UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2017
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 0-33169
Cross Country Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 13-4066229 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5201 Congress Avenue, Suite 100B
Boca Raton, Florida 33487
(Address of principal executive offices, zip code)
Registrant’s telephone number, including area code: (561) 998-2232
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting 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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of Common Stock on June 30, 2017 of $12.91 as reported on the NASDAQ National Market, was $454,055,531. This calculation does not reflect a determination that persons are affiliated for any other purpose.
As of February 26, 2018, 36,431,790 shares of Common Stock, $0.0001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement, for the 2018 Annual Meeting of Stockholders, which statement will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
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All references to “we,” “us,” “our,” or “Cross Country” in this Report on Form 10-K means Cross Country Healthcare, Inc., its subsidiaries and affiliates.
Forward-Looking Statements
In addition to historical information, this Form 10-K 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. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “suggests”, “appears”, “seeks”, “will” 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. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Item 1A - Risk Factors.” Readers should also carefully review the “Risk Factors” section contained in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us in fiscal year 2018.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and 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.
PART I
Item 1. Business.
Overview of Our Company
Cross Country Healthcare, Inc. (NASDAQ: CCRN) is a national leader in providing healthcare staffing, recruiting and value-added workforce solutions. Through a full suite of innovative workforce solutions and a national presence including 76 office locations throughout the United States (U.S.), we are able to meet the unique and dynamic needs of our clients. By utilizing our various solutions, clients are able to better plan their personnel needs, outsource recruitment processes, strategically flex their workforce, streamline their purchasing needs, access specialties not available in their local area, access quality healthcare personnel and provide continuity of care for improved patient outcomes.
Our solutions are geared towards assisting our clients in solving their labor issues while maintaining high quality outcomes. We are increasingly being called upon to provide more creative and strategic talent sourcing strategies, particularly to find efficiencies to support cost containment programs and to access hard to find specialties in the current tight labor market. Over the past several years, our Managed Service Programs (MSPs) have shifted to more of a total talent management relationship as our clients continue to focus on improving labor management to address complex financial, compliance, and other challenges in the healthcare industry. In the past 24 months, we have won 23 additional MSP contracts, and for the full year ended December 31, 2017, approximately 30% of our revenue was generated through MSP contracts. During 2017, we had more than 29,000 healthcare professionals on assignment at 6,975 facilities, and our MSPs served approximately 500 facilities.
Our workforce solutions include:
l Managed Service Programs (MSPs);
l Optimal Workforce Solutions (OWS);
l Education Healthcare Services;
l Electronic Medical Record Transition Staffing (EMR);
l Recruitment Process Outsourcing (RPO); and
l Internal Resource Pool Consulting & Development (IRP).
We are able to provide our services on a national level or through any one of our 69 local branches throughout the United States or through a combination of both. We service a variety of clients, including public and private acute care hospitals, public and charter schools, outpatient clinics, ambulatory care facilities, single and multi-specialty physician practices, rehabilitation facilities, urgent care centers, correctional facilities, government facilities, retailers, and many other healthcare providers. Our business consists of three business segments: (i) Nurse and Allied Staffing, (ii) Physician Staffing, and (iii) Other Human Capital Management Services. Fees for our services are paid directly by our clients and in certain instances by vendor managers, and as a result, we have no direct exposure to Medicare or Medicaid reimbursements.
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Our consolidated 2017 revenue was $865.0 million, reflecting a diversified revenue mix across healthcare customers. Nurse and Allied Staffing was 88% of revenue, comprised of travel nurse, travel allied, and branch-based local nurse and allied staffing (including staffing of public and charter schools). Physician Staffing was 10% of our revenue and consists primarily of physician staffing services with placements across multiple specialties. Other Human Capital Management Services was 2% of our revenue, which consists of our retained and contingent search services primarily for physicians and healthcare executives. On a company-wide basis, we have approximately 6,600 active contracts with healthcare clients, and we provide our staffing services and workforce solutions in all 50 states. In 2017, 2016, and 2015 no client accounted for more than 10% of our revenue. For additional financial information concerning our business segments, see Note 17 - Segment Data to the consolidated financial statements.
Acquisitions
We follow a structured disciplined approach with clearly identified objectives to make strategic acquisitions. Historically, we have acquired companies to improve our position in the four sectors of healthcare where we participate. Accordingly, we acquired traditional healthcare staffing companies such as travel nurse, travel allied, and per diem staffing. The strategic rationale for making acquisitions in Nurse and Allied Staffing has been to: (i) expand our workforce solutions offerings to deepen our relationships with current customers and to attract new customers; (ii) expand our local branch network to grow our local market presence and our MSP business; (iii) further diversify our customer base into the public and charter school market; (iii) diversify our customer base into the local ambulatory care and retail market, which provides more balance between our large volume-based customers and our small local customers; (iv) better position ourselves to take additional market share in our MSP business; (v) access more candidates and candidates in different specialties; and (vi) add new skill sets to our traditional staffing offerings.
In 2015 we expanded our acquisition strategy and acquired Mediscan, an education healthcare staffing company. Staffing of speech language pathologists, physical therapists, and other healthcare workers in schools (public and private) is: (i) mandated by the government; and (ii) not as sensitive to changes in the economy. We believe the higher margin education healthcare staffing market complements our current business and provides an opportunity to add new service lines and further diversify our customer base, as the Mediscan business is divided between acute/ambulatory care and public and charter schools.
In July 2017, we were presented with an opportunity to acquire a quality nurse staffing company, Advantage RN, LLC (Advantage). We acquired the Advantage business to supplement the number of nurses we place at our MSP clients, increase our capture rate, and reduce the number of positions outsourced to subcontractors. In addition, this acquisition provides a vehicle for us to cross-sell our MSP solutions to Advantage's clients, and increase our footprint in the Midwest where Advantage is located. In the fourth quarter of 2017, Advantage had an average of 750 nurses on assignment throughout the United States.
In December 2016, we acquired an RPO business, US Resources Healthcare. The rationale for this acquisition was to increase our workforce solutions capabilities to deliver financial and operating efficiencies to our customers through labor optimization services while enhancing the quality of care. By partnering with our customers to design and execute a tailored solution to meet their talent and business goals, we are able to find the talent our customers need. For additional financial information concerning our acquisitions, see Note 3 - Acquisitions to the consolidated financial statements.
Competition
The principal competitive factors in attracting, retaining, and expanding business with healthcare clients nationally include: (i) understanding the client’s work environment; (ii) offering a comprehensive suite of services to assist the client in assessing its personnel needs and partnering with clients to design various customizable alternative solutions; (iii) the timely filling of clients' needs; (iv) price; (v) customer service; (vi) quality assurance and screening capabilities; (vii) risk management policies; (viii) insurance coverage; and (ix) general industry reputation. The principal competitive factors in attracting qualified healthcare professionals for temporary employment include: (i) a large national pool of desirable assignments; (ii) pay and benefits; (iii) speed of placements; (iv) customer service; (v) quality of accommodations; and (vi) overall industry reputation. We focus on retaining healthcare professionals by providing high-quality customer service, long-term benefits (to employees), and medical malpractice insurance.
We believe we are one of only two large full-service healthcare staffing providers with a national footprint; one of the top five providers of physician staffing services in the United States; and one of the top providers of retained and contingent physician and healthcare executive search services in the healthcare marketplace. Some of our competitors in the healthcare staffing, workforce solutions, and search businesses include: AMN Healthcare Services, Inc., CHG Healthcare Services, Maxim Healthcare, Jackson Healthcare, Team Health, HealthTrust Workforce Solutions, MedAssets, and Witt Kiefer.
We believe we benefit competitively from the following:
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Breadth and Expertise of Value-Added Workforce Solutions Offered. As a long-time leader of MSP solutions, our additional services include: OWS, Education Healthcare Staffing Services, EMR staffing, RPO, and IRP. Our holistic approach is to deploy cost effective labor optimization strategies uniquely designed for each customer, all while ensuring quality of care for patients.
- | MSP Capabilities. Rather than an acute care facility’s talent management team working with multiple staffing agencies, our MSP model offers a consultative approach to address total talent management, a single point of contact, access to a nationwide network of subcontractors, uniform rates and terms, and accountability for the quality of healthcare professionals to our clients through the aggregation and standardization of total contract labor spend. This MSP model has become a desired practice of healthcare systems seeking to drive financial and operating efficiencies, while ensuring quality of care. |
- | OWS. These services allow our clients to outsource certain non-core department staff that may be particularly challenging to recruit and retain. By outsourcing these departments to our OWS team, our clients can better control their operating costs, gain access to our talent management expertise, free their internal resources for other purposes, streamline or increase efficiency for certain functions, and improve their overall focus. |
- | Education Healthcare Staffing Services. By providing consultative and staffing services to traditional public and charter school clients, we help them achieve performance and cost savings goals while experiencing greater flexibility in their operations. |
- | EMR. Based on the government mandate for hospitals to convert to Electronic Medical Records to ensure payment for services, we developed a sound transition and implementation process to help our clients backfill staffing needs while they adopt a new or upgraded EMR platform. Staffing plans are created in collaboration with our clients so they have adequate, planned, quality staffing to cover these peak vacancies. |
- | RPO. We offer business process outsourcing where a client transfers all or part of its talent management recruitment processes to us and we can assume the design and management of the recruitment process and the responsibility for the results. The structure of this solution differs greatly from client to client as there is a continuum of scope of the services that may be provided (e.g. end to end services or hybrid solutions). |
- | IRP. We consult with our clients to structure groups of their staff professionals that can be called upon when shortages exist or are expected. These professionals agree to fill positions when necessary and are available when called upon. They have experience with the facilities where they will work, so they are immediately up to speed with how things are done and what is expected from them the moment they arrive. This type of pool promotes quality of care and is cost-efficient for our clients. |
Ability to Meet a National Shift Towards a More Integrated Delivery of Healthcare. With our national resources, as well as local resources at our 69 local branches, we are uniquely positioned to assist hospitals and health systems which continue to turn to lower-cost, more accessible alternatives, such as outpatient or ambulatory care centers as a result of the Patient Protection and Affordable Care Act (ACA) of 2010 and other market dynamics. By offering travel, per diem, and permanent placement of a variety of healthcare professionals, we are also able to offer many different types of personnel to hospitals and health systems at their main campuses, as well as their ambulatory and outpatient care centers, in order to meet their workforce needs.
Brand Recognition. We go to market with a variety of brands, which are well-recognized among leading hospitals and healthcare facilities and many healthcare professionals. These businesses have been operating for more than twenty years.
Strong and Diverse Client Relationships. We provide healthcare staffing and workforce solutions to a diverse client base throughout the United States with approximately 6,600 active contracts with hospitals and healthcare facilities, and other healthcare providers. As a result, we have a diverse choice of assignments for our healthcare professionals to choose from. In addition, our joint venture with a large health system's staffing subsidiary provides us with a unique insight into the challenges facing many of our hospital clients generally and this provides us with the opportunity to better serve all of our clients by designing and implementing workforce solutions to meet their needs. Our relationship with the largest member- owned healthcare services company in the United States should also serve to expand our relationships in the healthcare community.
Recruiting and Placement of Healthcare Professionals. Healthcare professionals apply with us through our differentiated nursing, locum tenens, and allied healthcare recruitment brands. Our local branch network provides us access to local healthcare professionals who are uniquely qualified to provide care in ambulatory and outpatient settings. We believe our access to such a large and diverse group of healthcare professionals makes us more attractive to healthcare institutions and facilities seeking healthcare staffing and workforce solutions in the current dynamic marketplace.
Certifications. The staffing businesses of our Cross Country Staffing, Medical Staffing Network (MSN), and Mediscan brands are certified by The Joint Commission under its Health Care Staffing Services Certification Program. In addition,
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Credent Verification and Licensing Services, a subsidiary of Medical Doctor Associates (MDA), is certified by the National Committee of Quality Assurance (NCQA) -- one of only a handful of companies to achieve such certification.
Experienced Management Team. On average, our executive management team has more than 20 years of staffing experience. Led by our President and Chief Executive Officer, a 30-year staffing industry veteran who joined the Company in April 2013, the Company has strengthened its leadership team by bringing in experienced executives.
Demand and Supply Drivers
Demand Drivers
Effect of ACA on Healthcare Utilization. The ACA has increased the number of insured patients over the past few years, especially in states that have expanded Medicaid. It has been reported that the effect of the ACA on healthcare utilization has been that 20 million people have gained health insurance coverage, whether through the federal marketplace, Medicaid expansion, or individuals staying on their parents' health insurance plans (Obamacarefacts.com, January 2018). Despite the shortened enrollment period for 2018, an estimated 8,800,000 individuals have reportedly signed up for 2018 coverage via the federal health insurance exchange and 2017 enrollees were auto renewed in December 2017 for 2018 (Centers for Medicaid & Medicaid Services, Weekly Enrollment Snapshot, December, 2017). In addition, while the Tax Cuts and Jobs Act of 2017 Public Law No. 115-97 (2017 Tax Act) did away with the individual mandate, the elimination of that penalty does not go into effect until the beginning of 2019 and we expect many individuals to maintain insurance under their parents’ policies or otherwise. We believe the demand for healthcare professionals will continue as the number of insured has increased in the past few years under the ACA and with more persons employed who have healthcare insurance.
Creation of Healthcare Jobs Outpacing Other Industries and Occupations. Healthcare represented 15% of all jobs created in 2017 (HealthleadersMedia.com, January 5, 2018). The Bureau of Labor Statistics recently released its latest 10-year projections of employment growth (from 2016 to 2026), with forecasts by various industries and occupations. Overall, employment is expected to grow 7.4%, far outpaced by employment in the healthcare industry (18%) and among healthcare occupations (18%) (Staffing Industry Analysts, December 14, 2017). This projected 18% growth varies, however, among three categories that make up the healthcare industry: (i) ambulatory healthcare services; (ii) nursing and residential care; and (iii) hospitals. Employment for ambulatory healthcare services is projected to grow 31%; nursing and residential care is projected to grow 13%, and hospital employment is projected to grow 6.8%. The creation of additional jobs in the healthcare market should increase demand for our services as our temporary staff are typically hired to replace healthcare workers taking vacation and leaves of absence.
Use of Temporary Workforce. The December 2017 penetration rate of temporary workers was 2.1% (U.S. Bureau of Labor Statistics, 2017 Labor Force Statistics Database). We believe contingent labor will continue to be used strategically, as an increase in the use of temporary workers typically allows for cost-effective, time-sensitive solutions to specific business needs and allows organizations to leverage the skills of temporary workers while maintaining a lean staff of traditional permanent employees. Within the healthcare sector, we believe the current dynamic nature of the healthcare industry, among other things, has exacerbated hospitals’ needs for more flexibility to match revenue and payroll.
Hospitals Seeking Efficiencies to Reduce Costs. Hospitals continue to face pressure to keep costs down to protect their margins from continued Medicare rate reductions and fluctuations in demand for hospital care. This will be further exacerbated if Congress targets entitlement programs to reduce spending on both federal healthcare and anti-poverty programs to reduce the U.S. deficit. In addition, the national shift away from volume-based pricing to value-based pricing continues. The visibility of Hospital Consumer Assessment of Healthcare Providers and Systems survey scores, a national, standardized, publicly reported survey of patients' perspectives of hospital care, has also put pressure on hospitals to maintain a certain level of quality of care so hospitals do not incur financial penalties or risk decreased patient volume due to low scores. We believe these dynamics continue to put pressure on hospitals to find innovative solutions in order to better manage their workforce, which accounts for a large portion of their expenses. Working with an MSP allows healthcare facilities to easily flex their workforce numbers up and down and to streamline their talent acquisition process by having one point-of-contact (Modern Healthcare, March 16, 2017). As a result, we believe hospitals are more willing to engage healthcare staffing companies, such as ours, that provide both staffing and workforce solutions that can help them solve problems, such as assessing their workforce needs or reducing readmission rates without negatively impacting the quality of care. Many hospitals are also making vertical acquisitions by investing in outpatient facilities, ambulatory care centers, and stand-alone emergency departments in order to capture outpatient revenue, which will further drive demand for healthcare personnel.
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Outpatient/Ambulatory Settings Services Outpace Inpatient Services. Job growth in ambulatory services such as physician's offices and dental clinics continues to outpace that of the hospital sector as the demand for outpatient services grows (HealthleadersMedia.com, May 8, 2017). The ambulatory sector added 14,800 jobs in December 2017, while hospitals added 12,400 jobs in the same period (Modern Healthcare, January 2018). We believe certain initiatives previously taken under the ACA - such as Medicare reimbursement incentives for reduced readmissions, have had a direct correlation to the shift from inpatient services to outpatient/ambulatory settings. We believe we are poised to take advantage of this trend given our 69 local branches that deliver services in local settings.
Growing and Aging U.S. Population. Two long-term macro drivers of our business are demographic in nature -- a growing and aging U.S. population. The U.S. Census Bureau projects the U.S. population will increase approximately 31% (from 319 million in 2014 to 417 million in 2060) - crossing the 400 million mark in 2051. In addition, by 2030 one in five Americans is also projected to be 65 years old or more. The number of persons aged 65 and over is expected to increase to 98 million in 2060 (U.S. Census Bureau, 2015). Currently, there are 75 million baby boomers (Modern Healthcare, Nursing Shortage in Perspective, January 1, 2018), which is important because the utilization of healthcare services is generally higher among older people. The American Hospital Association (AHA) has also projected the share of hospital admissions for the over-65 age group to rise from 38% in 2004 to 56% in 2030. Currently, 80% of the baby boomer population has at least one chronic condition (Modern Healthcare, Nursing Shortage in Perspective, January 1, 2018). With the increase in the proportion of the population in older age groups reaching prime retirement age, healthcare occupations and industries are expected to have the fastest employment growth and to add the most jobs, increasing their employment share by four million people to 13.8% in 2026 (Healthcare Financial Management Association, October 30, 2017). Employment in the healthcare and social assistance sector is projected to add nearly 4 million jobs by 2026, about one-third of all new jobs (Modern Healthcare, Nursing Shortage in Perspective, January 1, 2018).
