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CCRN > SEC Filings for CCRN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for CROSS COUNTRY HEALTHCARE INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company's condensed consolidated financial statements present a consolidation of all its operations. This discussion supplements the detailed information presented in the condensed consolidated financial statements and notes thereto which should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K, filed for the year ended December 31, 2011, and is intended to assist the reader in understanding the financial results and condition of the Company.

Overview

We are a diversified leader in healthcare staffing services offering an extensive suite of staffing and outsourcing services to the healthcare market. We report our financial results according to four business segments: (1) nurse and allied staffing, (2) physician staffing, (3) clinical trial services and (4) other human capital management services. We believe we are one of the top two providers of travel nurse and allied staffing services; one of the top four providers of temporary physician staffing (locum tenens) services; and a leading provider of clinical trial staffing services, retained physician search services and educational seminars specifically for the healthcare marketplace.

We have a diversified revenue mix across business sectors and healthcare customers. For the quarter ended September 30, 2012, our nurse and allied staffing business segment represented approximately 54% of our revenue and is comprised of travel and per diem nurse staffing, and allied health staffing. Travel nurse staffing represented approximately 41% of our total revenue and 76% of our nurse and allied staffing business segment revenue. Other nurse and allied staffing services include the placement of allied healthcare professionals, such as rehabilitation therapists, radiology technicians, nurse practitioners and respiratory therapists. Our physician staffing business segment represented approximately 25% of our third quarter 2012 revenue and consists of temporary physician staffing services (locum tenens). Our clinical trial services business segment represented approximately 13% of our revenue and consists of service offerings that include traditional contract staffing and functional outsourcing, as well as drug safety monitoring and regulatory services to pharmaceutical and biotechnology customers. Our other human capital management services business segment represented approximately 8% of our revenue and consists of education and training and retained search services.

For the quarter ended September 30, 2012, our revenue was $129.1 million, and we had a net loss of $17.6 million, or $(0.57) per diluted share, which included non-cash impairment charges related to our clinical trial services business segment of $23.5 million pretax ($17.0 million, after taxes, or a loss of $0.55 per diluted share). Cash flow provided by operating activities for the nine months ended September 30, 2012 was $5.7 million. Cash flow from operating activities and cash on hand was used to repay a net of $7.5 million of total debt, for capital expenditures of $2.1 million, and for stock repurchases of $0.4 million. We ended the third quarter of 2012 with total debt of $34.5 million and $4.8 million of cash and cash equivalents, resulting in a ratio of debt, net of cash, to total capitalization of 11.7%.

In general, we evaluate our financial condition and operating results by revenue, contribution income (see Segment Information), and net (loss) income. We also use measurement of our cash flow generation and operating and leverage ratios to help us assess our financial condition. In addition, we monitor several key volume and profitability indicators such as number of open orders, contract bookings, number of FTEs, days filled and price.

Nurse and Allied Staffing

Demand for contract nurses, as measured by the number of open orders from our customers, is nearly twice the level it was last February, and is at a multi-year high. Our booking trends have also improved. However, we continue to face severe direct cost pressure in this business, in an operating environment that, until of late, has provided little opportunity to raise bill rates.

Our direct cost pressure is primarily due to:

- A significant increase in field personnel health insurance claims;

- A contraction in the nurse and allied staffing bill-pay spread;

- An unusual increase in the severity of a few ongoing workers' compensation claims; and

- Higher housing costs related to a higher national apartment rental market.


In addition, lower than expected revenue in the first nine months of 2012 in this segment reduced operating leverage as our overhead was calibrated to a greater level of staffing activity.

Our book to bill ratio, which measures net weeks booked as a percentage of the average field FTE count, was 108% in the third quarter of 2012. We expect this improved booking trend to result in sequential revenue growth for our fourth quarter. With demand for our travel nurse stuffing at a multi-year high, we anticipate greater success in our efforts to press for higher bill rates to help offset some of the margin pressure we have experienced through the third quarter relative to direct costs. In combination with our continued focus on cost reduction, we expect to drive a resumption of more profitable growth in 2013.

