our annual capital expenditures and on the amount of consolidated total assets and consolidated EBITDA that may be owned or attributable to our foreign subsidiaries. On May 7, 2009, we amended our Credit Agreement. The amendment extends the maturity of the revolving credit facility to be coterminous with the scheduled maturity of the secured term loan in November 2011. Borrowings under this revolving credit facility bear interest at floating rates as defined in the Credit Agreement and based upon either a LIBOR or a prime interest rate option selected by us, plus a combined spread of 3.50% to 4.50% and 2.50% to 3.50%, respectively, to be determined based on our then current leverage ratio. Additionally, the revolving credit facility portion of our Credit Agreement carries a combined unused fee of between 0.500% and 0.750% per annum based on our then current leverage ratio, with no mandatory payments prior to maturity of the revolving credit facility. We do not expect the additional interest rate mentioned above will have a material impact on our liquidity over the next twelve months. Pursuant to the amendment, the maximum leverage ratio is increased to 3.00 to 1.00 for the quarters ended September 30, 2009 through March 31, 2010, 2.75 to 1.00 for the quarter ended June 30, 2010, 2.50 to 1.00 for the quarters ended September 30 and December 31, 2010, 2.25 to 1.00 for the quarters ended March 31 and June 30, 2011 and 2.00 to 1.00 for the quarter ended September 30, 2011 through maturity. Additionally, a minimum $45.0 million Adjusted EBITDA floor, as calculated on a trailing twelve months basis excluding restructuring and non-cash charges, was added as a financial covenant. The interest rate for the term loan portion of our credit facility was not changed. We were in compliance with these requirements at September 30, 2009. As a result of the amendment, we incurred an amendment fee of approximately $1.8 million. These costs were deferred and are amortized over the remaining term of the credit facility.

In March 2009, we entered into three interest rate swap agreements for notional amounts of $10.0 million each, whereby we will pay fixed rates ranging from 1.55% to 1.76% under these agreements and receive a floating three-month LIBOR. Two of the agreements became effective in March 2009, and the remaining one will become effective in December 2009. As of September 30, 2009, we have seven interest rate swap agreements with a notional amount totaling $95.0 million, of which $65.0 million was in force at September 30, 2009 and the remaining $30.0 million will become effective in future periods. We pay fixed rates ranging from 1.61% to 4.94% under these agreements and receive a floating three-month LIBOR. The agreements expire beginning December 2009 through September 2010, and no initial investments were made to enter into these agreements.

At September 30, 2009 and December 31, 2008, the interest rate swap agreements had a fair value of $(1.7) million and $(2.5) million, respectively, which is included in other liabilities in the accompanying condensed consolidated balance sheets. Our interest rate swaps are valued using commonly quoted intervals from observable markets. In addition, we discount our derivative liabilities to reflect the potential credit risk to counterparties. We have formally documented the hedging relationships and account for these arrangements as cash flow hedges. At maturity, the swap agreements will have a fair value of zero and will require no cash outlay. However, if we elect to settle a swap prior to maturity, we would be required to outlay cash at the then stated fair value of the swap. If we settled all of our swaps at September 30, 2009, the net cash impact would be $1.7 million.

### Potential Fluctuations in Quarterly Results and Seasonality

Due to the regional and seasonal fluctuations in the hospital patient census, the healthcare staffing needs of our hospital and healthcare facility clients and the seasonal preferences for destinations of our temporary healthcare professionals, our volumes in nurse and allied and locums segments have historically been subject to moderate seasonal fluctuations. The impact of this seasonality on our consolidated revenue and earnings may vary due to a variety of factors, including volume and demand levels, and the results of any one quarter are not necessarily indicative of the results to be expected for any other quarter or for any year.

### Recent Accounting Pronouncements

In July 2009, the Financial Accounting Standards Board (“FASB”) amended guidance on revenue arrangements with multiple deliverables to require an entity to apply the relative selling price allocation method in order to a estimate selling price for all units of accounting, including delivered items, when vendor-specific objective evidence (VSOE) or acceptable third-party evidence (TPE) does not exist and expands the disclosure requirements to require an entity to provide both qualitative and quantitative information about the significant judgments made in applying the amended guidance and subsequent changes in those judgments that may significantly affect the timing or amount of revenue recognition. This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier application is permitted. We are currently evaluating the impact of the adoption of this guidance will have on our consolidated financial statements.

### Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “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. We based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The following factors could cause our actual results to differ materially from those implied by the forward-looking statements in this Quarterly Report:

- our ability to sustain our business in a significant economic downturn;
- our ability to continue to recruit qualified temporary and permanent healthcare professionals at reasonable costs;
- our ability to retain qualified temporary healthcare professionals for multiple assignments at reasonable costs;
- our ability to attract and retain sales and operational personnel;
- our ability to enter into contracts with hospitals, healthcare facility clients, affiliated healthcare networks and physician practice groups on terms attractive to us and to secure orders related to those contracts;
- our ability to demonstrate the value of our services to our healthcare and facility clients, which may be impacted by the role of intermediaries such as vendor management companies;
- the general level of patient occupancy and utilization of services at our hospital and healthcare facility clients’ facilities, including the potential impact on such utilization caused by adoption of alternative modes of healthcare delivery, which utilization may influence demand for our services;
- the overall level of demand for services offered by temporary and permanent healthcare staffing providers;
- the ability of our hospital, healthcare facility and physician practice group clients to retain and increase the productivity of their permanent staff;
- the variation in pricing of the healthcare facility contracts under which we place temporary healthcare professionals;
- our ability to successfully design our strategic growth, acquisition and integration strategies and to implement those strategies, which includes our ability to obtain credit at reasonable terms to complete acquisitions, integrate acquired companies’ accounting, management information, human resource and other administrative systems, and implement or remediate controls, procedures and policies at acquired companies;
- our ability to leverage our cost structure;
- access to and undisrupted performance of our management information and communication systems, including use of the Internet, and our candidate and client databases and payroll and billing software systems;
- our ability to keep our web sites operational at a reasonable cost and without service interruptions;
- the effect of existing or future government legislation and regulation, including healthcare reform;
- our ability to grow and operate our business in compliance with legislation and regulations, including regulations that may affect our clients and, in turn, affect demand for our services, such as Medicare reimbursement rates which may negatively affect both orders and client receivables;
- the challenge to the classification of certain of our healthcare professionals as independent contractors;
- the impact of medical malpractice and other claims asserted against us;
- the disruption or adverse impact to our business as a result of a terrorist attack or breach of security of our data systems;
- our ability to carry out our business strategy and maintain sufficient cash flow and capital structure to support our business;
- our ability to meet our financial covenants, which if not met, could adversely affect our liquidity, including our borrowing ability and capacity;
- the loss of key officers and management personnel that could adversely affect our ability to remain competitive;
- the effect of recognition by us of an impairment to goodwill;
- our ability to maintain and enhance the brand identities we have developed, at reasonable costs; and
- the effect of adjustments by us to accruals for self-insured retentions.

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report on Form 10-Q are set forth in our Annual Report on Form 10-K for the year ended December 31, 2008.

## Market risk

As filed, 1,275 characters.

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not believe that we have any material market risk exposure with respect to derivative or other financial instruments.

During 2009 and 2008, our primary exposure to market risk was interest rate risk associated with our debt instruments. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description of our debt instruments. Excluding the effect of our interest rate swap arrangements, a 1% change in interest rates on our variable rate debt would have resulted in interest expense fluctuating approximately $0.8 million and $1.3 million during the nine months ended September 30, 2009 and 2008, respectively. Considering the effect of our interest rate swap arrangements, a 1% change in interest rates on our variable rate debt would have resulted in interest expense fluctuating approximately $0.3 million and $0.7 million during the nine months ended September 30, 2009 and 2008, respectively.

Our international operations create exposure to foreign currency exchange rate risks. We believe that our foreign currency risk is immaterial.

## Controls and procedures

As filed, 1,021 characters.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2009 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Oct 30, 2009.
Source: SEC EDGAR, the filing index for accession 0001193125-09-218876. Last ingested by Listed: Nov 5, 2026, 17:59 ET. No prices; not investment advice.