Nursing Shortage. The Georgetown University Center on Education and the Workforce (CEW) predicts a shortage of 192,620 nurses in 2020, which differs from the surplus of nurses predicted for 2025 by the Health Resources and Services Administration (HRSA) National Center for Health Workforce Analysis (Georgetown University Center on Education and the Workforce (CEW), Forecasts of Nursing Demand 2015). With healthcare now representing almost 20% of the U.S. economy, the aging of the U.S. population, and the expansion of healthcare coverage under the ACA, both the CEW and HRSA agree that demand for healthcare services and healthcare workers will continue to grow. The CEW’s analysis of the nursing shortage differs from that of the HRSA in that the CEW has made assumptions on the “active supply” of nurses - noting there is a stark difference between the number of nursing professionals who are licensed and the number of nursing professionals in the workforce. In 2013, there were 5.2 million licensed nursing professionals, but only 3.6 million were employed in the nursing workforce - so one-third of licensed nurses do not work in nursing (Georgetown University CEW, Forecasts of Nursing Demand 2015). As further noted by CEW, “as the economy improves, many more nurses will have the option to leave the nursing workforce for other types of jobs or to retire.” By 2030, almost a million nurses will retire and leave the workforce taking with them the years of knowledge and experience they have accumulated (Modern Healthcare, Nursing Shortage In Perspective, January 1, 2018). In addition, even HRSA’s analysis notes that its national projection does not take into account an imbalance of RNs at the state level where many states are projected to experience a smaller growth in RN supply relative to their state-specific demand, resulting in a geographical shortage of RNs by 2025. If current trends hold, seven states will have a nursing shortage in 2030: Alaska, California, Georgia, New Jersey, South Carolina, South Dakota, and Texas (Modern Healthcare, Nursing Shortage In Perspective, January 1, 2018). Four of those states will have shortages of 10,000 or more nurses: California, New Jersey, South Carolina, and Texas (Modern Healthcare, Nursing Shortage In Perspective, January 1, 2018). HRSA’s national projection also does not take into account a projected shortfall of registered nurses in particular specialties over the next ten years (Georgetown University CEW, Forecasts of Nursing Demand 2015). We believe the following factors will continue to contribute to new growth in demand for nurses: the continued aging of the baby boomers, the changing landscape of the healthcare industry with emerging care delivery models focused on quality of care, managing health status and preventing acute health issues (e.g., nurses taking on new and/or expanded roles in preventive care and care coordination), an uncertain level of newly insured individuals in the healthcare market, the number of nurses approaching retirement, and the number of registered nurses that re-entered the workforce during the economic downturn that are now likely to leave their jobs during a better economy.
More People Working Who Are Now Insured. The U.S. economy had a strong year in 2017, and the job market showed continued signs of growth with unemployment at 4.1% through December 2017 (U.S. Bureau of Labor Statistics, 2017 Labor Force Statistics Database). Individuals with employer-sponsored health insurance are more likely to seek medical care than the uninsured, which raises demand for healthcare services and healthcare staff (U.S. Healthcare Staffing Growth Assessment, Staffing Industry Analysts, December 2016). We believe the broader trends that created these labor market changes in 2017 will continue through 2018. Changes to tax rates should also boost the economy making jobs more attractive, thus continuing the consistent low unemployment trends from 2017. Temporary
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staffing added jobs every month during 2017 and the December 2017 temporary penetration rate for the U.S. continued at a record high 2.10 percent (U.S. Bureau of Labor Statistics, 2017 Labor Force Statistics Database). The acceleration of the U.S. economy in 2017 has led to solid job growth, which we expect will result in more individuals receiving healthcare from their employers - thus supporting the demand for healthcare services.
Increased Need for Healthcare and Special Education Services in Schools. The Individuals with Disabilities Education Act (IDEA), enacted in 1975, mandates that children and youth ages 3-21 with disabilities be provided a free and appropriate public school education. According to the U.S. Department of Education, National Center for Education Statistic Report titled “The Condition of Education" (May 2017), the number of children and youth ages 3-21 receiving special education services was 6.7 million, or about 14% of traditional public and charter school enrollment. Of those students in school year 2014-15, 20% had a speech or language impairment, 13% had other health impairments, 9% had autism, 5% had emotional disturbances, 2% had multiple disabilities, and 1% had orthopedic impairments. The IDEA requires that these children and young adults receive care from speech language pathologists, physical therapists, occupational therapists, nurses and other healthcare professionals while at school. Based on the foregoing, we believe the demand for consulting and healthcare staffing services for public schools and charter schools will continue to be strong for agencies that can provide consulting services, healthcare personnel, technical assistance on policies, implementation, and training related to children and youth with special needs in school settings.
Physician Shortage. The United States is expected to face a shortage of physicians over the next decade, according to a physician workforce report released by the Association of American Medical Colleges on April 5, 2016. The projections show a shortage ranging between 61,700 and 94,700 in 2025 as demand for physicians continues to outpace supply, according to the Association of American Medical Colleges, with a significant shortage showing among many surgical specialties. This demand is largely due to the projected aging of the population and the ACA. Nationally, almost one-third of active physicians are age 60 or older (2017 State Physician Workforce Data Report, Association of American Medical Colleges). In addition, approximately 25% of active physicians in the United States are international medical graduates (2017 State Physician Workforce Data Report, Association of American Medical Colleges). The U.S. is expected to face a shortage of up to 20,500 primary care physicians by 2020 -- a number that is expected to grow to up to 31,100 by 2025, according to analysis by the AAMC (March 2015). The projected shortfall of non-primary care physicians is expected to be up to 63,700 by 2025. The AAMC also expects nearly one-third of all physicians will retire in the next decade. And, while the number of applicants to U.S. medical schools is increasing, it is not expected to keep pace with expected future demand.
Supply Drivers
Networking. We rely heavily on word-of-mouth referrals for our healthcare professionals. Historically, more than half of our field employees have been referred to us by other healthcare professionals. Our most effective “sales force” is our network of healthcare professionals who have taken temporary or permanent assignments with us or who are currently working for us. We continue to make investments in our online social and professional networks that have also made it easier for us to connect with healthcare professionals and stay connected with them, thus enhancing our recruitment efforts.
Traditional Reasons. Nurses, allied professionals, and locum tenens physicians work on temporary assignments to experience different geographic regions of the United States without moving permanently, work flexible schedules, gain professional development by working at prestigious healthcare facilities, earn top money and bonuses, travel with friends and family while enjoying quality accommodations, experience various clinical settings, look for a permanent position, and avoid workplace politics often associated with permanent staff positions.
Nurse Retirements. 70,000 nurses are retiring annually and, by 2030, almost a million nurses will retire and leave the workforce taking with them the years of knowledge and experience they have accumulated (Modern Healthcare, Nursing Shortage In Perspective, January 1, 2018). The 2017 Survey of Registered Nurses, Viewpoints on Leadership, Nursing Shortages, and their Profession conducted by AMN Healthcare found that 36% of nurses surveyed said they are planning to retire in one year or less, and 46% of nurses in 2017 who are planning to retire said they will do it in four years or more. 73% of baby boomer nurses who are planning to retire say they will do so in three years or less (2017 Survey of Registered Nurses, AMN Healthcare). These findings support the proposition that significant nurse retirements are already underway (2017 Survey of Registered Nurses, AMN Healthcare).
Higher Quit Rates with an Improved Economy. The Bureau of Labor Statistics uses the quit rate as a measure of workers’ willingness or ability to leave jobs. According to the February 6, 2018 Job Openings and Labor Turnover Survey Database, quits rose from 1.3% in December 2009 to 2.2% in December 2015 and was 2.2% through December 2017 (Bureau of Labor Statistics, Job Openings and Labor Turnover - December 2017). This increased quit
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rate from reflected increased confidence among the workforce. The number of job openings reported at the end of December 2017 also remained steady at 5,800,000 (Bureau of Labor Statistics, Job Openings and Labor Turnover Survey, December 2017). With an improved economy and the low national unemployment rate, nurses do not appear as hesitant to quit or voluntarily leave their jobs. We believe with the increased volume of orders for temporary healthcare workers and as wages increase, staff nurses are more confident to change jobs and/or enter the temporary workforce. This is further supported by the 2017 Survey of Registered Nurses conducted by AMN Healthcare that found fewer nurses are planning to remain in their current positions, and some nurses currently working at the bedside plan to work outside of a direct patient care role or will work per diem for more flexibility and/or fewer hours (2017 Survey of Registered Nurses, AMN Healthcare).
National Licensure Compact Promoting Mobility for RNs. The Enhanced Nurse Licensure Compact (eNLC), overseen by the National Council of State Boards of Nursing, was implemented on January 19, 2018. Under the eNLC, registered nurses and licensed practical/vocational nurses in member states can provide care to patients in other states without having to obtain additional licenses. It takes advantage of new technology and national databases to ensure that compact-licensed nurses meet consistent standards and background check benchmarks. The compact creates an expedited licensing process that gives nurses these privileges as long as they meet eleven uniform licensing as long as they meet eleven uniform licensing requirements. The eNLC will: (i) allow nurses to quickly cross state borders to provide vital services in the event of a disaster; (ii) make practicing across state borders more affordable and convenient by reducing the need for nurses and/or agencies who employ them to obtain additional nursing licenses; and (iii) allow licensed nurses in 25 states to use telehealth to treat patients in other states (National Council of State Boards of Nursing, Fact Sheet).
Temporary Physician Assignments. Locum tenens assignments offer physicians the ability to focus on practicing medicine while avoiding the stress of running their own practices; the ability to avoid paying the high costs of malpractice insurance; the opportunity to pick up extra shifts and weekends and work during the vacation time of full-time staff jobs in order to earn extra money and repay student loans; to lead a more flexible lifestyle; and to maintain their autonomy while practicing medicine. The supply of physicians available for our Physician Staffing services is variable and is influenced by several factors: the desire of physicians to work temporary assignments, the desire of physicians close to retirement to work fewer hours, work-life balance for all physicians, and the trend toward more female physicians in the workforce who traditionally work fewer hours than their male counterparts.
Physicians Seeking Stability as Full-Time Staff. Over the past several years, physicians have increasingly become employees of hospitals or health systems due to business pressures and costs of operating private practices. Physician practices faced a combination of factors that include: stagnant or declining reimbursement rates, increased regulatory burden (including the Medicare Access and CHIP Reauthorization Act of 2015), rising costs, greater risk associated with operating a private practice, and an increased desire for a better work-life balance. We believe physicians have sought employment with hospitals at higher rates over the past few years due to: traversing the maze of insurance company requirements, financial strains on private practices from repeated threatened pay cuts based on Medicare’s sustainable growth rate formulas, and the uncertain future of healthcare associated with the ACA. Joining a hospital's staff provides financial certainty and the ability to focus more on practicing medicine. We believe the increase in physicians employed by healthcare facilities will continue to increase supply for our physician and executive search business as physicians look for permanent employment with hospitals or health systems.
Our Business Strategy
Our business strategy is to increase our workforce solutions business and our capture rate at those accounts, grow our supply of healthcare professionals, improve our operating leverage through growth and cost containment, and make strategic disciplined acquisitions to strengthen and broaden our market presence:
Increasing our workforce solutions business by delivering value-added solutions and strengthening and expanding current client relationships and developing new relationships with hospitals and healthcare facilities. While the shift to value-based payments could slow or reverse, we believe that some iteration of the value-based payment models will remain in effect continuing to put financial pressure on our clients. To assist clients in meeting their financial and healthcare quality goals in a more complex environment, we design and execute workforce solutions customized to meet their unique needs. Our full suite of service offerings includes: MSP, OWS, IRP, Educational Healthcare Services, and RPO. Each of our businesses enjoy strong customer relationships that may serve as a platform to sell new MSP services or expand our workforce solutions at current clients. As a result, we continue to invest in sales and marketing to increase market share through cross-collaboration of our businesses.
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Improving our capture rate at current MSP accounts and expanding our national and local market presence to support the shift to outpatient and ambulatory care centers. We believe our large national footprint will allow us to: (i) increase our market share at our current MSPs by improving our capture rate of per diem, local and allied healthcare staffing professionals; (ii) sell our MSP services to clients of our local branch-based network; (iii) support our current hospital and health system clients who are shifting care from inpatient to outpatient where possible and responding to market changes by making vertical acquisitions to control quality across the care continuum; (iv) support smaller, local customers; (v) support retail or commercial providers, such as national drugstore chains; (vi) broaden our customer base; and (vii) gain access to additional healthcare professionals who are uniquely qualified to provide care in outpatient and ambulatory care centers.
Growing our supply of healthcare professionals. We are investing in technology initiatives to enhance the efficiency and effectiveness of our interactions with our healthcare professionals. We also continue to invest in mobile and online technologies to increase our ability to attract and retain healthcare professionals. We believe providing communication options to our healthcare professionals will strengthen our relationships with them to improve supply and further enhance our delivery of high quality care for patients.
Expanding our gross profit margin and delivering a higher Adjusted EBITDA margin. We believe this can be accomplished by: (i) continuing to obtain pricing increases from our customers; (ii) managing our mix of business with hospitals and local/retail customers; (iii) expanding our workforce solutions business; and (iv) making further investments in our higher margin businesses: retained, contingent and permanent search, local allied, Healthcare Education Consulting, and RPO businesses.
Making strategic and disciplined acquisitions to strengthen and broaden our market presence. We believe the best acquisitions follow a structured and disciplined approach with clear strategic objectives, detailed implementation plans, and a focus on creating and capturing value for our shareholders. Our management team has broad and varied experience in multiple types of transactions.
Business Overview
Services Provided
Nurse and Allied Staffing
The Nurse and Allied Staffing segment provides traditional staffing, including temporary and permanent placement of travel nurses and allied professionals, branch-based local nurses, and allied staffing. It markets its service to hospitals and other customers through its Cross Country Staffing®, MSN, Allied Health Group, Advantage, Mediscan, and DirectEd brands. The Nurse and Allied Staffing segment markets its services to healthcare professionals using a multi-brand strategy to segment the market, obtain greater shelf space and maximize its relevance to its healthcare professionals.
We provide flexible workforce solutions to the healthcare and school markets through diversified offerings designed to meet the special needs of each client, including: MSP, OWS, Educational Healthcare Services, IRP and RPO services. Our clients include: public and private acute care hospitals, government-owned facilities, public and charter schools, outpatient clinics, ambulatory care facilities, physician practice groups, retailers, and many other healthcare providers. The Joint Commission has certified our Nurse and Allied Staffing businesses under its Health Care Staffing Services Certification Program. Our Nurse and Allied Staffing revenue and contribution income is set forth in Note 17 - Segment Data to the consolidated financial statements.
A majority of our revenue is generated from staffing registered nurses on long-term contract assignments (typically 13 weeks in length) at hospitals and health systems using various brands. While the typical lead-time to staff a travel healthcare professional is four to five weeks, we also have candidates who are pre-qualified and ready to begin assignments within one to two weeks at hospital clients that have urgent needs. Additionally, we offer a short-term staffing solution of registered nurses, licensed practical nurses, certified nurse assistants, advanced practitioners, pharmacists, and more than 100 specialties of allied professionals on local per diem and short-term assignments in a variety of clinical and non-clinical settings through our national network of local branch offices. We also provide travel allied professionals on long-term contract assignments to hospitals, public and charter schools, and skilled nursing facilities under the Cross Country Staffing®, Mediscan, and DirectEd brands.
Physician Staffing
We provide physicians in many specialties, certified registered nurse anesthetists (CRNAs), nurse practitioners (NPs), and physician assistants (PAs) under our MDA brand 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,
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government facilities, and managed care organizations. We recruit these professionals nationally and place them on assignments varying in length from several days up to one year. Our Physician Staffing revenue and contribution income is set forth in Note 17 - Segment Data to the consolidated financial statements.
Other Human Capital Management Services
We provide retained and contingent search services for physicians, healthcare executives, nurses, advanced practice, and allied health professionals. The revenue and contribution income of our Other Human Capital Management Services Segment is set forth in Note 17 - Segment Data to the consolidated financial statements.
Our Cejka Search® (Cejka) subsidiary has been a leading physician, executive, nurses, advanced practice, and allied health retained and contingent search firm for more than twenty years. Cejka recruits top healthcare talent for organizations nationwide through a team of experienced professionals, advanced use of recruitment technology, and commitment to service excellence. Serving clients nationwide, Cejka completes hundreds of search assignments annually for organizations spanning the continuum of healthcare, including physician group practices, hospitals and health systems, academic medical centers, accountable care organizations, managed care, and other healthcare organizations.
Our Business Model
We have developed and will continue to focus our business model on increasing revenue and achieving greater profitability through higher efficiencies, expanding current MSP services and adding new MSP accounts, and further diversifying our customer base - all while continuing to offer the highest possible quality services.
Marketing and Recruiting Healthcare Professionals
We operate differentiated brands to recruit nurses and allied professionals. We believe our multi-brand recruiting model helps us reach a larger volume and a more diverse group of candidates to fill open positions at our clients throughout the United States in various clinical and non-clinical settings and in many different geographic areas. We believe nurses and allied professionals are attracted to us because we offer a wide range of diverse assignments in attractive locations, competitive compensation and benefit packages, scheduling options, as well as a high level of service to them. In addition, we believe nurses and allied professionals are confident we will have new assignments for them as they complete their current assignment. Our benefits generally include professional liability insurance, a 401(k) plan, health insurance, reimbursed travel, per diem allowances, and housing. Each of our nurse and allied healthcare professionals is employed by us is typically paid hourly wages and any other benefits they are entitled to receive during the assignment period.