Physician Staffing

In the third quarter of 2012, revenue from our physician staffing services increased compared to the prior year's third quarter and the second quarter of 2012. The physician staffing business appears to have stabilized in the last several quarters despite continued pressure relating to the increased willingness of physicians to become employees of hospitals and health systems.

We continue to believe the long-term demographic drivers of this business are favorable. These drivers include an aging population demanding more health care, an aging physician population from the baby boom generation nearing retirement age, and more females entering the profession, who historically have provided relatively less hours of service on average than males. In addition, we believe the increase in the insured population that is expected to result from the implementation of healthcare reform should increase demand for primary care physicians which should benefit our business.

Clinical Trial Services

While the environment for clinical trial services has been challenging, we have been experiencing gradual improvement in demand in the core contract staffing and functional outsourcing components of this segment, which represented approximately 93% of segment revenue in the third quarter of 2012, and have seen an increased level of interest for drug safety work. During the past several quarters, there has been a moderate increase in research and development (R&D) activity by pharmaceutical and biotechnology companies following several years of uncertainty with respect to R&D spending. Notwithstanding the improving demand environment, our clinical trial business has seen more competition in functional service provider business from contract research organizations (CRO) that historically did not compete with this business, which has put some pressure on our margins.

Results of Operations

The following table summarizes, for the periods indicated, selected condensed
consolidated statements of operations data expressed as a percentage of revenue:


                                       19
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                                           Three Months Ended               Nine Months Ended
                                             September 30,                    September 30,
                                         2012              2011           2012              2011

Revenue from services                       100.0 %          100.0 %         100.0 %          100.0 %
Direct operating expenses                    75.4             72.8            74.5             72.8
Selling, general and administrative
expenses                                     22.9             22.1            23.9             23.0
Bad debt expense                              0.2              0.1             0.2              0.1
Depreciation and amortization                 1.6              1.8             1.8              2.0
Impairment charges                           18.2                -            11.1                -
(Loss) income from operations               (18.3 )            3.2           (11.5 )            2.1
Foreign exchange loss (gain)                  0.1             (0.1 )           0.0              0.0
Interest expense                              0.3              0.6             0.4              0.6
Debt financing costs                          0.2                -             0.1                -
Loss on modification of debt                  0.1                -             0.0                -
Other (income) expense, net                  (0.1 )           (0.1 )           0.0             (0.1 )
(Loss) income before income taxes           (18.9 )            2.8           (12.0 )            1.6
Income tax (benefit) expense                 (5.3 )            1.4            (3.4 )            0.7
Net (loss) income                           (13.6 ) %          1.4 %          (8.6 ) %          0.9 %

Acquisitions

MDA Holdings, Inc.

In September 2008, we consummated the acquisition of substantially all of the assets of privately-held MDA Holdings, Inc. and its subsidiaries and all of the outstanding stock of a subsidiary of MDA Holdings, Inc. (collectively, MDA). As of September 30, 2012, an indemnification escrow account of $3.6 million exists.

Goodwill, Trademarks and Other Identifiable Intangible Assets

Goodwill, trademarks and other intangible assets represented 79.0% of our stockholders' equity as of September 30, 2012. Goodwill, trademarks and other identifiable intangible assets from acquisitions were $102.8 million, $50.7 million and $18.8 million, respectively, net of accumulated amortization, at September 30, 2012. In accordance with the Intangibles-Goodwill and Other Topic of the FASB ASC, goodwill and certain other identifiable intangible assets are not subject to amortization; instead, we review impairment annually at year-end, or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

See Critical Accounting Principles and Estimates and Note 3- Goodwill and Other Identifiable Intangible Assets for a detailed description of the results of our impairment analyses conducted in the second and third quarters of 2012, which resulted in impairment charges related to the goodwill of our nurse and allied staffing and clinical trial services reporting units.

Other identifiable intangible assets, which are subject to amortization, are being amortized using the straight-line method over their estimated useful lives ranging from 3.25 to 15 years.