Recruiters are an essential element of our Nurse and Allied Staffing business, and are responsible for establishing and maintaining key relationships with candidates for the duration of their assignments with us. Recruiters match the supply of qualified candidates in our databases with the demand for open orders posted by our clients. While we rely on word-of-mouth for referrals, we also market our brands on the Internet, including extensive utilization of social media, which has become an increasingly important component of our recruitment efforts. We maintain a number of websites to allow potential applicants to obtain information about our brands and assignment opportunities, as well as to apply online.
MDA recruits and contracts with physicians and advanced practice professionals to provide medical services for MDA’s healthcare customers. Each physician or advanced practice professional is an independent contractor and enters into an agreement with MDA to provide medical services at a particular healthcare facility or physician practice group based on terms and conditions specified by that customer. Physicians and advanced practice professionals are engaged to provide medical services for a healthcare customer ranging from a few days up to a year. We believe physicians are attracted to us because we offer a wide variety of assignments, competitive fees, medical malpractice insurance, and a high level of service to them. MDA relies on word-of-mouth referrals, but also markets it brands on the Internet and through extensive social media campaigns.
Sales and Marketing
We market our Nurse and Allied Staffing services to our hospitals, healthcare facilities, schools, and other clients using our Cross Country Staffing, Medical Staffing Network™, Allied Health Group, Mediscan, and DirectEd brands. Cross Country Staffing typically contracts with our nurse and allied healthcare clients on behalf of itself and our other brands. Mediscan contracts with its hospitals, public schools, and charter schools under the Mediscan and DirectEd brands. Our traditional staffing includes temporary and permanent placement of travel nurses and allied professionals, branch-based local nurses and allied staffing, and physicians. We provide healthcare staffing opportunities to our healthcare professionals, and staffing and workforce solutions to our healthcare clients in all 50 states.
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We provide flexible workforce solutions to the healthcare and school markets through diversified offerings meeting the special needs of each client. Orders for open positions and other services are entered into our various databases and are available to recruiters. Account managers, who develop relationships with our clients to understand their specific settings and culture, submit candidate profiles to clients, and confirm offers and placements with them.
MDA markets its Physician Staffing operations to hospitals and other healthcare facilities on a national basis. Our recruiters use our extensive database of physicians and their expertise in their given specialties to contact physicians to schedule short and long-term engagements at healthcare customers. MDA successfully operates a multi-site business model with employees at several locations.
Cejka markets its retained and contingent search services to healthcare clients primarily through industry professional organizations, direct marketing, Cejka’s website, and word-of-mouth.
Credentialing and Quality Management
We screen all of our candidates prior to placement through our credentialing departments. While screening requirements are typically negotiated with our clients, each of our businesses has adopted its own minimum standard screening requirements. We continue to monitor our nursing and allied professional employees after placement in an effort to ensure quality performance, to determine eligibility for future placements, and to manage our malpractice risk profile. Our credentialing processes are designed to ensure that our professionals have the requisite skill set required by our customers, as well as the aptitude to meet the day-to-day requirements and challenges they would typically encounter on assignments where they are placed. The credentialing of our nurse and allied healthcare professionals is designed to align with the guidelines of The Joint Commission, a national accrediting body, to ensure quality care. Our Cross Country University division, accredited by the American Nurse Credentialing Center, provides training, assessment, and professional development to further ensure the quality of the personnel we place on assignment. Our physician credentialing entity, Credent, is also certified by the NCQA. We ask each of our healthcare clients to evaluate our healthcare employees who work at their facility at the end of each assignment in order to continually assess client satisfaction, and so that we may assist our employees with further educational development, if and where necessary.
Payment for Services
We negotiate payment for services with our clients based on market conditions and needs. We generally bill our nurse and allied employees at an hourly rate and assume all employer costs, including payroll, withholding taxes, benefits, professional liability insurance, and other requirements, as well as any travel and housing arrangements, where applicable. Our shared service center processes hours worked by field employees in the time and attendance systems, which in turn generate the billable transactions to our clients.
Hours worked by independent contractor physicians are reported to our MDA office. We bill our clients for hours worked by independent contractor physicians and for our recruitment fee. We negotiate payment for services with our clients based on market conditions and needs, and the amount we earn is not fixed. We keep a recruitment fee and pass on an agreed amount to the independent contractor physician on behalf of our clients.
For our physician and executive search business, Cejka typically bills its clients a candidate acquisition fee and is reimbursed for certain marketing expenses.
Operations
Our Nurse and Allied and Physician Staffing businesses are operated through a relatively centralized business model servicing all assignment needs of our healthcare professional employees, physicians, and client healthcare facilities through operation centers located in Boca Raton, Florida; Newtown Square, Pennsylvania; West Chester, Ohio; Woodland Hills, California; and Berkeley Lake, Georgia. In addition to the key sales and recruitment activities, certain of these centers also perform support activities such as coordinating housing, payroll processing, benefits administration, billing and collections, travel reimbursement processing, customer service, and risk management. On December 31, 2017, we had 76 office locations.
Cejka Search primarily operates its business from its headquarters located in Creve Coeur, Missouri. This business operates relatively independently, other than certain ancillary services that are provided from our Boca Raton, Florida headquarters, such as payroll, legal, and information systems support.
Information Systems
Various information systems are utilized to run our customer relationship management, recruitment, and placement functions based on the different brands that we operate. Some of these sophisticated applications are proprietary and are hosted in Tier 1
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hosting facilities while other systems are Software as a Service (SaaS) based and hosted by our vendor partners. All of these systems were built/bought to handle considerable growth of all of our businesses. With capability to provide support to all of our facility clients, field employees, and independent contractors, our systems maintain detailed information about our client skill sets and status which assist us in enabling fulfillment and assignment renewal. Our databases are also an extensive pool of existing and potential customers and all related recruitment and sales activity. We constantly evaluate our systems, and the legacy systems for MDA and Cejka Search were recently replaced by an industry leading SaaS product.
Our financial and human resource systems are managed on leading enterprise resource planning software suites that manage certain aspects of accounts payable, accounts receivable, general ledger, billing, and human capital management. These systems have the ability to scale to accommodate revenue growth and/or employee growth. All of our systems are managed by our onshore and offshore Information Technology team.
Risk Management, Insurance, and Benefits
We have developed a risk management program that requires prompt notification of incidents by clients, clinicians, and independent contractors, educational training to our employees, loss analysis, and prompt reporting procedures to reduce our risk exposure. Each of our temporary employees receives instructions regarding the timely reporting of claims and this information is also available on our website. While we cannot predict the future, we continuously review facts and incidents associated with professional liability and workers’ compensation claims in order to identify trends and reduce our risk of loss in the future where possible. In addition, upon notification of an incident that may result in liability to us, we promptly gather all available documentation and review the actions of our employee and independent contractor to determine if he or she should remain on an assignment and whether he or she is eligible for another assignment with us. We consider assessments provided by our clients and we work with clinicians and experts from our insurance carriers to determine employment eligibility and potential exposure. Prior to approving an employee or independent contractor for an assignment, we review records from applicable state professional associations, the national practitioners’ database, and other such databases available to us.
We provide workers’ compensation insurance coverage, professional liability coverage, and healthcare benefits for our eligible temporary professionals. We record our estimate of the ultimate cost of, and reserves for, workers' compensation and professional liability benefits based on actuarial models prepared or reviewed by an independent actuary using our loss history as well as industry statistics. In determining our reserves, we include reserves for estimated claims incurred but not reported. We also estimate on a quarterly basis the healthcare claims that have occurred but have not been reported based on our historical claim submission patterns. The ultimate cost of workers’ compensation, professional liability, and health insurance claims will depend on actual amounts incurred to settle those claims and may differ from the amounts reserved for such claims.
The Company maintains a number of insurance policies including general liability, workers’ compensation, fidelity, fiduciary, directors and officers, cyber, property, and professional liability policies. These policies provide coverage subject to their terms, conditions, limits of liability, and deductibles, for certain liabilities that may arise from our operations. There can be no assurance that any of the above policies will be adequate for our needs, or that we will maintain all such policies in the future.
Regulations
We provide services directly to our clients on a contract basis and receive payment directly from them. However, many of our clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced reimbursement rates. In addition, insurance companies and managed care organizations seek to control costs by requiring healthcare providers, such as hospitals, to discount their services in exchange for exclusive or preferred participation in their benefit plans. While not affecting us directly, future federal and state legislation or evolving commercial reimbursement trends may further reduce or change conditions for our clients’ reimbursement. Such limitations on reimbursement could reduce our clients’ cash flows, hampering the pricing we can charge clients and their ability to pay us. We continuously monitor changes in regulations and legislation for potential impacts on our business.
Our business is subject to regulation by numerous governmental authorities in the jurisdictions in which we operate. Complex federal and state laws and regulations govern, among other things, the licensure of professionals, the payment of our employees (e.g., wage and hour laws, employment taxes and income tax withholdings, etc.), and the operations of our business generally. We conduct business primarily in the U.S. and are subject to federal and state laws and regulations applicable to our business, which may be amended from time to time. Future federal and state legislation or interpretations thereof may require us to change our business practices. Compliance with all of these applicable rules and regulations require a significant amount of resources. We endeavor to be in compliance with all such rules and regulations.
Employees
As of December 31, 2017, we had approximately 1,800 corporate employees. During 2017, we employed an average of 7,397 full-time equivalent field employees in Nurse and Allied Staffing which does not include our Physician Staffing independent
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contractors, all of whom are not employees. Throughout 2017 we were not subject to any collective bargaining agreements. However, in October 2015, the employees we have outsourced to a customer in New York under our OWS model, mainly paraprofessionals, voted to be represented by Local 1199 of the Service Employees International Union. We began negotiating with Local 1199 for an initial collective bargaining agreement in 2016 to cover the terms and conditions of employment for these employees (approximately 450 employees) and expect those negotiations to result in an agreement in 2018. We consider our relationship with employees to be good.
Additional Information
Financial reports and filings with the Securities and Exchange Commission (SEC), including this Annual Report on Form 10-K, are available free of charge as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC, on or through our corporate website at www.crosscountryhealthcare.com. The information found on our website is not part of this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
Item 1A. Risk Factors.
The following risk factors could materially and adversely affect our future operating results and could cause actual results to differ materially from those predicted in the forward-looking statements we make about our business.
Decreases in demand by our clients may adversely affect the profitability of our business.
Among other things, changes in the economy, a decrease or stagnation in the general level of in-patient admissions or out-patient services at our clients’ facilities, uncertainty regarding or changes to federal healthcare law and the willingness of our hospital, healthcare facilities and physician group clients to develop their own temporary staffing pools and increase the productivity of their permanent staff may, individually or in the aggregate, significantly affect demand for our temporary healthcare staffing services and may hamper our ability to attract, develop and retain clients. When a hospital’s admissions increase, temporary employees or other healthcare professionals are often added before full-time employees are hired. As admissions decrease, clients typically reduce their use of temporary employees or other healthcare professionals before undertaking layoffs of their permanent employees. In addition, if hospitals continue to consolidate in an effort to enhance their market positions, improve operational efficiency, and create organizations capable of managing population health, demand for our services could decrease. Decreases in demand for our services may also affect our ability to provide attractive assignments to our healthcare professionals.
Our clients may terminate or not renew their contracts with us.
Our arrangements with hospitals, healthcare facilities and physician group clients are generally terminable upon 30 to 90 days’ notice. These arrangements may also require us to, among other things, guarantee a percentage of open positions that we will fill. We may have to pay a penalty or a client may terminate our contract if we are unable to meet those obligations, either of which could have a negative impact on our profitability. We may have fixed costs, including housing costs, associated with terminated arrangements that we will be obligated to pay post-termination, thus negatively impacting our profitability. In addition, the loss of one or more of our large clients could materially affect our profitability.
We may be unable to recruit enough quality healthcare professionals to meet our clients’ demands.
We rely significantly on our ability to attract, develop and retain healthcare professionals who possess the skills, experience and, as required, licensure necessary to meet the specified requirements of our healthcare clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies as well as actual and potential clients such as healthcare facilities and physician groups, some of which seek to fill positions with either permanent or temporary employees. We rely on word-of-mouth referrals, as well as social media to attract qualified healthcare professionals. If our social media strategy is not successful, our ability to attract qualified healthcare professionals could be negatively impacted.
In addition, with a shortage of certain qualified nurses and physicians in many areas of the United States, competition for these professionals remains intense. Our ability to recruit and retain healthcare professionals depends on our ability to, among other things, offer assignments that are attractive to healthcare professionals and offer them competitive wages and benefits or payments, as applicable. Our competitors might increase hourly wages or the value of benefits to induce healthcare professionals to take assignments with them. If we do not raise wages or increase the value of benefits in response to such increases by our competitors, we could face difficulties attracting and retaining qualified healthcare professionals. If we raise wages or increase benefits in response to our competitors’ increases and are unable to pass such cost increases on to our clients, our margins could decline. At this time, we still do not have enough nurses, allied professionals and physicians to meet all of our clients’ demands for these staffing services. This shortage of healthcare professionals generally and the competition for
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their services may limit our ability to increase the number of healthcare professionals that we successfully recruit, decreasing our ability to grow our business.
If our healthcare facility clients increase the use of intermediaries it could impact our profitability.
We continue to see an increase in the use of intermediaries by our clients. These intermediaries typically enter into contracts with our clients and then subcontract with us and other agencies to provide staffing services, thus interfering to some extent in our relationship with our clients. Each of these intermediaries charges an administrative fee. In instances where we do not win new MSP opportunities or where other vendors win this MSP or VMS business with our current customers, the number of professionals we have on assignment at those clients could decrease. If we are unable to negotiate hourly rates with intermediaries for the services we provide at these clients which are sufficient to cover administrative fees charged by those intermediaries, it could impact our profitability. If those intermediaries become insolvent or fail to pay us for our services, it could impact our bad debt expense and thus our overall profitability. We also provide comprehensive MSP and other workforce solutions directly to certain of our clients. While such contracts typically improve our market share at these facilities, they could result in less diversification of our customer base, increased liability, and reduced margins.
Our costs of providing services may rise faster than we are able to adjust our bill rates and pay rates and, as a result, our margins could decline.
Costs of providing our services could change more quickly than we are able to renegotiate bill rates in our active contracts and pay rates with our thousands of healthcare professionals. For example, we offer housing subsidies to our healthcare professionals or provide actual housing to our healthcare professionals. At any given time, we have over a thousand apartments on lease throughout the U.S. because we provide housing for certain of our healthcare professionals when they are on an assignment with us. The cost of subsidizing housing or renting apartments and furniture for these healthcare professionals may increase faster than we are able to renegotiate our rates with our customers, and this may have a negative impact on our profitability. In addition, an increase in other incremental costs beyond our control, such as insurance and unemployment rates could negatively affect our financial results. The costs related to obtaining and maintaining professional and general liability insurance, health insurance and workers’ compensation insurance for healthcare providers has generally been increasing. This could have an adverse impact on our financial condition unless we are able to pass these costs through to our clients or renegotiate pay rates with our healthcare providers.
Our labor costs could be adversely affected by a shortage of experienced healthcare professionals and labor union activity.
Our operations are dependent on our ability to recruit and staff quality healthcare professionals. We compete with other healthcare staffing companies in recruiting and retaining qualified personnel. We may be required to enhance wages and benefits to our employees, which could negatively impact our profitability. Labor union activity is another factor that could adversely affect our labor costs or otherwise adversely impact us. To the extent a significant portion of our employee base unionizes, our labor costs could increase significantly.
If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenues consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. In the event we are not entirely effective at recruiting and retaining qualified management, nurses and other medical support personnel, or in controlling labor costs, this could have an adverse effect on our results of operations.
We may face difficulties integrating our acquisitions into our operations and our acquisitions may be unsuccessful, involve significant cash expenditures or expose us to unforeseen liabilities.
We continually evaluate opportunities to acquire companies that would complement or enhance our business and at times have preliminary acquisition discussions with some of these companies. These acquisitions involve numerous risks, including potential loss of key employees or clients of acquired companies; difficulties integrating acquired personnel and distinct cultures into our business; difficulties integrating acquired companies into our operating, financial planning and financial reporting systems; diversion of management attention from existing operations; and assumptions of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare and tax regulations. These acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition.
If applicable government regulations change, we may face increased costs that reduce our revenue and profitability.
The temporary healthcare staffing industry is regulated in many states. For example, in some states, firms such as our nurse staffing companies must be registered to establish and advertise as a nurse-staffing agency or must qualify for an exemption from registration in those states. If we were to lose any required state licenses, we could be required to cease operating in those
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states. The introduction of new regulatory provisions could also substantially raise the costs associated with hiring temporary employees. For example, some states could impose sales taxes or increase sales tax rates on temporary healthcare staffing services. These increased costs may not be able to be passed on to clients. In addition, if government regulations were implemented that limited the amount we could charge for our services, our profitability could be adversely affected.
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory environment that affect the purchasing policies, practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could reduce the funds available to purchase our services or otherwise require us to modify our offerings.
We provide our services to hospitals and health systems who pay us directly. Accordingly, Medicare, Medicaid and insurance reimbursement policy changes generally do not directly impact us. However, indirectly, our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. The healthcare industry is highly regulated by federal and state authorities and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the financial health of our customers. Reimbursement changes in government programs, particularly Medicare and Medicaid, can and do indirectly affect the demand and the prices paid for our services.
The ACA was a measure designed to expand access to affordable health insurance, control healthcare spending and improve healthcare quality. Many states have adopted or are considering changes in healthcare laws or policies in part due to state budgetary shortfalls. We believe that we are well-positioned to help our customers in a value-based care environment, which we expect will remain a key feature of government policy under any modified or replacement legislation. Nonetheless, the impact of any other legislation to repeal or amend or replace the ACA is uncertain and could adversely affect our business, cash flow and financial performance.
We operate our business in a regulated industry and modifications, inaccurate interpretations or violations of any applicable statutory or regulatory requirements may result in material costs or penalties as well as litigation and could reduce our revenue and earnings per share.