Segment Information

We report the following business segments in accordance with the Segment Reporting Topic of the FASB ASC:

Nurse and allied staffing - The nurse and allied staffing business segment provides travel nurse and allied staffing services and per diem nurse staffing services primarily to acute care hospitals. Nurse and allied staffing services are marketed to public and private healthcare facilities and for-profit and not-for-profit facilities throughout the U.S.

Physician staffing - The physician staffing business segment provides multi-specialty locum tenens to the healthcare industry throughout the U.S.


Clinical trial services - The clinical trial services business segment provides clinical trial, drug safety, and regulatory professionals on a contract and outsourced basis to companies in the pharmaceutical, biotechnology and medical device industries, as well as to contract research organizations, primarily in the U.S.

Other human capital management services - The other human capital management services business segment includes the combined results of our education and training and retained search businesses that both have operations within the U.S.

Information on operating segments and a reconciliation to (loss) income from operations for the periods indicated are as follows:

                                            Three Months Ended           Nine Months Ended
                                               September 30,               September 30,
                                            2012          2011          2012          2011
                                                        (amounts in thousands)
Revenue from services:
Nurse and allied staffing                 $  69,750     $  73,378     $ 206,904     $ 208,506
Physician staffing                           32,681        30,814        92,879        90,853
Clinical trial services                      16,865        16,754        51,162        48,871
Other human capital management services       9,827        10,223        31,122        31,027
                                          $ 129,123     $ 131,169     $ 382,067     $ 379,257

Contribution income (a):
Nurse and allied staffing                 $   2,950     $   6,324     $   9,191     $  16,968
Physician staffing                            3,108         2,935         8,192         8,600
Clinical trial services                       1,575         2,239         4,458         5,083
Other human capital management services          25           984         1,410         2,320
                                              7,658        12,482        23,251        32,971
Unallocated corporate overhead                5,729         5,946        18,105        17,285
Depreciation                                  1,220         1,548         4,372         5,193
Amortization                                    803           833         2,440         2,675
Impairment charges (b)                       23,500             -        42,232             -
(Loss) income from operations             $ (23,594 )   $   4,155     $ (43,898 )   $   7,818



(a) We define contribution income as (loss) income from operations before depreciation, amortization, impairment charges and other corporate expenses not specifically identified to a reporting segment. Contribution income is a measure used by management to access operations and is provided in accordance with the Segment Reporting Topic of the FASB ASC.

(b) During the three and nine months ended September 30, 2012, we recognized pretax impairment charges of $23.5 million and $42.2 million, respectively. Refer to discussion in Critical Accounting Principles and Estimates and in Note 3 -Goodwill and Other Identifiable Intangible Assets, to our condensed consolidated financial statements.

Comparison of Results for the Three Months Ended September 30, 2012 compared to the Three Months Ended September 30, 2011

Revenue from services

Revenue from services decreased $2.0 million, or 1.6%, to $129.1 million for the three months ended September 30, 2012, as compared to $131.2 million for the three months ended September 30, 2011. The decrease was due to lower revenue from our nurse and allied staffing and other human capital management services business segments, partially offset by an increase in revenue from our physician staffing and clinical trial services business segments.


Nurse and allied staffing

Revenue from our nurse and allied staffing business segment decreased $3.6 million, or 4.9%, to $69.8 million in the three months ended September 30, 2012, from $73.4 million in the three months ended September 30, 2011, primarily due to lower staffing volume, partially offset by slightly higher average bill rates in the three months ended September 30, 2012.

The average number of nurse and allied staffing FTEs on contract during the three months ended September 30, 2012, decreased 4.6% from the three months ended September 30, 2011. The average nurse and allied staffing revenue per FTE per day decreased slightly in the three months ended September 30, 2012 compared to the three months ended September 30, 2011, due to a decrease in the average hours provided by our nurse and allied professionals partially offset by an increase in our average bill rates of 0.5%.

Physician staffing

Revenue from our physician staffing business increased $1.9 million or 6.1% to $32.7 million for the three months ended September 30, 2012, compared to $30.8 million in the three months ended September 30, 2011. The increase in revenue reflects higher revenue per day filled due to higher bill rates partly offset by slightly lower volume.