Our industry is subject to many complex federal, state, local and international laws and regulations related to, among other things, the licensure of professionals, the payment of our field employees (e.g., wage and hour laws, employment taxes and income tax withholdings, etc.) and the operations of our business generally (e.g., federal, state and local tax laws). If we do not comply with the laws and regulations that are applicable to our business, we could incur civil and/or criminal penalties as well as litigation or be subject to equitable remedies.
We are subject to litigation, which could result in substantial judgment or settlement costs; significant legal actions could subject us to substantial uninsured liabilities.
We are party to various litigation claims and legal proceedings. We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, if any, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. We may not have sufficient insurance to cover these risks. Actual outcomes or losses may differ materially from those estimated by our current assessments which would impact our profitability. Adverse developments in existing litigation claims or legal proceedings involving our Company or new claims could require us 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 our financial results.
In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, vicarious liability, violation of certain consumer protection acts, negligent hiring, negligent credentialing, product liability or related legal theories. We may be subject to liability in such cases even if the contribution to the alleged injury was minimal or related to one of our subcontractors or its employees. Many of these actions involve large claims and significant defense costs. In addition, we may be subject to claims related to torts or crimes committed by our corporate employees or healthcare professionals that we place on assignment. In most instances, we are required to indemnify clients against some or all of these risks. A failure of any of our corporate employees or healthcare professional to observe our policies and guidelines, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages.
To protect ourselves from the cost of these types of claims, we maintain professional malpractice liability insurance and general liability insurance coverage with terms and in amounts with deductibles that we believe are appropriate for our operations. We are partially self-insured for our workers' compensation coverage, health insurance coverage, and professional liability
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coverage for our locum tenens providers. If we become subject to substantial uninsured workers' compensation, medical coverage or medical malpractice liabilities, whether directly or indirectly, our financial results may be adversely affected. In addition, our insurance coverage may not cover all claims against us or continue to be available to us at a reasonable cost. If we are unable to pay our self-insured retention portion or maintain adequate insurance coverage, we may be exposed to substantial liabilities.
If provisions in our corporate documents and Delaware law delay or prevent a change in control, we may be unable to consummate a transaction that our stockholders consider favorable.
Our certificate of incorporation and by-laws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of “blank check” preferred stock. Without stockholder approval, the Board of Directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire us. Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.
Market disruptions may adversely affect our operating results and financial condition.
Economic conditions and volatility in the financial markets may have an adverse impact on the availability of credit to us and to our customers and businesses generally. To the extent that disruption in the financial markets occurs, it has the potential to materially affect our and our customers’ ability to tap into debt and/or equity markets to continue ongoing operations, have access to cash and/or pay debts as they come due. These events could negatively impact our results of operations and financial conditions. Although we monitor our credit risks to specific clients that we believe may present credit concerns, default risk or lack of access to liquidity may result from events or circumstances that are difficult to detect or foresee. Conditions in the credit markets and the economy generally could adversely impact our business and limit or prohibit us from refinancing our credit agreements on terms favorable to us when they become due.
Stock issuable under our stock option plans are presently in effect and sales of this stock could cause our stock price to decline.
We registered 4,398,001 shares of common stock for issuance under our 1999 stock option plan, and 3,500,000 shares of common stock for issuance under our 2007 Stock Incentive Plan. In 2014 and 2017, we amended and restated that Plan to issue an additional 600,000 shares and 2,000,000 shares, respectively, all of which have been registered. Fully vested stock appreciation rights of 94,500 were issued and outstanding as of February 26, 2018. Shares of restricted stock outstanding as of February 26, 2018, were 511,599. In addition, a target of 256,371 performance stock awards were issued and outstanding as of February 26, 2018. See Note 14 - Stockholders' Equity to our consolidated financial statements. Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock, under our benefit plans, is eligible for resale in the public market without restriction. We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of these shares for future sale will have on the market price of our common stock.
We are dependent on the proper functioning of our information systems and applications hosted by our vendors.
We are dependent on the proper functioning of our information systems in operating our business, including those applications hosted by our vendors. Critical information systems used in daily operations identify and match staffing resources and client assignments and perform billing and accounts receivable functions. Additionally, we rely on our information systems in managing our accounting and financial reporting. These systems are subject to certain risks, including technological obsolescence. We are currently evaluating the technology platforms of our businesses. If our proprietary systems of Software as a Service applications fail or are otherwise unable to function in a manner that properly supports our business operations, or if these systems require significant costs to repair, maintain or further develop or update, we could experience business interruptions or delays that could materially and adversely affect our business and financial results.
In addition, our information systems are protected through a secure hosting facility and additional backup remote processing capabilities also exist in the event our primary systems fail or are not accessible. However, the business is still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events which may prevent personnel from gaining access to systems necessary to perform their tasks in an automated fashion. In the event that critical information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could impact our ability to identify business opportunities quickly, to, among other things, maintain billing and clinical records reliably, to bill for services efficiently and to maintain our accounting and financial reporting accurately.
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We are increasingly dependent on third parties for the execution of certain critical functions.
We have outsourced certain critical applications or business processes to external providers, including but not limited to, cloud-based services. We exercise care in the selection and oversight of these providers. However, the failure or inability to perform on the part of one or more of these critical suppliers could cause significant disruptions and increased costs to our business
Our collection, use, and retention of personal information and personal health information create risks that may harm our business.
As part of our business model, we collect, transmit and retain personal information of our employees and contract professionals and their dependents, including, without limitation, full names, social security numbers, addresses, birth dates, and payroll-related information. We use commercially available information security technologies to protect such information in digital format and have security and business controls to limit access to such information. In addition, we periodically perform penetration tests and respond to those findings. However, employees or third parties may be able to circumvent these measures and acquire or misuse such information, resulting in breaches of privacy, and errors in the storage, use or transmission of such information may result in breaches of privacy. Privacy breaches may require notification and other remedies, which can be costly, and which may have other serious adverse consequences for our business, including regulatory penalties and fines, claims for breach of contract, claims for damages, adverse publicity, reduced demand for our services by clients and/or healthcare professional candidates, harm to our reputation, and regulatory oversight by state or federal agencies. The possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens. We may be required to incur significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.
Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence. We have implemented systems and processes to focus on identification, prevention, mitigation and resolution. However, these measures cannot provide absolute security, and our systems may be vulnerable to cyber-security breaches such as viruses, hacking, and similar disruptions from unauthorized intrusions. In addition, we rely on third party service providers to perform certain services, such as payroll and tax services. Any failure of our systems or third party systems may compromise our sensitive information and/or personally identifiable information of our employees. While we have secured cyber insurance to potentially cover certain risks associated with cyber incidents, there can be no assurance the insurance will be sufficient to cover any such liability.
Losses caused by natural disasters, such as hurricanes and fires, could cause us to suffer material financial losses.
Catastrophes can be caused by various events, including, but not limited to, hurricanes, fires, and other severe weather. The incidence and severity of catastrophes are inherently unpredictable. With our headquarters and shared services located in South Florida, we are more vulnerable to possible disruptions from hurricanes and the impacts resulting therefrom, such as tornadoes, flooding, fuel shortages, and disruption of internet services. The extent of losses from a catastrophe is a function of both the total amount of insured exposure and the severity of the event. We do not maintain business interruption insurance for these events. We could suffer material financial losses as a result of disruptions from hurricanes, fires, and other catastrophes.
We have a level of indebtedness which may have an adverse effect on our business or limit our ability to take advantage of business, strategic or financing opportunities.
As indicated below, we have and will continue to have a significant amount of indebtedness relative to our equity. The following table sets forth our total principal amount of debt and stockholders’ equity.
December 31, 2017 | |||
(amounts in thousands) | |||
Total debt at par | $ | 100,000 | |
Total Cross Country Healthcare, Inc. stockholders' equity | $ | 237,089 | |
Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal, interest or other amounts due on our indebtedness. Subject to certain restrictions under our existing indebtedness, we and our
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subsidiaries may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have the effect of increasing our total leverage. As a consequence of our indebtedness, (1) demands on our cash resources may increase, (2) we are subject to restrictive covenants that limit our financial and operating flexibility, and (3) we may choose to institute self-imposed limits on our indebtedness based on certain considerations including market interest rates, our relative leverage and our strategic plans. For example, as a result of our level of indebtedness and the uncertainties arising in the credit markets and the U.S. economy:
- | we may be more vulnerable to general adverse economic and industry conditions; |
- | we may have to pay higher interest rates upon refinancing or on our variable rate indebtedness if interest rates rise, thereby reducing our cash flows; |
- | we may find it more difficult to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements that would be in our long-term interests; |
- | we may be required to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our debt, reducing the available cash flow to fund other investments; |
- | we may have limited flexibility in planning for, or reacting to, changes in our business or in the industry; |
- | we may have a competitive disadvantage relative to other companies in our industry that are less leveraged; and |
- | we may be required to sell debt or equity securities or sell some of our core assets, possibly on unfavorable terms, in order to meet payment obligations. |
These restrictions could have a material adverse effect on our business.
We could fail to generate sufficient cash to fund our liquidity needs and/or fail to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness.
We currently have sufficient liquidity to operate our business in the normal course. If, however, we were to make an acquisition or enter into a similar type of transaction, our liquidity needs may exceed our current capacity. In addition, our existing credit facilities currently contain financial covenants that require us to operate above a minimum fixed charge coverage ratio and below a consolidated leverage ratio. Deterioration in our operating results could result in our inability to comply with these covenants and would result in a default under our credit facility. If an event of default exists, our lenders could call the indebtedness and we may be unable to renegotiate or secure other financing.
We are subject to business risks associated with international operations.
We have international operations in India where our Cross Country Infotech, Pvt Ltd. (Infotech) subsidiary is located. Infotech provides in-house information systems development and support services as well as some back-office processing services. We have limited experience in supporting our services outside of North America. Operations in certain markets are subject to risks inherent in international business activities, including: fluctuations in currency exchange rates; changes in regulations; varying economic and political conditions; overlapping or differing tax structures; and regulations (pertaining to, among other things, compensation and benefits, vacation, and the termination of employment). Our inability to effectively manage our international operations or to violate a regulation could result in increased costs and adversely affect our results of operations.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors and fraud, or in making all material information known in a timely manner to management.
Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or
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procedures may deteriorate. Because of the inherent limitations, misstatements due to error or fraud may occur and not be detected.
Impairment in the value of our goodwill, trade names, or other intangible assets could negatively impact our net income and earnings per share.
We are required to test goodwill and intangible assets with indefinite lives (such as trade names) annually, to determine if impairment has occurred. Long-lived assets and other identifiable intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that amounts may not be recoverable. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying amount of the goodwill or other intangible assets and the implied fair value of the goodwill or the fair value of the indefinite-lived intangible asset in the period the determination is made. The testing of goodwill and other intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations, changes in competition or potential changes in our stock price and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of our future performance, could affect the fair value of goodwill, trade names, or other intangible assets, which may result in an impairment charge. We cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other intangible assets become impaired, there could be an adverse effect on us. At December 31, 2017, goodwill, trade names not subject to amortization, and other intangible assets represented 44% of our total assets. In 2017 and 2016, we recorded impairment charges of $14.4 million and $24.3 million, respectively.
We could suffer adverse tax and other financial consequences if taxing authorities do not agree with our tax positions, if there are further legislative tax changes, or if we are unable to utilize our net operating losses.
We are periodically subject to a number of tax examinations by taxing authorities in the states and countries where we do business. We also have significant deferred tax assets related to our net operating losses (NOLs) in U.S. federal and state taxing jurisdictions, which, generally, for U.S. federal and state tax purposes, carry forward for up to twenty years. Tax years generally remain subject to examination until three years after NOLs are used or expire. We expect that we will continue to be subject to tax examinations in the future. We recognize tax benefits of uncertain tax positions when we believe the positions are more likely than not of being sustained upon a challenge by the relevant tax authority. We believe our judgments in this area are reasonable and correct, but there is no guarantee that we will be successful if challenged by a taxing authority. If there are tax benefits, including, but not limited to, the use of NOLs, expense reimbursements, or other tax attributes, that are challenged successfully by a taxing authority, we may be required to pay additional taxes or we may seek to enter into settlements with the taxing authorities, which could require significant payments or otherwise have a material adverse effect on our business, results of operations, and financial condition.
In addition, U.S. federal, state and local, as well as international, tax laws and regulations are extremely complex and subject to varying interpretations. Most recently, on December 22, 2017, the President signed the 2017 Tax Act into law. The 2017 Tax Act contains substantial changes to the U.S. federal income tax code effective January 1, 2018, including a reduction in the federal corporate rate from 35% to 21%. In the long-term, we anticipate that we will have an overall benefit from the reduction in the tax rate slightly offset by potential deductions disallowed under the current law. However, we recognized an $8.0 million tax charge in 2017 primarily the result of the lower corporate tax rate, which required us to remeasure our net deferred tax asset to reflect the lower corporate tax rate. Although we are not aware of any provision in the 2017 Tax Act or any other pending tax legislation that would have a material adverse impact on our financial performance, the ultimate impact of the 2017 Tax Act may differ from our current assessment due to changes in interpretations and assumptions made by us as well as the issuance of any further regulations or guidance regarding the U.S. federal income tax code. At this time, it is unclear how many U.S. states will incorporate these federal law changes, or portions thereof, into their tax codes. There can be no assurance that the 2017 Tax Act or any other legislative changes will not negatively impact our operating results, financial condition, and future business operations.
In addition, we may be limited in our ability to utilize our NOLs to offset future taxable income and thereby reduce our otherwise payable income taxes. Our ability to utilize our NOLs is also dependent, in part, upon us having sufficient future earnings to utilize our NOLs before they expire. If market conditions change materially and we determine that we will be unable to generate sufficient taxable income in the future to utilize our NOLs, we could be required to record an additional valuation allowance. We review the valuation allowances for our NOLs periodically and make adjustments from time to time, which can result in an increase or decrease to the net deferred tax asset related to our NOLs. If we are unable to use our NOLs or use of our NOLs is limited, we may have to make significant payments or reduce our deferred tax assets, which could have a material adverse effect on our business, results of operations and financial condition.
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If certain of our healthcare professionals are reclassified from independent contractors to employees our profitability could be materially adversely impacted.
Federal or state taxing authorities could re-classify our locum tenens physicians, CRNAs and other independent contractors as employees, despite both the general industry standard to treat them as independent contractors and many state laws prohibiting non-physician owned companies from employing physicians (e.g., the “corporate practice of medicine”). If they were re-classified as employees, we would be subject to, among other things, employment and payroll-related tax claims, as well as any applicable penalties and interest. Any such reclassification would have a material adverse impact on our business model for that business segment and would negatively impact our profitability.
If the method for paying locum tenens physicians changes, it could negatively impact our profitability.
The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) creates a new framework for rewarding physicians for providing higher quality care by establishing two tracks of payment: a merit-based incentive payment system (MIPS), and Advanced Alternative Payment Models (AAPMs). If hospitals change the method for paying locum tenens physicians to meet their performance goals or other criteria for Medicaid or Medicare reimbursements, the profitability of our business could be adversely impacted.
Our financial results could be adversely impacted by the loss of key management.
We believe the successful execution of our business strategy and our ability to build upon significant recent investments and acquisitions depends on the continued employment of key members of our senior management team. If we were to lose any key personnel, we may not be able to find an appropriate replacement on a timely basis and our results of operations could be negatively affected. Further, the loss of a significant number of employees or our inability to hire a sufficient number of qualified employees could have a material adverse effect on our business.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We do not own any real property. Our principal leases as of February 1, 2018 are listed below.
Location | Function | Square Feet | Lease Expiration | |||
Boca Raton, Florida | Nurse and Allied Staffing administration and general office use | 70,406 | December 31, 2025 | |||
Boca Raton, Florida | Corporate headquarters | 48,154 | November 30, 2025 | |||
Berkeley Lake, Georgia | Physician Staffing office | 41,607 | October 31, 2024 | |||
Creve Coeur, Missouri | Physician and Executive search headquarters | 27,051 | August 31, 2024 | |||
Item 3. Legal Proceedings.
We are subject to legal proceedings and claims that arise in the ordinary course of our business. We do not believe the outcome of these matters will have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock currently trades under the symbol “CCRN” on the NASDAQ Global Select Market (NASDAQ). Our common stock commenced trading on the NASDAQ National Market under the symbol “CCRN” on October 25, 2001. The
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following table sets forth, for the periods indicated, the high and low sale prices per share of CCRN common stock. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Sale Prices | |||||||
Calendar Period | High | Low | |||||
2017 | |||||||
Quarter Ended March 31, 2017 | $ | 14.96 | $ | 14.48 | |||
Quarter Ended June 30, 2017 | $ | 13.11 | $ | 12.69 | |||
Quarter Ended September 30, 2017 | $ | 12.73 | $ | 12.32 | |||
Quarter Ended December 31, 2017 | $ | 13.44 | $ | 13.02 | |||
2016 | |||||||
Quarter Ended March 31, 2016 | $ | 13.10 | $ | 12.31 | |||
Quarter Ended June 30, 2016 | $ | 13.48 | $ | 12.93 | |||
Quarter Ended September 30, 2016 | $ | 13.40 | $ | 12.94 | |||
Quarter Ended December 31, 2016 | $ | 13.93 | $ | 13.45 | |||
The graph below compares the Company to the cumulative 5-year total return of holders of the Company's common stock with the cumulative total returns of the NASDAQ Composite index and the Dow Jones U.S. Business Training & Employment Agencies index. The graph assumes that the value of the investment in the Company's common stock and in each of the indexes (including reinvestment of dividends) was $100 on December 31, 2012 and tracks it through December 31, 2017.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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As of February 21, 2018, there were 135 stockholders of record of our common stock. In addition, there were 4,396 beneficial owners of our common stock held by brokers or other institutions on behalf of stockholders.