Physician staffing days filled is equivalent to total hours filled during the respective period divided by eight hours. Physician staffing days filled decreased 0.7% to 22,647 days in the three months ended September 30, 2012, compared to 22,811 days in the three months ended September 30, 2011. Revenue per day filled for the three months ended September 30, 2012 was $1,443, a 6.8% increase from the three months ended September 30, 2011. Revenue per day filled is calculated by dividing total physician staffing revenue by days filled for the respective period.

Clinical trial services

Revenue from clinical trial services increased $0.1 million, or 0.7%, to $16.9 million in the three months ended September 30, 2012, from $16.8 million in the three months ended September 30, 2011. This increase was primarily due to an increase in placement fees and higher staffing volume in our traditional contract staffing portion of this business partially offset by lower average bill rates and one less billable day in the three months ended September 30, 2012.

Other human capital management services

Revenue from other human capital management services for the three months ended September 30, 2012, decreased $0.4 million, or 3.9%, to $9.8 million from $10.2 million in the three months ended September 30, 2011, reflecting reduced seminar attendance and lower revenue from our retained search business.

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 $1.9 million, or 2.0%, to $97.4 million for the three months ended September 30, 2012, as compared to $95.4 million for three months ended September 30, 2011.

As a percentage of total revenue, direct operating expenses represented 75.4% of revenue for the three months ended September 30, 2012, and 72.8% for the three months ended September 30, 2011. The increase was primarily due to higher health and workers' compensation insurance expenses for our field staff, partially resulting from favorable worker's compensation accruals in the prior year, and an increase in compensation and independent contractor expenses as a percentage of revenue.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $0.5 million, or 1.8%, to $29.6 million for the three months ended September 30, 2012, as compared to $29.1 million for the three months ended September 30, 2011 due to an increase in consolidated state and non-income tax expenses, as well as an increase in direct mail expenses in our education and training business. As a percentage of total revenue, selling, general and administrative expenses were 22.9% and 22.1%, for the three months ended September 30, 2012 and 2011, respectively. The increase is due partly to the higher level of selling, general and administrative expenses described above and partly to negative operating leverage.


Included in selling, general and administrative expenses are unallocated corporate overhead of $5.7 million for three months ended September 30, 2012, compared to $5.9 million for the three months ended September 30, 2011. As a percentage of consolidated revenue, unallocated corporate overhead was 4.4% and 4.5% for the three month periods ended September 30, 2012 and 2011, respectively. Share-based compensation, included in unallocated corporate overhead, was $0.6 million and $0.8 million in the three months ended September 30, 2012 and 2011, respectively.

Bad debt expense

In the three months ended September 30, 2012, we recorded $0.3 million of reserves for bad debt representing 0.2% of consolidated revenue from services. In the three months ended September 30, 2011, we recorded $0.1 million of reserves for bad debt representing 0.1% of consolidated revenue from services.

Contribution income

Nurse and allied staffing

Contribution income from our nurse and allied staffing segment for the three months ended September 30, 2012, decreased $3.4 million or 53.4%, to $3.0 million from $6.3 million in three months ended September 30, 2011. As a percentage of segment revenue, contribution income was 4.2% for the three months ended September 30, 2012, and 8.6% for the three months ended September 30, 2011. This decrease was primarily due to a combination of higher field staff insurance expenses, reflecting unusually high field health claims activity in the current quarter and a favorable worker's compensation accrual in the third quarter of 2011, higher housing costs, a decrease in our bill pay spread primarily due to geographic mix, and negative operating leverage in the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Physician staffing

Contribution income from physician staffing for the three months ended September 30, 2012 increased $0.2 million or 5.9% to $3.1 million, from $2.9 million in the three months ended September 30, 2011. As a percentage of segment revenue, contribution income was 9.5% in the three months ended September 30, 2012 and 2011. Continued higher physician expenses were offset by lower professional liability accruals and improved operating leverage in the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Clinical trial services

Contribution income from clinical trial services decreased $0.7 million, or 29.7% to $1.6 million in the three months ended September 30, 2012, compared to $2.2 million in the three months ended September 30, 2011. As a percentage of segment revenue, contribution income was 9.3% in the three months ended September 30, 2012 compared to 13.4% in the three months ended September 30, 2011. This decrease is primarily due to higher pay rates and payroll taxes for our field employees and significantly higher field health insurance costs.