We have never paid or declared cash dividends on our common stock. Covenants in our credit agreement limit our ability to repurchase our common stock and declare and pay cash dividends on our common stock. On February 28, 2008, our Board of Directors authorized our most recent stock repurchase program whereby we may purchase up to 1.5 million of our common shares, subject to the terms of our current credit agreement. The shares may be repurchased from time-to-time in the open market and the repurchase program may be discontinued at any time at our discretion. At December 31, 2017, we had 942,443 shares of common stock left remaining to repurchase under this authorization, subject to the limitations of our credit agreement as described in Note 14 - Stockholders' Equity to our consolidated financial statements.
Item 6. Selected Financial Data.
The selected consolidated financial data as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015 are derived from the audited consolidated financial statements of Cross Country Healthcare, Inc., included elsewhere in this Report. The selected consolidated financial data as of December 31, 2015, 2014, and 2013 and for the years ended December 31, 2014 and 2013 are derived from the consolidated financial statements of Cross Country Healthcare, Inc., that have been audited but not included in this Report on Form 10-K.
The following selected financial data should be read in conjunction with the consolidated financial statements and related notes of Cross Country Healthcare, Inc., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this report.
Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(Amounts in thousands, except per share data) | |||||||||||||||||||
Consolidated Statements of Operations Data: | |||||||||||||||||||
Revenue from services | $ | 865,048 | $ | 833,537 | $ | 767,421 | $ | 617,825 | $ | 438,311 | |||||||||
Income (loss) from operations | 11,748 | 6,184 | 20,565 | (10,468 | ) | (8,022 | ) | ||||||||||||
Consolidated net income (loss) | 38,802 | 8,731 | 4,954 | (31,534 | ) | (54,250 | ) | ||||||||||||
Net income (loss) attributable to common shareholders | 37,513 | 7,967 | 4,418 | (31,783 | ) | (51,969 | ) | ||||||||||||
Per Share Data: | |||||||||||||||||||
Net income (loss) per share attributable to common shareholders - Basic | $ | 1.07 | $ | 0.25 | $ | 0.14 | $ | (1.02 | ) | $ | (1.75 | ) | |||||||
Net income (loss) per share attributable to common shareholders - Diluted | $ | 1.01 | $ | 0.15 | $ | 0.14 | $ | (1.02 | ) | $ | (1.75 | ) | |||||||
Weighted Average Common Shares Outstanding: | |||||||||||||||||||
Basic | 35,018 | 32,132 | 31,514 | 31,190 | 31,009 | ||||||||||||||
Diluted | 36,166 | 36,246 | 32,162 | 31,190 | 31,009 | ||||||||||||||
Other Operating Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 25,537 | $ | 20,630 | $ | 2,453 | $ | 4,995 | $ | 8,055 | |||||||||
Total assets | 467,687 | 388,378 | 365,595 | 324,502 | 248,245 | ||||||||||||||
Total debt at par | 100,000 | 64,523 | 63,094 | 58,702 | 8,576 | ||||||||||||||
Total stockholders’ equity | 237,719 | 151,802 | 141,344 | 130,332 | 160,667 | ||||||||||||||
Net cash provided by (used in) operating activities | 45,508 | 30,145 | 18,235 | (4,072 | ) | 8,659 | |||||||||||||
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_______________
The following items impact the comparability and presentation of our consolidated data:
• | Consolidated net income (loss) for the years ended December 31, 2017, 2016, 2015, and 2014, respectively, includes amounts attributable to noncontrolling interest of $1.3 million, $0.8 million, $0.5 million, and $0.2 million. See Note 1 - Organization and Basis of Presentation to our consolidated financial statements. |
• | We acquired all of the assets of Advantage effective July 1, 2017, all of the membership interests of Mediscan on October 30, 2015, substantially all of the assets and certain liabilities of MSN on June 30, 2014, and the operating assets of On Assignment, Inc.'s Allied Healthcare Staffing division on December 2, 2013. The results of these acquisition's operations have been included in our consolidated statements of operations since their respective effective dates of acquisition. For the years ended December 31, 2017, 2016, 2015, 2014, and 2013, we recognized $2.0 million, $0.1 million, $0.9 million, $8.0 million, and $0.5 million of acquisition and integration costs, respectively. See Note 3 - Acquisitions to our consolidated financial statements. |
• | The years ended December 31, 2017 and 2016 include less than $0.1 million and $0.8 million, respectively, of acquisition-related contingent consideration expense primarily related to the USR and Mediscan acquisitions. See Note 3 - Acquisitions and Note 10 - Fair Value Measurements to our consolidated financial statements. |
• | We incurred restructuring costs in the years ended December 31, 2017, 2016, 2015, 2014, and 2013, for $1.0 million, $0.8 million, $1.3 million, $0.8 million, and $0.5 million, respectively. Restructuring costs relate to discrete cost savings initiatives in each year. |
• | The year ended December 31, 2013 includes a legal settlement charge of $0.8 million related to a wage and hour class action lawsuit in California. |
• | Non-cash impairment charges of $14.4 million, $24.3 million, $2.1 million, $10.0 million, and $6.4 million, respectively, were incurred in the years ended December 31, 2017, 2016, 2015, 2014, and 2013. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets to our consolidated financial statements. |
• | The years ended December 31, 2017 and 2016 include the impact of a gain on derivative liability of $1.6 million and $5.8 million, while the years ended December 31, 2015 and 2014 include the impact of a loss on derivative liability of $9.9 million and $16.7 million, respectively. The derivative liability related to the Convertible Notes issued in conjunction with the acquisition of MSN. See Note 9 - Convertible Notes Derivative Liability to our consolidated financial statements. |
• | We incurred a loss on sale of business of $2.2 million (an after-tax gain of $1.3 million), in the year ended December 31, 2015, related to the sale of our education seminars business, Cross Country Education, LLC (CCE) on August 31, 2015. See Note 4 - Disposal to our consolidated financial statements. |
• | The years ended December 31, 2017, 2016, and 2013 include a loss on early extinguishment of debt of $5.0 million, $1.6 million, and $1.4 million, respectively, related to extinguishment fees and the write-off of unamortized loan fees and net debt discount and issuance costs related to prior credit agreements. See Note 8 - Debt to our consolidated financial statements. |
• | The income tax benefit for the year ended December 31, 2017 was primarily the result of reducing federal and certain state valuation allowances on our deferred tax assets totaling $45.4 million, offset by an $8.0 million reduction in our net deferred tax assets (relating to the impact from the 2017 Tax Act signed into legislation on December 22, 2017). Previously, in the year ended December 31, 2013, we recorded valuation allowances of $52.0 million covering all of our net deferred tax assets. The valuation allowance was maintained and reflected in the years ended December 31, 2014 through December 31, 2016. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 1. Business, Item 6. Selected Financial Data, Item 1A. Risk Factors, Forward-Looking Statements and Item 15. Consolidated Financial Statements and the accompanying notes and other data, all of which appear elsewhere in this Annual Report on Form 10-K.
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Business Overview
We provide healthcare staffing, recruiting and workforce solutions to our customers through a network of 76 office locations throughout the U.S. Our services include placing clinicians on travel and per diem assignments, local short-term contracts, and permanent positions. In addition, we offer flexible workforce management solutions to our customers including: MSP, education healthcare, RPO, and other outsourcing and value-added services as described in Item 1. Business. In addition, we provide both retained and contingent placement services for healthcare executives, physicians, and other healthcare professionals.
We manage and segment our business based on the nature of our 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 Other Human Capital Management Services.
● | Nurse and Allied Staffing – For the year ended December 31, 2017, Nurse and Allied Staffing represented approximately 88% of our total revenue. Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added workforce solutions including: temporary and permanent placement of travel and local branch-based nurse and allied professionals, MSP services, education healthcare services, and outsourcing services. Substantially all of the results of the acquisition of Advantage have been aggregated with our Nurse and Allied Staffing business segment. See Note 3 - Acquisitions to our consolidated financial statements. |
● | Physician Staffing – For the year ended December 31, 2017, Physician Staffing represented approximately 11% of our total revenue. Physician Staffing provides physicians in many specialties, as well as CRNAs, NP, and PAs under our Medical Doctor Associates (MDA) brand as independent contractors on temporary assignments throughout the U.S. Less than 2% of the business related to the Advantage acquisition is managed by, and included in, the Physician Staffing business segment. |
● | Other Human Capital Management Services – For the year ended December 31, 2017, Other Human Capital Management Services (OHCMS) represented approximately 1% of our total revenue. Subsequent to the sale of our education seminars business, CCE, on August 31, 2015, OHCMS is comprised of retained and contingent search services for physicians, healthcare executives, and other healthcare professionals within the U.S. |
Summary of Operations
For the year ended December 31, 2017, revenue from services grew 3.8% to $865.0 million, entirely from our Nurse and Allied Staffing business, driven by the acquisition of Advantage effective July 1, 2017, and partly offset by declines in our other segments. Demand in our Nurse and Allied Staffing segment remained relatively stable. However, our fourth quarter revenue was impacted by, in part, what we believe are some short-term pressures on our business including: the impact severe weather had on our operations, particularly due to office closures; lower demand for premium rate specialties; fewer overall placements; and a lower renewal rate. These pressures are expected to continue to impact our first quarter 2018 results, but we expect to recover in the latter part of 2018. The slight decline in our Physician Staffing segment is due to lower volume of days filled and the impact of specialty mix. Our volume of days filled increased for advanced practices compared to a decline for physician specialties. Generally, our pricing remained strong across all segments and we continued to add a growing number of MSPs that should drive continued growth in demand for our services. Excluding the impact of the Advantage acquisition, we continued to manage our selling, general, and administrative expenses as we remain committed to improving operating leverage and overall profitability. Net income attributable to common shareholders was $37.5 million, or $1.01 per diluted share and was impacted by noncash items including an income tax benefit resulting from the reversal of substantially all of the our valuation allowances on net deferred tax assets, partly offset by impairment charges related to Physician Staffing, and income tax expense attributable to the remeasurement of deferred tax assets under the 2017 Tax Act. As a result of the valuation allowance release, we expect our ongoing effective tax rate to be more normalized and our remaining net operating losses should offset the majority of cash taxes paid until 2019.
For the year ended December 31, 2017, we generated cash flow from operating activities of $45.5 million. In the third quarter of 2017, we financed the acquisition of Advantage using available cash and an incremental term loan. We renewed and increased the size of our Credit Agreement to a total of $215.0 million, leaving us with extra capacity for further growth. As of December 31, 2017, we had $25.5 million of cash and cash equivalents and a $100.0 million term loan outstanding. There were no borrowings drawn on our $115.0 million revolving credit facility, with $21.6 million of letters of credit outstanding, leaving $93.4 million available for borrowings under the revolving credit facility. See Note 8 - Debt to our consolidated financial statements.
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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. Due to the timing of our business process and other factors, certain of these operating metrics may not necessarily correlate to the reported GAAP results for the periods presented. Some of the segment financial results analyzed include revenue, gross profit margins, 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.
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. | |
Physician Staffing | Days filled is calculated by dividing the total hours invoiced during the period by 8 hours. This method does not reflect the impact of revenue generated from permanent placements, reimbursed expenses, discounts and allowances, and the impact from accruals and adjustments recorded for financial statement purposes. |
Revenue per day filled is calculated by dividing revenue invoiced by days filled for the period presented. Invoiced revenue excludes revenue from permanent placement and accrued revenue. | |
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Results of Operations
The following table summarizes, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of revenue. Our historical results of operations are not necessarily indicative of future operating results.
Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Revenue from services | 100.0 | % | 100.0 | % | 100.0 | % | ||
Direct operating expenses | 73.6 | 73.4 | 74.3 | |||||
Selling, general, and administrative expenses | 21.7 | 21.5 | 21.0 | |||||
Bad debt expense | 0.2 | 0.1 | 0.1 | |||||
Depreciation and amortization | 1.2 | 1.1 | 1.0 | |||||
Loss on sale of business | — | — | 0.3 | |||||
Acquisition and integration costs | 0.2 | — | 0.1 | |||||
Acquisition-related contingent consideration | — | 0.1 | — | |||||
Restructuring costs | 0.1 | 0.1 | 0.2 | |||||
Impairment charges | 1.6 | 2.9 | 0.3 | |||||
Income from operations | 1.4 | 0.8 | 2.7 | |||||
Interest expense | 0.5 | 0.7 | 0.9 | |||||
(Gain) loss on derivative liability | (0.2 | ) | (0.7 | ) | 1.3 | |||
Loss on early extinguishment of debt | 0.6 | 0.2 | — | |||||
Income before income taxes | 0.5 | 0.6 | 0.5 | |||||
Income tax benefit | (4.0 | ) | (0.5 | ) | (0.1 | ) | ||
Consolidated net income | 4.5 | 1.1 | 0.6 | |||||
Less: Net income attributable to noncontrolling interest in subsidiary | 0.2 | 0.1 | — | |||||
Net income attributable to common shareholders | 4.3 | % | 1.0 | % | 0.6 | % | ||
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Comparison of Results for the Year Ended December 31, 2017 compared to the Year Ended December 31, 2016
Year Ended December 31, | ||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||
2017 | 2016 | $ | % | |||||||||||
(Dollars in thousands) | ||||||||||||||
Revenue from services | $ | 865,048 | $ | 833,537 | $ | 31,511 | 3.8 | % | ||||||
Direct operating expenses | 636,462 | 611,802 | 24,660 | 4.0 | % | |||||||||
Selling, general, and administrative expenses | 187,435 | 179,820 | 7,615 | 4.2 | % | |||||||||
Bad debt expense | 1,828 | 593 | 1,235 | 208.3 | % | |||||||||
Depreciation and amortization | 10,174 | 9,182 | 992 | 10.8 | % | |||||||||
Acquisition-related contingent consideration | 44 | 814 | (770 | ) | (94.6 | )% | ||||||||
Acquisition and integration costs | 1,975 | 78 | 1,897 | 2,432.1 | % | |||||||||
Restructuring costs | 1,026 | 753 | 273 | 36.3 | % | |||||||||
Impairment charges | 14,356 | 24,311 | (9,955 | ) | (40.9 | )% | ||||||||
Income from operations | 11,748 | 6,184 | 5,564 | 90.0 | % | |||||||||
Interest expense | 4,214 | 6,106 | (1,892 | ) | (31.0 | )% | ||||||||
Gain on derivative liability | (1,581 | ) | (5,805 | ) | 4,224 | 72.8 | % | |||||||
Loss on early extinguishment of debt | 4,969 | 1,568 | 3,401 | 216.9 | % | |||||||||
Other income, net | (155 | ) | (230 | ) | 75 | 32.6 | % | |||||||
Income before income taxes | 4,301 | 4,545 | (244 | ) | (5.4 | )% | ||||||||
Income tax benefit | (34,501 | ) | (4,186 | ) | (30,315 | ) | (724.2 | )% | ||||||
Consolidated net income | 38,802 | 8,731 | 30,071 | 344.4 | % | |||||||||
Less: Net income attributable to noncontrolling interest in subsidiary | 1,289 | 764 | 525 | 68.7 | % | |||||||||
Net income attributable to common shareholders | $ | 37,513 | $ | 7,967 | $ | 29,546 | 370.9 | % | ||||||
Revenue from services
Revenue from services increased $31.5 million, or 3.8%, to $865.0 million for the year ended December 31, 2017, as compared to $833.5 million for the year ended December 31, 2016. The increase was entirely from Nurse and Allied Staffing primarily due to the Advantage acquisition, and partially offset by lower revenue from Physician Staffing and OHCMS. 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 field insurance expenses. Direct operating expenses increased $24.7 million, or 4.0%, to $636.5 million for the year ended December 31, 2017, as compared to $611.8 million for the year ended December 31, 2016, entirely due to the Advantage acquisition. As a percentage of total revenue, direct operating expenses increased to 73.6% compared to 73.4% in the prior year period.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $7.6 million, or 4.2%, to $187.4 million for the year ended December 31, 2017, as compared to $179.8 million for the year ended December 31, 2016, partly due to the impact of the acquisition of Advantage. Excluding the impact of Advantage, the increase was primarily due to investments in revenue-producing headcount, higher marketing costs for candidate attraction, and higher compensation and benefit costs. As a percentage of total revenue, selling, general, and administrative expenses were 21.7% and 21.5% for the year ended December 31, 2017 and December 31, 2016, respectively.
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Depreciation and amortization expense
Depreciation and amortization expense in the year ended December 31, 2017 increased to $10.2 million as compared to $9.2 million for the year ended December 31, 2016, partly due to the additional amortization of other intangible assets of Advantage. As a percentage of revenue, depreciation and amortization expense was 1.2% for the year ended December 31, 2017 and 1.1% for the year ended December 31, 2016.
Acquisition-related contingent consideration
Acquisition-related contingent consideration totaled less than $0.1 million for the year ended December 31, 2017, related to the accretion on earnouts, partly offset by the reversal of an earnout liability related to Mediscan which was determined would not be achieved, as compared to $0.8 million for the year ended December 31, 2016, primarily related to accretion of the Mediscan earnouts. In the fourth quarter of 2017, we also recognized a decrease in the fair value of the USR earnout liability of $1.3 million, driven by the decrease in the projected USR 2018 and 2019 revenue and EBITDA amounts, offset by a $1.2 million increase in the projected fair value of Mediscan's DirectEd earnout liability, as a result of an increase in their projected 2018 and 2019 gross profit amounts. See Note 9 - Fair Value Measurements to our consolidated financial statements.
Acquisition and integration costs
During the years ended December 31, 2017 and 2016, we incurred acquisition and integration costs of $2.0 million and $0.1 million, respectively. The 2017 costs consisted primarily of transaction, advisory, and legal fees related to the acquisition of Advantage. See Note 3 - Acquisitions to our consolidated financial statements.
Restructuring costs
Restructuring costs include severance and exit costs incurred as part of separate and discrete cost savings initiatives. We recorded restructuring costs of $1.0 million for the year ended December 31, 2017 and $0.8 million for the year ended December 31, 2016.
Impairment charges
In the fourth quarter of 2017, we recorded non-cash impairment charges of $14.4 million relating to the Physician Staffing reporting unit. We reduced our long-range forecast for the Physician Staffing business segment in the fourth quarter of 2017. The lower than expected revenue was driven by lower booking volumes, partly due to the loss of customers. In addition, margins of the reporting unit were negatively impacted from continued investments in the business. As a result, we recorded non-cash impairment charges of $8.7 million related to trade names and $5.7 million related to goodwill.
In the second quarter of 2016, we recorded non-cash impairment charges of $24.3 million relating to the Physician Staffing reporting unit. Based on its under-performance to plan through the six months ended June 30, 2016, we revised our growth assumptions for the Physician Staffing reporting unit which triggered our evaluation.
Interest expense
Interest expense totaled $4.2 million for the year ended December 31, 2017 and $6.1 million for the year ended December 31, 2016. The decrease was due to a lower effective interest rate partially offset by higher average borrowings. The effective interest rate on our borrowings decreased to 4.6% for the year ended December 31, 2017 compared to 8.4% for the year ended December 31, 2016, primarily due to the payoff of our $25.0 million 8% fixed rate Convertible Notes on March 17, 2017. See Note 7 - Debt to our consolidated financial statements.
Gain on derivative liability
Gain on derivative liability of $1.6 million and $5.8 million for the years ended December 31, 2017 and December 31, 2016, respectively, related to the change in the fair value of embedded features of our Convertible Notes. The gains in both periods primarily resulted from decreases in our share price from the end of the respective prior years through the 2017 payoff date and through December 31, 2016. The gain in 2016 was partially offset by a reduction in credit risk. See Note 8 - Debt and Note 9 - Convertible Notes Derivative Liability to our consolidated financial statements.
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Loss on early extinguishment of debt
Loss on early extinguishment of debt of $5.0 million for the year ended December 31, 2017 relates to the write-off of original issue discount and debt issuance costs of $4.4 million and a pre-payment fee of $0.6 million due to the early settlement of our Convertible Notes. Loss on early extinguishment of debt was $1.6 million for the year ended December 31, 2016 and related to the write-off of unamortized net debt discount and issuance costs, including a redemption premium of $0.6 million, related to our Second Lien Term Loan. See Note 8 - Debt to our consolidated financial statements.
Income tax benefit
Income tax benefit from continuing operations totaled $34.5 million for the year ended December 31, 2017, compared to $4.2 million for the year ended December 31, 2016. The effective tax rate was negative 802.2% and negative 92.1%, including the impact of discrete items, for the years ended December 31, 2017 and 2016, respectively. The effective tax rate in 2017 was impacted by the reversal of valuation allowances, partially offset by the changes in estimated deferred tax assets resulting from the 2017 Tax Act. The effective tax rate in 2016 is different than the statutory rates primarily due to the impact from amortization of indefinite-lived intangible assets for tax purposes and the partial non-deductibility of certain per diem expenses and international and state minimum taxes. See Note 13 - Income Taxes to our consolidated financial statements for further information.
Comparison of Results for the Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
Year Ended December 31, | ||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||
2016 | 2015 | $ | % | |||||||||||
(Dollars in thousands) | ||||||||||||||
Revenue from services | $ | 833,537 | $ | 767,421 | $ | 66,116 | 8.6 | % | ||||||
Direct operating expenses | 611,802 | 570,056 | 41,746 | 7.3 | % | |||||||||
Selling, general, and administrative expenses | 179,820 | 161,275 | 18,545 | 11.5 | % | |||||||||
Bad debt expense | 593 | 999 | (406 | ) | (40.6 | )% | ||||||||
Depreciation and amortization | 9,182 | 8,066 | 1,116 | 13.8 | % | |||||||||
Loss on sale of business | — | 2,184 | (2,184 | ) | (100.0 | )% | ||||||||
Acquisition-related contingent consideration | 814 | — | 814 | 100.0 | % | |||||||||
Acquisition and integration costs | 78 | 902 | (824 | ) | (91.4 | )% | ||||||||
Restructuring costs | 753 | 1,274 | (521 | ) | (40.9 | )% | ||||||||
Impairment charges | 24,311 | 2,100 | 22,211 | 1,057.7 | % | |||||||||
Income from operations | 6,184 | 20,565 | (14,381 | ) | (69.9 | )% | ||||||||
Interest expense | 6,106 | 6,810 | (704 | ) | (10.3 | )% | ||||||||
(Gain) loss on derivative liability | (5,805 | ) | 9,901 | (15,706 | ) | (158.6 | )% | |||||||
Loss on early extinguishment of debt | 1,568 | — | 1,568 | 100.0 | % | |||||||||
Other income, net | (230 | ) | (306 | ) | 76 | 24.8 | % | |||||||
Income before income taxes | 4,545 | 4,160 | 385 | 9.3 | % | |||||||||
Income tax benefit | (4,186 | ) | (794 | ) | (3,392 | ) | (427.2 | )% | ||||||
Consolidated net income | 8,731 | 4,954 | 3,777 | 76.2 | % | |||||||||
Less: Net income attributable to noncontrolling interest in subsidiary | 764 | 536 | 228 | 42.5 | % | |||||||||
Net income attributable to common shareholders | $ | 7,967 | $ | 4,418 | $ | 3,549 | 80.3 | % | ||||||
Revenue from services
Revenue from services increased $66.1 million, or 8.6%, to $833.5 million for the year ended December 31, 2016, as compared to $767.4 million for the year ended December 31, 2015. The increase was entirely from Nurse and Allied Staffing,
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including the impact from the Mediscan acquisition, and partially offset by lower revenue from Physician Staffing and Other Human Capital Management Services, partly due to the divestiture of CCE. 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 field insurance expenses. Direct operating expenses increased $41.7 million, or 7.3%, to $611.8 million for the year ended December 31, 2016, as compared to $570.1 million for year ended December 31, 2015. The increase was due to both higher volume of business driven by organic growth and the result of the Mediscan acquisition, as well as increases in certain costs such as compensation for healthcare professionals and related benefits. These increases were partly offset by the impact of the divestiture of CCE.
As a percentage of total revenue, direct operating expenses represented 73.4% of revenue for the year ended December 31, 2016, and 74.3% for the year ended December 31, 2015 primarily due to improved pricing.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $18.5 million, or 11.5%, to $179.8 million for the year ended December 31, 2016, as compared to $161.3 million for the year ended December 31, 2015. The increase was primarily due to investments in our IT infrastructure, growth in revenue producing headcount such as recruiters and workforce solutions specialists, higher marketing costs for candidate attraction, and the impact of the acquisition of Mediscan. These were partially offset by a reduction in expenses related to the CCE divestiture. As a percentage of total revenue, selling, general, and administrative expenses were 21.5% and 21.0% for the year ended December 31, 2016 and December 31, 2015, respectively.
Depreciation and amortization expense
Depreciation and amortization expense in the year ended December 31, 2016 increased to $9.2 million as compared to $8.1 million for the year ended December 31, 2015, as a result of the Mediscan acquisition. As a percentage of revenue, depreciation and amortization expense was 1.1% for the year ended December 31, 2016 and 1.0% for the year ended December 31, 2015.
Loss on sale of business
During the year ended December 31, 2015, we sold our education seminars business and recognized a pre-tax loss of $2.2 million related to the divestiture of the business. There were no such transactions during the year ended December 31, 2016.
Acquisition-related contingent consideration
Acquisition-related contingent consideration totaled $0.8 million for the year ended December 31, 2016, primarily related to the Mediscan acquisition. There were no such costs for the year ended December 31, 2015. See Note 3 - Acquisitions to our consolidated financial statements.
Acquisition and integration costs
During the years ended December 31, 2016 and 2015, we incurred acquisition and integration costs of $0.1 million and $0.9 million, respectively. The 2016 costs related to the acquisition of USR, while the 2015 costs related to the acquisition of Mediscan. See Note 3 - Acquisitions to our consolidated financial statements.
Restructuring costs
Restructuring costs include severance and lease consolidations as part of our specific cost savings initiatives. We recorded restructuring costs of $0.8 million for the year ended December 31, 2016, related to the centralization of corporate functions and optimizing our branch footprint. We recorded restructuring costs of $1.3 million for the year ended December 31, 2015, related to severance and office consolidations.
Impairment charges
In the second quarter of 2016, we recorded non-cash impairment charges of $24.3 million relating to the Physician Staffing reporting unit. Based on its under-performance to plan through the six months ended June 30, 2016, we revised our growth
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assumptions for the Physician Staffing reporting unit which triggered our evaluation. In the fourth quarter of 2016, we determined that no additional impairment of goodwill or other intangible assets was warranted. In the fourth quarter of 2015, we conducted an assessment of our indefinite-lived intangible assets and recorded non-cash impairment charges of $2.1 million relating to the Physician Staffing trade names. We determined that based on our projected revenue stream, our estimated fair value was less than the carrying amount of the trade names. See Critical Accounting Principles and Estimates and Note 5 - Goodwill, Trade Names, and Other Intangible Assets to our consolidated financial statements.
Interest expense
Interest expense totaled $6.1 million for the year ended December 31, 2016 and $6.8 million for the year ended December 31, 2015. We refinanced our debt structure late in the second quarter of 2016, which resulted in lower overall borrowing costs. The effective interest rate on our borrowings was 8.4% for the year ended December 31, 2016 compared to 10.1% in the year ended December 31, 2015. Our $25.0 million in Convertible Notes which bear an interest rate of 8.00% will become callable by us in July 2017.
(Gain) loss on derivative liability
Gain on derivative liability of $5.8 million and loss on derivative liability of $9.9 million for the years ended December 31, 2016 and December 31, 2015, respectively, relate to the change in the fair value of embedded features of our Convertible Notes from the end of the respective prior year. The gain and loss were primarily a result of a corresponding decrease and increase, respectively, in our share price in the respective periods. The Convertible Notes include terms that are considered to be embedded derivatives, including conversion and redemption features that primarily protect the investors' investment with us. Each reporting period we are required to fair value the embedded derivative with the changes being recorded as a component of other expense (income) on our consolidated statements of operations. See Note 9 - Convertible Notes Derivative Liability to our consolidated financial statements.
Loss on early extinguishment of debt
Loss on early extinguishment of debt was $1.6 million for the year ended December 31, 2016 and related to the write-off of unamortized net debt discount and issuance costs, including a redemption premium of $0.6 million, related to our Second Lien Term Loan. See Note 8 - Debt to our consolidated financial statements.
Income tax benefit
Income tax benefit from continuing operations totaled $4.2 million for the year ended December 31, 2016, compared to $0.8 million for the year ended December 31, 2015. The effective tax rate was negative 92.1% and negative 19.1%, including the impact of discrete items, for the years ended December 31, 2016 and 2015, respectively. Excluding discrete items, our effective tax rate for these years was negative 89.8% and 41.1%, respectively. The effective tax rates are different than the statutory rates primarily due to the impact from amortization of indefinite-lived intangible assets for tax purposes, the partial non-deductibility of certain per diem expenses, and international and state minimum taxes.
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Segment Results
Information on operating segments and a reconciliation to income (loss) from operations for the periods indicated are as follows:
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
(amounts in thousands) | |||||||||||
Revenue from services: | |||||||||||
Nurse and Allied Staffing | $ | 758,267 | $ | 721,486 | $ | 621,258 | |||||
Physician Staffing | 93,610 | 98,283 | 115,336 | ||||||||
Other Human Capital Management Services | 13,171 | 13,768 | 30,827 | ||||||||
$ | 865,048 | $ | 833,537 | $ | 767,421 | ||||||
Contribution income (loss): | |||||||||||
Nurse and Allied Staffing | $ | 73,614 | $ | 71,992 | $ | 55,718 | |||||
Physician Staffing | 5,256 | 8,265 | 10,213 | ||||||||
Other Human Capital Management Services | (357 | ) | (535 | ) | 1,863 | ||||||
78,513 | 79,722 | 67,794 | |||||||||
Unallocated corporate overhead | 39,190 | 38,400 | 32,703 | ||||||||
Depreciation and amortization | 10,174 | 9,182 | 8,066 | ||||||||
Loss on sale of business | — | — | 2,184 | ||||||||
Acquisition and integration costs | 1,975 | 78 | 902 | ||||||||
Acquisition-related contingent consideration | 44 | 814 | — | ||||||||
Restructuring costs | 1,026 | 753 | 1,274 | ||||||||
Impairment charges | 14,356 | 24,311 | 2,100 | ||||||||
Income from operations | $ | 11,748 | $ | 6,184 | $ | 20,565 | |||||
See Note 17 - Segment Data.
Certain statistical data for our business segments for the periods indicated are as follows:
Year Ended December 31, | Percent | |||||||||||||
2017 | 2016 | Change | Change | |||||||||||
Nurse and Allied Staffing statistical data: | ||||||||||||||
FTEs | 7,397 | 6,953 | 444 | 6.4 | % | |||||||||
Average Nurse and Allied Staffing revenue per FTE per day | $ | 281 | $ | 284 | $ | (3 | ) | (1.1 | )% | |||||
Physician Staffing statistical data: | ||||||||||||||
Days filled | 61,148 | 62,482 | (1,334 | ) | (2.1 | )% | ||||||||
Revenue per day filled | $ | 1,549 | $ | 1,549 | $ | — | — | % | ||||||
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Year Ended December 31, | Percent | |||||||||||||
2016 | 2015 | Change | Change | |||||||||||
Nurse and Allied Staffing statistical data: | ||||||||||||||
FTEs | 6,953 | 6,624 | 329 | 5.0 | % | |||||||||
Average Nurse and Allied Staffing revenue per FTE per day | $ | 284 | $ | 257 | $ | 27 | 10.5 | % | ||||||
Physician Staffing statistical data: | ||||||||||||||
Days filled | 62,482 | 77,601 | (15,119 | ) | (19.5 | )% | ||||||||
Revenue per day filled | $ | 1,549 | $ | 1,463 | $ | 86 | 5.9 | % | ||||||
See definition of Business Measurements under the Operating Metrics section of our Management's Discussion and Analysis.
Segment Comparison - Year Ended December 31, 2017 compared to the Year Ended December 31, 2016
Nurse and Allied Staffing
Revenue from the Nurse and Allied Staffing business segment increased $36.8 million, or 5.1% to $758.3 million for the year ended December 31, 2017, from $721.5 million for the year ended December 31, 2016. The year-over-year increase was entirely due the impact of the Advantage acquisition. Excluding the impact of the Advantage acquisition, revenue declined 1.3%, primarily due to the impact of higher average bill rates partly related to specific project revenue in the prior year and lower premium rate business in 2017, partially offset by growth in our education healthcare staffing operations.
Contribution income from Nurse and Allied Staffing for the year ended December 31, 2017, increased $1.6 million or 2.3%, to $73.6 million from $72.0 million in year ended December 31, 2016. As a percentage of segment revenue, contribution income margin decreased to 9.7% for the year ended December 31, 2017 from 10.0% for the year ended December 31, 2016, primarily due to higher compensation packages for our field staff that were in place in the early part of the year.
Operating Metrics
The average number of Nurse and Allied Staffing FTEs on contract during the year ended December 31, 2017 increased 6.4% over the year ended December 31, 2016, in part due to the impact of the acquisition of Advantage. Average Nurse and Allied Staffing revenue per FTE per day decreased approximately 1.1% in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to less premium rate business in 2017.
Physician Staffing
Revenue from Physician Staffing decreased $4.7 million, or 4.8% to $93.6 million for the year ended December 31, 2017, compared to $98.3 million for the year ended December 31, 2016, primarily due to a decrease in volume of days filled.
Contribution income from Physician Staffing for the year ended December 31, 2017, decreased $3.0 million or 36.4% to $5.3 million compared to $8.3 million in the year ended December 31, 2016. As a percentage of segment revenue, contribution income was 5.6% for the year ended December 31, 2017 and 8.4% for the year ended December 31, 2016. The margins were negatively impacted from continued investments in the business.
Operating Metrics
Physician Staffing days filled decreased 2.1% to 61,148 in the year ended December 31, 2017, compared to 62,482 in the year ended December 31, 2016, primarily due to a decline in physician specialties, partly offset by an increase in advanced practices. Part of the volume decline in physician specialties is due to a reduction in orders from government customers. Revenue per day filled was $1,549 for the years ended December 31, 2017 and 2016.
Other Human Capital Management Services
Revenue from OHCMS for the year ended December 31, 2017, decreased $0.6 million, or 4.3%, to $13.2 million from $13.8 million in the year ended December 31, 2016, primarily due to a decrease in executive searches and placements, partially offset by higher physician searches.
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Contribution loss from OHCMS for the year ended December 31, 2017, decreased by $0.1 million, or 33.3%, to $0.4 million, compared to $0.5 million for the year ended December 31, 2016.
Unallocated corporate overhead
Included in unallocated corporate overhead is corporate compensation and benefits, and general and administrative expenses including rent and utilities, computer supplies and expenses, insurance, professional expenses, corporate-wide projects (initiatives) and public company expenses. Unallocated corporate overhead was $39.2 million for the year ended December 31, 2017, compared to $38.4 million for the year ended December 31, 2016, primarily due to an increase in compensation and benefits. As a percentage of consolidated revenue, unallocated corporate overhead was 4.5% for the year ended December 31, 2017, and 4.6% for the year ended December 31, 2016.
Segment Comparison - Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
Nurse and Allied Staffing
Revenue from Nurse and Allied Staffing business segment increased $100.2 million, or 16.1%, to $721.5 million for the year ended December 31, 2016, from $621.3 million for the year ended December 31, 2015. The year-over-year increase was primarily due to a combination of improved pricing and the impact of the Mediscan acquisition.