Other human capital management services

Contribution income from other human capital management services for the three months ended September 30, 2012 decreased $1.0 million, or 97.5%, to $25,000, from $1.0 million in the three months ended September 30, 2011. Contribution income as a percentage of segment revenue was 0.3% for the three months ended September 30, 2012 and 9.6% for the three months ended September 30, 2011. The decrease in contribution income margin was due to an increase in direct mail expenses in our education and training business and negative operating leverage. Our retained search business has the highest fixed cost structure of all of our businesses. Due to this high fixed cost structure, when revenue declines, the business suffers a disproportionate decline in contribution margin. Conversely, when revenue increases, it should produce a disproportionally strong margin improvement.

Depreciation and amortization expense

Depreciation and amortization expense in the three months ended September 30, 2012, totaled $2.0 million as compared to $2.4 million for the three months ended September 30, 2011. As a percentage of consolidated revenue, depreciation and amortization expense was 1.6% for the three months ended September 30, 2012 and 1.8% for the three months ended September 30, 2011.


Impairment Charges

Impairment charges in the three months ended September 30, 2012 represents impairment of goodwill and certain trademarks in our clinical trial services business segment due to the results of interim impairment analyses pursuant to the Intangibles - Goodwill and Other Topic of the FASB ASC.

Pursuant to an interim impairment analysis of goodwill, we determined that the fair value of our clinical trial services business segment was lower than its respective carrying value. The decrease in value was due to reduced contribution margins in this business, partly related to market developments that became more apparent in the third quarter of 2012 which lowered the expected future results used for goodwill impairment testing. In addition, certain other market based valuation data points were considered based on more recent information. Pursuant to the second step of the interim impairment testing, we are required to calculate an implied fair value of goodwill based on a hypothetical purchase price allocation. As of the date of this filing, we have not finalized this second step of our impairment testing due to the limited time period from the first indication of potential impairment to the date of filing and the complexities involved in estimating the fair value. Accounting guidance provides that in circumstances in which step two of the impairment analysis has not been completed, a company should recognize an estimated impairment charge to the extent that it determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated using guidance of accounting for contingencies. Based on the best estimate as of the date of this filing, we recorded a pre-tax goodwill impairment charge of $22.1 million as of September 30, 2012. However, we have not completed the step two analysis as of the date of this filing, and we plan to finalize it in the fourth quarter of 2012.

Additionally, in connection with this interim impairment review as of September 30, 2012, we determined the estimated fair value of certain trademarks relating to our clinical trial services reporting unit were less than their carrying value primarily due to a change in the useful life assumptions we believe a hypothetical marketplace participant would use in evaluating estimated future cash flows. As a result, an estimate of $1.4 million was recorded as impairment charges for these trademarks in the three months ended September 30, 2012. Due to this impairment analysis, the useful life of these trademarks were reassessed and determined to have an estimated economic life of 3.25 years.

See Critical Accounting Principles and Estimates and Note 3 - Goodwill and Other Identifiable Intangible Assets to our condensed consolidated financial statements.

Debt financing costs

Debt financing costs in the three months ended September 30, 2012 relate to third party debt financing costs for our Current Credit Agreement. See Note 6- Debt, to our condensed consolidated financial statements for more information. No similar costs were incurred in the three months ended September 30, 2011.

Interest expense

Interest expense totaled $0.4 million for the three months ended September 30, 2012 compared to $0.7 million for the three months ended September 30, 2011. The decrease in interest expense was primarily due to lower average borrowings. The effective interest rate on our borrowings was 2.3% for both the three month periods ended September 30, 2012 and 2011.

Income tax (benefit) expense

Income tax benefit totaled $6.8 million for the three months ended September 30, 2012, as compared to $1.9 million of income tax expense for the three months ended September 30, 2011. The effective tax rate was 27.9% and 50.9% in the . . .

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