Contribution income from Nurse and Allied Staffing for the year ended December 31, 2016, increased $16.3 million or 29.2%, to $72.0 million from $55.7 million in year ended December 31, 2015. As a percentage of segment revenue, contribution income margin increased to 10.0% for the year ended December 31, 2016 from 9.0% for the year ended December 31, 2015, reflecting improvements in bill/pay spread partially offset by an increase in our compensation packages.
Operating Metrics
The average number of Nurse and Allied Staffing FTEs on contract during the year ended December 31, 2016 increased 5.0% over the year ended December 31, 2015, primarily due to increased demand and the impact of the Mediscan acquisition. Average Nurse and Allied Staffing revenue per FTE per day increased approximately 10.5% in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to improved pricing.
Physician Staffing
Revenue from Physician Staffing decreased $17.1 million, or 14.8% to $98.3 million for the year ended December 31, 2016, compared to $115.3 million for the year ended December 31, 2015. The decrease in revenue was due to lower volume of days filled during the period, and was partially offset by favorable pricing.
Contribution income from Physician Staffing for the year ended December 31, 2016, decreased $1.9 million or 19.1% to $8.3 million compared to $10.2 million in the year ended December 31, 2015. As a percentage of segment revenue, contribution income was 8.4% for the year ended December 31, 2016 and 8.9% for the year ended December 31, 2015. The margin decline was primarily due to lower gross profit and reduced operating leverage on the lower revenue.
Operating Metrics
Physician Staffing days filled decreased 19.5% to 62,482 in the year ended December 31, 2016, compared to 77,601 in the year ended December 31, 2015. Revenue per day filled for the year ended December 31, 2016 was $1,549, a 5.9% increase from the year ended December 31, 2015, reflecting higher average prices. The primary decline in days filled was due to lower demand from our customers and partly due to the loss of customers.
Other Human Capital Management Services
Revenue from OHCMS for the year ended December 31, 2016, decreased $17.1 million, or 55.3%, to $13.8 million from $30.8 million in the year ended December 31, 2015, as a result of the divestiture of our education seminars business in the third quarter of 2015. In addition, revenue from our physician and executive search business decreased 15.2% on a lower level of retained and executive searches.
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Contribution income from OHCMS for the year ended December 31, 2016, decreased by $2.4 million, or 128.7%, to a loss of $0.5 million, compared to income of $1.9 million in the year ended December 31, 2015. The decrease in contribution income was primarily due to the revenue decrease in our physician and executive search business resulting in lower operating leverage for the business. Contribution income as a percentage of segment revenue decreased to a negative 3.9% for the year ended December 31, 2016 from a positive 6.0% for the year ended December 31, 2015.
Unallocated corporate overhead
Included in unallocated corporate overhead is corporate compensation and benefits, and general and administrative expenses including rent and utilities, computer supplies and expenses, insurance, professional expenses, corporate-wide projects (initiatives), and public company expenses. Unallocated corporate overhead was $38.4 million for the year ended December 31, 2016, compared to $32.7 million for the year ended December 31, 2015. The increase is primarily due to higher compensation and benefits and professional expenses as we have been centralizing administrative functions. In addition, we made investments in company-wide projects and IT infrastructure. As a percentage of consolidated revenue, unallocated corporate overhead was 4.6% for the year ended December 31, 2016, and 4.3% for the year ended December 31, 2015.
Transactions with Related Parties
See Note 16 - Related Party Transactions to our consolidated financial statements.
Liquidity and Capital Resources
At December 31, 2017, we had $25.5 million in cash and cash equivalents, and $100.0 million of Term Loan outstanding. Working capital increased by $5.8 million to $114.3 million as of December 31, 2017, compared to $108.5 million as of December 31, 2016. Our net days' sales outstanding (DSO), which excludes amounts owed to subcontractors, increased 3 days to 58 days as of December 31, 2017, compared to 55 days as of December 31, 2016.
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. 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. See debt discussion which follows. In 2018, we are planning to launch a new initiative to replace our legacy system which supports the travel nurse staffing operations. The total cost of the initiative is expected to be approximately $10 million to $12 million through 2019, with approximately $5 million to $6 million being incurred in 2018. We expect the majority of the costs for the initiative to be capitalized. Operating cash flows and cash on hand, along with amounts available under our revolving credit facility, should be sufficient to meet these needs during the next twelve months.
Cash Flow Comparisons
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net cash provided by operating activities during the year ended December 31, 2017 was $45.5 million compared to $30.1 million during the year ended December 31, 2016, primarily due to higher collections partly offset by the timing of payments for the year ended December 31, 2017.
Investing activities used a net of $91.4 million in the year ended December 31, 2017 compared to $9.8 million in the year ended December 31, 2016. Net cash used in the year ended December 31, 2017 was for the Advantage acquisition and for capital expenditures, of which $2.9 million was reimbursed from our landlord for tenant improvements and is reflected in operating activities. Net cash used in investing activities in the year ended December 31, 2016 included $6.5 million for capital expenditures, $1.9 million for the acquisition of USR, and $1.9 million of other acquisition-related settlements, which was partially offset by the receipt of $0.5 million related to proceeds from the sale of CCE. See Note 3 - Acquisitions and Note 4 - Disposal to our consolidated financial statements.
Net cash provided by financing activities during the year ended December 31, 2017 was $50.8 million, compared to $2.2 million net cash used during the year ended December 31, 2016. During the year ended December 31, 2017, in the first quarter, we paid off our Convertible Notes with a partial cash payment of $5.0 million and extinguishment fees of $0.6 million. We also funded the acquisition of Advantage using our Senior Credit Facility and subsequently refinanced, resulting in net borrowings of $68.5 million on the Senior Credit Facility ($62.0 million in Term Loans and $6.5 million on the
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Revolving Credit Facility which was subsequently repaid) and debt issuance costs of $0.9 million. In addition, we used cash to repay $1.5 million on our Term Loan, pay $1.8 million for shares withheld for taxes, $1.2 million for noncontrolling shareholder payments, and $0.3 million of contingent consideration. During the year ended December 31, 2016, we entered into the 2016 Senior Credit Facility which provided us with $40.0 million of borrowings under the Term Loan Facility. Part of the proceeds from the borrowings were used to prepay our $30.0 million Second Lien Term Loan including a prepayment penalty of $0.6 million and $1.2 million of debt issuance costs. During the year ended December 31, 2016, we also repaid a net of $8.0 million on our senior secured asset-based credit facility and $0.5 million on our term loan facility, and used cash to pay $0.9 million for shares withheld for taxes, $0.7 million for noncontrolling shareholder payments, and $0.2 million of contingent consideration.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net cash provided by operating activities during the year ended December 31, 2016 was $30.1 million compared to $18.2 million during the year ended December 31, 2015, primarily due to higher revenue from services coupled with a 2 day improvement in net DSO for the year ended December 31, 2016.
Investing activities used a net of $9.8 million in the year ended December 31, 2016 compared to $24.1 million in the year ended December 31, 2015. Net cash used in investing activities in the year ended December 31, 2016 included $6.5 million for capital expenditures in 2016 (of which $1.3 million has been reimbursed from our landlord for tenant improvements and is reflected in operating activities), and $2.4 million for capital expenditures in 2015. During the year ended December 31, 2016, we used $1.9 million for the acquisition of USR, and $1.9 million of acquisition-related settlements, which was partially offset by the receipt of $0.5 million related to proceeds from the sale of CCE. See Note 4 - Disposals to our consolidated financial statements. This compares to a use of $28.7 million for the Mediscan acquisition and $0.1 million of acquisition-related settlements related to MSN, partially offset by proceeds from the sale of our education seminars business of $7.2 million, net of related costs for the year ended December 31, 2015.
Net cash used in financing activities during the year ended December 31, 2016 was $2.2 million, compared to net cash provided by financing activities of $3.4 million during the year ended December 31, 2015. During the year ended December 31, 2016, we used a total of $1.8 million for debt issuance costs and extinguishment fees related to refinancing our debt and we increased the principal amount of our debt by $1.4 million. See Note 8 - Debt to our consolidated financial statements. During 2016, we also paid $0.2 million for contingent consideration related to the Mediscan acquisition. During the year ended December 31, 2015, we increased the principal amount of our debt by $4.5 million primarily to fund the acquisition of Mediscan, including acquisition-related expenses. In addition, we used cash to pay $0.9 million and $0.5 million for shares withheld for taxes, and $0.7 million and $0.5 million for noncontrolling shareholder payments, for the years ended December 31, 2016 and 2015, respectively.
Debt
Credit Facilities
As more fully described in Note 8 - Debt to our consolidated financial statements, on June 22, 2016, we entered into a senior credit agreement (2016 Credit Agreement), which provided a term loan of $40.0 million (Term Loan) and a revolving credit facility of up to $100.0 million (Revolving Credit Facility) (together with the Term Loan, the 2016 Senior Credit Facilities) both of which would have matured in five years.
Effective July 1, 2017, we completed the acquisition of substantially all of the assets of Advantage, for cash consideration of $86.6 million, net of cash acquired, using available cash and $66.9 million in borrowings under the 2016 Credit Facility, including a $40.0 million Incremental Term Loan.
Effective July 1, 2017, we entered into a Second Amendment to our 2016 Credit Agreement to permit the acquisition of Advantage. Also in connection with the acquisition of Advantage, pursuant to the 2016 Credit Agreement, we entered into an Incremental Term Loan Agreement which provided us with an incremental term loan of $40.0 million to pay for part of the consideration of the acquisition.
On August 1, 2017, we entered into an Amendment and Restatement to our Credit Agreement (Amended and Restated Credit Agreement) to refinance and increase the current aggregate committed size of the facility to $215.0 million, including a term loan of $100.0 million (Amended Term Loan) and a $115.0 million revolving credit facility (Amended Revolving Credit Facility) (together with the Amended Term Loan, the Amended Credit Facilities). The proceeds of $106.5 million from this refinancing included $6.5 million under the new revolving credit facility, and were used to repay borrowings under our
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previously existing credit facilities, as well as to pay related interest, fees and expenses. As of December 31, 2017 the Applicable Margin is 2.25% for Eurodollar Loans and LIBOR Index Rate Loans and 1.25% for Base Rate Loans. As of December 31, 2017, we had a $100.0 million Amended Term Loan and $21.6 million in letters of credit outstanding, leaving $93.4 million available under the Amended Revolving Credit Facility. We believe this provides us with the ability to continue to execute our strategy to grow the business.
Convertible Notes
On March 17, 2017, we paid in full our fixed rate 8% Convertible Notes. The Convertible Notes, had an aggregate principal amount of $25.0 million, and were convertible into shares of our Common Stock, at a conversion price of $7.10 per share. As a result of the early repayment, we recognized $5.0 million as loss on early extinguishment of debt.
At inception of the notes, and at the time of the payoff, the conversion price of $7.10 was below the market price. The initial agreement allowed us to force conversion of the Notes only after three years, beginning July 1, 2017, and if the VWAP exceeded 125% of the Conversion Price for 20 days of a 30 day trading period (the threshold was $8.88, which we were well above). As such, we and the Noteholders agreed to an early settlement at fair value based on the stock price. In connection with the repayment, we issued to the Noteholders an aggregate of 3,175,584 shares of Common Stock and cash in the aggregate amount of $5.6 million.
See Note 8 - Debt to our consolidated financial statements.
Stockholders' Equity
See Note 14 - Stockholders' Equity to our consolidated financial statements.
Commitments and Off-Balance Sheet Arrangements
As of December 31, 2017, we do not have any off-balance sheet arrangements.
The following table reflects our contractual obligations and other commitments as of December 31, 2017:
Commitments | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | |||||||||||||||||||||
(Unaudited, amounts in thousands) | ||||||||||||||||||||||||||||
Term Loan (a) | $ | 100,000 | $ | 6,875 | $ | 7,500 | $ | 8,125 | $ | 10,000 | $ | 67,500 | $ | — | ||||||||||||||
Interest on debt (b) | 18,395 | 5,371 | 4,025 | 3,758 | 3,418 | 1,823 | — | |||||||||||||||||||||
Contingent consideration (c) | 7,391 | 280 | 399 | 6,712 | — | — | — | |||||||||||||||||||||
Operating lease obligations (d) | 32,741 | 6,700 | 5,180 | 4,438 | 3,993 | 3,698 | 8,732 | |||||||||||||||||||||
$ | 158,527 | $ | 19,226 | $ | 17,104 | $ | 23,033 | $ | 17,411 | $ | 73,021 | $ | 8,732 | |||||||||||||||
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(a) | Under our Amended Term Loan, 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 December 31, 2017, we are in compliance with the financial covenants and other covenants contained in the Credit Agreement. |
(b) | Interest on debt represents payments due through maturity for our Term Loan, calculated using the December 31, 2017 applicable LIBOR and margin rate totaling 3.6%. |
(c) | The contingent consideration represents the estimated payments due to the sellers related to the Mediscan and USR acquisitions, including accretion. In the third quarter of 2017, we determined that one of the contingent consideration earnouts related to the Mediscan acquisition would not be achieved for 2017 and, as a result, the entire earnout liability was reversed. See Note 3 - Acquisitions to our consolidated financial statements. While it is not certain if, or when, the remaining contingent payments will be made, we have included the payments in the table based on our best estimates of the amounts and dates when the contingencies may be resolved. |
(d) | Represents future minimum lease payments associated with operating lease agreements with original terms of more than one year. |
See Note 12 - Commitments and Contingencies to our consolidated financial statements.
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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 $3.8 million at December 31, 2017. 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
We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to asset impairment, accruals for self-insurance, allowance for doubtful accounts and sales allowances, taxes and other contingencies, and litigation. We state our accounting policies in the notes to the audited consolidated financial statements for the year ended December 31, 2017, contained herein. These estimates are based on information that is currently available to us and on various assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Goodwill, trade names, and other intangible assets
Our business acquisitions typically result in the recording of goodwill, trade names, and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. As more fully described in Note 2 - Summary of Significant Accounting Policies, we assess the impairment of goodwill of our reporting units and indefinite-lived intangible assets annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. 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.
2017 Impairment Charges
As of October 1, 2017, we performed our annual quantitative impairment test of goodwill, trade names, and other indefinite-lived intangible assets. Upon completion of the impairment testing, we determined that the estimated fair value of the Physician Staffing reporting unit’s trade name was less than its carrying amount resulting in impairment. For our goodwill impairment testing, with the exception of the Physician Staffing reporting unit, the estimated fair value of our Nurse and Allied and OHCMS reporting units exceeded their respective carrying values. The fair value of the Nurse and Allied Staffing reporting unit substantially exceeded its carrying amount. For the OHCMS reporting unit, there was less than 20% of excess fair value over its carrying amount leaving it at risk of impairment in future periods if forecasted results are not achieved.
Projections of revenue, operating costs, and expected cash flows of each reporting unit are inputs into the quantitative testing
for goodwill and intangible assets. We reduced our long-term revenue forecast for the Physician Staffing business
segment in the fourth quarter. The lower than expected revenue was driven by lower booking volumes, partly due to the loss of
customers. In addition, margins of the reporting unit were negatively impacted from continued investments in the business. As
a result, we recorded non-cash impairment charges of $8.7 million related to our trade names and $5.7 million
related to goodwill during the fourth quarter.
2016 Impairment Charges
We performed our annual impairment test as of October 1, 2016. Upon completion of the impairment testing, we determined that no impairment of goodwill, trade names, or other intangible assets was warranted.
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During an evaluation of goodwill, trade names, and other intangible assets at June 30, 2016, we determined that indicators were present in the Physician Staffing reporting unit which would suggest the fair value of the reporting unit may have declined below its carrying value. As a result, an interim impairment test of goodwill, trade names, and other intangible assets was performed as of June 30, 2016. The evaluation resulted in the carrying value of goodwill, trade names, and other intangible assets for Physician Staffing to exceed the estimated fair value. As a result, we recorded a non-cash impairment charge totaling $24.3 million: $17.7 million related to goodwill, $0.6 million related to trade names, and $6.0 million related to customer relationships.
2015 Impairment Charges
During the fourth quarter of 2015, we determined that no goodwill impairment charges were warranted since the estimated fair value of our reporting units exceeded their respective carrying values. As of December 31, 2015, the fair value of our Physician Staffing reporting unit exceeded its carrying value by less than 20%. The rest of our reporting units had fair values that were substantially in excess of their carrying values.
In the fourth quarter of 2015, in conjunction with our annual testing of indefinite-lived intangible assets not subject to amortization, we recorded a non-cash impairment charge of approximately $2.1 million related to Physician Staffing trade names. We reduced our long-term revenue forecast in the fourth quarter for this business and, as a result, our calculation of estimated fair value was less than the carrying amount of the trade names, resulting in a non-cash impairment charge. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets to our consolidated financial statements.
There can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. Although management believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.
In addition, we are required to test the recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for potential impairment, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.
Risk and Uncertainties
The calculation of fair value used in these impairment assessments included a number of estimates and assumptions that required significant judgments, including projections of future income and cash flows, the identification of appropriate market multiples and the choice of an appropriate discount rate. See Note 10 - Fair Value Measurements. Changes in these assumptions could materially affect the determination of fair value for each reporting unit. Specifically, further deterioration of demand for our services, further deterioration of labor market conditions, reduction of our stock price for an extended period, or other factors as described in Item 1.A. Risk Factors, may affect our determination of fair value of each reporting unit. This evaluation can also be triggered by various indicators of impairment which could cause the estimated discounted cash flows to be less than the carrying amount of net assets. If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations. Under the current credit agreement an impairment charge will not have an impact on our liquidity. As of December 31, 2017, we had total goodwill and intangible assets not subject to amortization of $144.3 million or 30.9% of our total assets.
Health, workers' compensation, and professional liability expense
We maintain accruals for our health, workers’ compensation, and professional liability claims that are partially self-insured and are classified as accrued compensation and benefits on our consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating our historical experience and trends related to health, workers’ compensation, and professional liability claims and payments, based on actuarial models, as well as industry experience and trends. If such models indicate that our accruals are overstated or understated, we will adjust accruals as appropriate. Healthcare insurance accruals have fluctuated with increases or decreases in the average number of temporary healthcare professionals on assignment as well as actual company experience and increases in national healthcare costs. As of December 31, 2017 and 2016, we had $5.1 million and $4.1 million accrued, respectively, for incurred but not reported health insurance claims. Corporate and field employees are covered through a partially self-insured health plan. Workers’ compensation insurance accruals can fluctuate over time due to the number of employees and inflation, as well as additional exposures arising from the current policy year. As of December 31, 2017, and 2016, we had $11.4 million and $11.0 million accrued for case reserves and for incurred but not reported workers’ compensation claims, net of insurance receivables, respectively. The accrual for
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workers’ compensation is based on an actuarial model which is prepared or reviewed by an independent actuary semi-annually. As of December 31, 2017, and 2016, we had $6.4 million and $6.6 million accrued, respectively, for case reserves and for incurred but not reported professional liability claims, net of insurance receivables. The accrual for professional liability is based on actuarial models which are prepared by an independent actuary semi-annually.
Revenue recognition
Revenue from services consists primarily of temporary staffing revenue. Revenue is recognized when services are rendered and all of the following criteria are met: persuasive evidence of the arrangement exists; service has been provided; and we have no remaining obligations; the fee is fixed and determinable; and collectability is reasonably assured. Accounts receivable includes an accrual for employees’ and independent contractors’ estimated time worked but not yet invoiced. We maintain a sales allowance for estimated future billing adjustments resulting from client concessions or resolutions of billing disputes.
We record revenue on a gross basis as a principal or on a net basis as an agent depending on the arrangement, as follows:
• | We have also entered into certain contracts with acute care facilities to provide comprehensive MSP solutions. Under these contract arrangements, we use our nurses primarily, along with those of third party subcontractors, to fulfill customer orders. If a subcontractor is used, we invoice our customer for these services, but revenue is recorded at the time of billing, net of any related subcontractor liability. The resulting net revenue represents the administrative fee charged by us for our MSP services. |
• | Revenue from our Physician Staffing business is recognized on a gross basis as we believe we are the principal in the arrangements. |
Allowances
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. We determine the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer’s financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We write-off specific accounts based on an ongoing review of collectability as well as our past experience with the customer. In addition, we maintain a sales allowance for customer disputes which may arise in the ordinary course, which is recorded as contra-revenue. Historically, losses on uncollectible accounts and sales allowances have not exceeded our allowances. As of December 31, 2017, our total allowances were $3.7 million.
Contingent liabilities
We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include professional liability and employee-related matters. Our healthcare facility clients may also become subject to claims, governmental inquiries and investigations, and legal actions to which we may become a party relating to services provided by our professionals. From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with our healthcare facility clients relating to these matters.
Income taxes
We account for income taxes in accordance with the Income Taxes Topic of the FASB ASC. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of December 31, 2017, we have deferred tax assets related to certain federal, state, and foreign net operating loss carryforwards of $18.2 million. The carryforwards will expire as follows: federal between 2032 and 2037, state between 2018 and 2037, and foreign between 2019 and 2022.
As of December 31, 2017 and 2016, we had valuation allowances on our deferred tax assets of $1.1 million and $46.5 million, respectively. For the year ended December 31, 2017, we reduced the valuation allowance recorded by $45.4 million (comprised of $15.7 million related to U.S. net operating losses, $4.4 million related to state net operating losses, and $25.3 million related to other net deferred tax assets) predominantly on the basis of management’s reassessment of deferred tax assets that are more likely than not to be realized. The valuation allowance on a portion of state net operating losses not more
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likely than not realizable was not released due to the respective expiration periods and specific state taxable income projections. See Note 13 - Income Taxes to our consolidated financial statements.
As of each reporting date, management considers new evidence, both positive and negative, that could impact its position relative to the future realization of deferred tax assets. As of December 31, 2017, management determined that there was sufficient positive evidence to conclude that it was more likely than not that our net deferred tax assets are realizable. We therefore reduced the valuation allowance accordingly.
In arriving at our conclusion to release the valuation allowance, we considered several positive and negative factors. For the twelve quarters ended December 31, 2017, we had $27.7 million in cumulative pre-tax income adjusted for permanent items. We have a history of utilizing net operating losses prior to expiration. Further, the five-year forecast of pre-tax book income is expected to exceed future tax deductions. Our growth estimates are tied to the growing demand for healthcare solutions for our customers, including a growing aging U.S. population, and our customers’ pressure to keep costs down by using our staffing solutions. With regard to negative evidence, we do not have any material taxable temporary differences to offset deductible temporary differences and do not have any net operating losses available for carryback. Additionally, we are not considering and are not aware of any tax planning strategies that would impact the valuation allowance analysis. As such, the primary focus of our analysis emphasized the positive evidence of our three-year cumulative pre-tax income position adjusted for permanent items and projections of future taxable income that outweighed any negative evidence available.
On December 22, 2017, the 2017 Tax Act was signed into legislation which, among other changes, reduced the Corporate federal income tax rate from 35% to 21%, effective for our year ended December 31, 2018. Because a change in tax law is accounted for in the period of enactment, we have recorded income tax expense of $8.0 million, primarily due to a re-measurement of deferred tax assets and liabilities. The impact of the Global Intangible Low-Taxed Income provision, the transition tax on the deemed repatriation of deferred foreign income, and any future tax impact associated with basis differences on foreign subsidiaries is expected to be immaterial. The 2017 Tax Act is a comprehensive bill containing other provisions, such as limitations on the deductibility of interest expense and certain executive compensation, that are not expected to materially affect us.
The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting required under the Income Taxes Topic of the FASB ASC. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under the Income Taxes Topic of the FASB ASC is complete. To the extent that a company's accounting for certain income tax effects is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the Income Taxes Topic of the FASB ASC on the basis of the provisions of the tax laws that were in effect immediately before the enactment. The ultimate impact of the 2017 Tax Act in our financial statements is provisional with regard to certain foreign tax provisions and may differ from our estimates due to changes in the interpretations and assumptions made by us as well as additional regulatory guidance that may be issued. See Note 13 - Income Taxes to our consolidated financial statements.
We are subject to income taxes in the U.S. and certain foreign jurisdictions. Significant judgment is required in determining our consolidated provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of our business there are many transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the Income Taxes Topic of the FASB ASC. An unrecognized tax benefit represents the difference between the recognition of benefits related to exposure items for income tax reporting purposes and financial reporting purposes. The current portion of the unrecognized tax benefit is classified as a component of other current liabilities, and the non-current portion is included within other long-term liabilities on the consolidated balance sheets. As of December 31, 2017, total unrecognized tax benefits recorded was $3.8 million. We reserve for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision.
We are regularly under audit by tax authorities. Although the outcome of tax audits is always uncertain, we believe that we have appropriate support for the positions taken on our tax returns and that our annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Embedded derivative
See Note 9 - Convertible Notes Derivative Liability to our consolidated financial statements.
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Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements.
Seasonality
The number of healthcare professionals on assignment with us is subject to moderate seasonal fluctuations which may impact our quarterly revenue and earnings. Hospital patient census and staffing needs of our hospital and healthcare facilities fluctuate, which impact our number of orders for a particular period. Many of our hospital and healthcare facility clients are located in areas that experience seasonal fluctuations in population during the winter and summer months. These facilities adjust their staffing levels to accommodate the change in this seasonal demand and many of these facilities utilize temporary healthcare professionals to satisfy these seasonal staffing needs. Likewise, the number of nurse and allied professionals on assignment may fluctuate due to the seasonal preferences for destinations of our temporary nurse and allied professionals. In addition, we expect our Physician Staffing business to experience higher demand in the summer months as physicians take vacations. We also expect our education and school business to experience lower demand in the summer months when public and charter schools are closed. This historical seasonality of revenue and earnings may vary due to a variety of factors 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. In addition, typically, our first quarter results are negatively impacted by the reset of payroll taxes.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we seek to ensure that billing rates reflect increases in costs due to inflation. In addition, we attempt to minimize any residual impact on our operating results by controlling operating costs.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
We are exposed to the risk of fluctuation in interest rates relating to our variable rate debt related to our Amended Credit Facilities. During the year ended December 31, 2017 or 2016, we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. Our current credit agreement charges us interest at a rate of LIBOR plus a leverage-based margin. See Note 8 - Debt to our consolidated financial statements for further information.
We have been exposed to interest rate risk associated with our debt instruments which have had interest based on floating rates. A 1% change in interest rates on variable rate debt would have resulted in interest expense fluctuating approximately by $0.7 million and $0.4 million in the years ended December 31, 2017 and 2016. In February 2018, we entered into an International Swap Dealers Association Master Agreement (ISDA) with a potential counterparty in anticipation of entering into a derivative to reduce our exposure to fluctuations in interest rates associated with our debt.
Foreign Currency Risk
We have minor exposure to the impact of foreign currency fluctuations. Approximately 1% of selling, general, and administrative expenses are related to certain software development and information technology support provided by our employees in Pune, India. Changes in foreign currency exchange rates impact translations of foreign denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. We have not entered into any foreign currency hedges.
Our international operations transact business in their functional currency. As a result, fluctuations in the value of foreign currencies against the U.S. dollar have an impact on reported results. Expenses denominated in foreign currencies are translated into U.S. dollars at monthly average exchange rates prevailing during the period. Consequently, as the value of the U.S. dollar changes relative to the currencies of our non-U.S. markets, our reported results vary.
Fluctuations in exchange rates also impact the U.S. dollar amount of stockholders’ equity. The assets and liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of a reporting period. The resulting translation adjustments are recorded in stockholders’ equity, as a component of accumulated other comprehensive loss, included in other stockholders’ equity on our consolidated balance sheets.
41
Item 8. Financial Statements and Supplementary Data.
See Item 15 – Exhibits, Financial Statement Schedules of Part IV of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure 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.
Changes in Internal Control Over Financial Reporting
We acquired all of the membership interests of Advantage in July 2017. Due to the timing of the acquisition and as allowed
under SEC guidance, management’s assessment of and conclusion regarding the design and effectiveness of internal control
over financial reporting excluded the internal control over financial reporting of the acquired business, which is relevant to our
2017 consolidated financial statements as of and for the year ended December 31, 2017.
Except as disclosed above, there were no other changes in our internal controls over financial reporting during 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in the Internal Control-Integrated Framework (2013 framework). As permitted, our
management’s assessment of and conclusion on the effectiveness of our internal controls did not include the internal controls of
Advantage, because it was acquired by us in July 2017. The total assets of the acquisition constituted $92.9 million as of December 31, 2017, and $47.0 million of revenue from services for the year ended December 31, 2017.
Based on its evaluation, management concluded that, as of December 31, 2017, our internal control over financial reporting is effective based on the specific criteria.
Attestation Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page 43.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Cross Country Healthcare, Inc.
Boca Raton, Florida
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cross Country Healthcare, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 2, 2018, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Advantage RN, LLC, which was acquired on July 1, 2017, and whose financial statements constituted $92.9 million of total assets and $47.0 million of revenue from services of the consolidated financial statement amounts as of and for the year ended December 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at Advantage RN, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
43
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP | |
Certified Public Accountants | |
Boca Raton, Florida | |
March 2, 2018 | |
44
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information with respect to directors, executive officers and corporate governance is included in our Proxy Statement for the 2018 Annual Meeting of Stockholders (Proxy Statement) to be filed pursuant to Regulation 14A with the SEC and such information is incorporated herein by reference.
Item 11. Executive Compensation.
Information with respect to executive compensation is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
Information with respect to beneficial ownership of our common stock is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.
With respect to equity compensation plans as of December 31, 2017, see table below:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) (1) | ||||||
Equity compensation plans approved by security holders | 94,500 | $ | 5.19 | 2,338,804 | |||||
Equity compensation plans not approved by security holders | None | N/A | N/A | ||||||
Total | 94,500 | $ | 5.19 | 2,338,804 | |||||
(1) For Performance Stock Awards issued under the 2014 Omnibus Incentive Plan, we consider the expected number of shares that may be issued under the award to be outstanding. When the number of Performance Stock Awards have been determined, we true up the actual number of shares that were awarded and return any unawarded shares into shares available for issuance. See Note 14 - Stockholders' Equity to our consolidated financial statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to certain relationships and related transactions, and director independence is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information with respect to the fees and services of our principal accountant is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.
45
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as part of the report. | ||
(1 | ) | Consolidated Financial Statements |
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets as of December 31, 2017 and 2016 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015 | ||
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016, and 2015 | ||
Consolidated Statement of Stockholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015 | ||
Notes to Consolidated Financial Statements | ||
(2 | ) | Financial Statements Schedule |
Schedule II – Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016, and 2015 | ||
(3 | ) | Exhibits |
See Exhibit Index immediately following signatures. | ||
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CROSS COUNTRY HEALTHCARE, INC. | ||
By: | /s/ William J. Grubbs | |
Name: William J. Grubbs | ||
Title: President, Chief Executive Officer, Director | ||
Principal Executive Officer | ||
Date: March 2, 2018 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities indicated and on the dates indicated:
Signature | Title | Date | ||
/s/ William J. Grubbs | President, Chief Executive Officer, Director | March 2, 2018 | ||
William J. Grubbs | (Principal Executive Officer) | |||
/s/ Christopher R. Pizzi | SVP & Chief Financial Officer | March 2, 2018 | ||
Christopher R. Pizzi | (Principal Accounting and Financial Officer) | |||
/s/ W. Larry Cash | Director | March 2, 2018 | ||
W. Larry Cash | ||||
/s/ Thomas C. Dircks | Director | March 2, 2018 | ||
Thomas C. Dircks | ||||
/s/ Gale Fitzgerald | Director | March 2, 2018 | ||
Gale Fitzgerald | ||||
/s/ Richard M. Mastaler | Director | March 2, 2018 | ||
Richard M. Mastaler | ||||
/s/ Mark Perlberg | Director | March 2, 2018 | ||
Mark Perlberg | ||||
/s/ Joseph A. Trunfio | Director | March 2, 2018 | ||
Joseph A. Trunfio | ||||
47
EXHIBIT INDEX
No. | Description | |
3.1 | ||
*3.2 | ||
3.3 | ||
4.1 | ||
4.2 # | ||
4.3 # | ||
4.4 | ||
10.1 # | ||
10.2 # | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 # | ||
10.7 # | ||
10.8 | ||
10.90 | ||
10.10 # | ||
10.11 | ||
10.12 | ||
10.13 | ||
48
EXHIBIT INDEX (CONTINUED)
No. | Description | |
10.14 | ||
10.15 # | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 # | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
49
EXHIBIT INDEX (CONTINUED)
No. | Description | |
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36 | ||
10.37 # | ||
10.38 # | ||
10.39 # | ||
10.40 | ||
10.41 | ||
10.42 | ||
10.43 # | ||
10.44 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | ||
50
EXHIBIT INDEX (CONTINUED)
No. | Description | |
10.49 | ||
10.5 | ||
10.51 | ||
10.52 | ||
10.53 | ||
10.54 # | ||
*10.55 # | ||
*10.56 | ||
14.1 | ||
16.1 | ||
*21.1 | ||
*23.1 | ||
*31.1 | ||
*31.2 | ||
*32.1 | ||
*32.2 | ||
**101.INS | XBRL Instance Document | |
**101.SCH | XBRL Taxonomy Extension Schema Document | |
**101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
**101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
**101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
**101.PRE | PRE XBRL Taxonomy Extension Presentation Linkbase Document | |
________________
# Represents a management contract or compensatory plan or arrangement
* Filed herewith
** Furnished herewith
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Cross Country Healthcare, Inc. | |
Financial Statement Schedule | |
Schedules not filed herewith are either not applicable, the information is not material or the information is set forth in the consolidated financial statements or notes thereto.
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Cross Country Healthcare, Inc.
Boca Raton, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cross Country Healthcare, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP | |
Certified Public Accountants | |
Boca Raton, Florida | |
March 2, 2018 | |
We have served as the Company's auditor since 2015.
F- 2
CROSS COUNTRY HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except for share data)
December 31, | |||||||
2017 | 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 25,537 | $ | 20,630 | |||
Accounts receivable, net of allowances of $3,688 in 2017 and $3,245 in 2016 | 173,603 | 173,620 | |||||
Prepaid expenses | 5,287 | 6,126 | |||||
Insurance recovery receivable | 3,497 | 3,037 | |||||
Other current assets | 963 | 2,198 | |||||
Total current assets | 208,887 | 205,611 | |||||
Property and equipment, net | 14,086 | 12,818 | |||||
Goodwill | 117,589 | 79,648 | |||||
Trade names | 26,702 | 35,402 | |||||
Other intangible assets, net | 60,976 | 36,835 | |||||
Non-current deferred tax assets | 20,219 | — | |||||
Other non-current assets | 19,228 | 18,064 | |||||
Total assets | $ | 467,687 | $ | 388,378 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 50,597 | $ | 58,850 | |||
Accrued compensation and benefits | 34,271 | 33,243 | |||||
Current portion of long-term debt | 6,875 | 2,250 | |||||
Other current liabilities | 2,845 | 2,749 | |||||
Total current liabilities | 94,588 | 97,092 | |||||
Long-term debt, less current portion | 92,259 | 84,750 | |||||
Non-current deferred tax liabilities | 105 | 13,154 | |||||
Long-term accrued claims | 28,757 | 28,870 | |||||
Contingent consideration | 5,088 | 5,301 | |||||
Other long-term liabilities | 9,171 | 7,409 | |||||
Total liabilities | 229,968 | 236,576 | |||||
Commitments and contingencies | |||||||
Stockholders' equity: | |||||||