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| AHS > SEC Filings for AHS > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. Certain statements in this "Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations" are "forward-looking statements." See "Special Note Regarding Forward-Looking Statements" under Item 1, "Business." We intend this MD&A
section to provide you with a narrative from the perspective of our management
on our financial condition, results of operations, liquidity and certain other
factors that may affect our future results. The following sections comprise this
MD&A:
• Overview
• Management Initiatives
• Recent Trends
• Critical Accounting Policies and Estimates
• Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet and Other Financing Arrangements
• Potential Fluctuations in Quarterly Results and Seasonality
• Inflation
• Recent Accounting Pronouncements
Overview
We are the innovator in healthcare workforce solutions and staffing services to healthcare facilities across the nation. As an innovative workforce solutions partner, our managed services programs, recruitment process outsourcing, consulting services, and placement of physicians, nurses and allied healthcare professionals into temporary and permanent positions enable our clients to successfully reduce complexity, increase efficiency and improve patient outcomes within the rapidly evolving healthcare environment. Our clients include acute and sub-acute care hospitals, government facilities, community health centers and clinics, physician practice groups, and several other healthcare-related settings. Our clients utilize our workforce solutions and healthcare staffing services to manage their temporary and permanent clinical workforce needs in an economically beneficial manner. Our managed services program enables healthcare organizations to increase their efficiency by managing all of their clinical supplemental workforce needs through one company.
We conduct business through three reportable segments: nurse and allied healthcare staffing, locum tenens staffing and physician permanent placement services. For the year ended December 31, 2012, we recorded revenue of $954.0 million, as compared to revenue of $887.5 million for 2011. We recorded net income of $17.1 million, as compared to a net loss of $(26.3) million for 2011, which included pre-tax impairment charges of $38.9 million reported in the loss from discontinued operations for the year ended December 31, 2011.
Nurse and allied healthcare staffing segment revenues comprised 69% and 64% of
total consolidated revenues for the years ended December 31, 2012 and 2011,
respectively. Through our nurse and allied healthcare staffing segment, we
provide hospital and other healthcare facilities with a range of clinical
workforce solutions, including: (1) a comprehensive managed services solution in
which we manage all of the temporary nursing and allied needs of a client;
(2) traditional clinical staffing solutions of variable assignment lengths; and
(3) a recruitment process outsourcing program that leverages our expertise and
support systems to replace or complement a client's existing internal
recruitment function for permanent placement needs.
Locum tenens staffing segment revenues comprised 27% and 31% of total consolidated revenues for the years ended December 31, 2012 and 2011, respectively. Through our locum tenens staffing segment, we place physicians of all specialties, as well as dentists, certified registered nurse anesthetists, physician assistants and nurse practitioners, with clients on a temporary basis as independent contractors. These locum tenens physicians and other locum tenens clinicians are used by our healthcare facility and physician practice group clients to fill temporary vacancies created by vacation and leave schedules and to bridge the gap while they seek permanent candidates or explore expansion. Our locum tenens clients represent a diverse group of healthcare organizations throughout the United States, including hospitals, medical groups, occupational medical clinics, individual practitioners, networks, psychiatric facilities, government institutions and managed care entities. The professionals we place are recruited nationwide and are typically placed on multi-week contracts with assignment lengths ranging from a few days up to one year.
Physician permanent placement services segment revenues comprised 4% and 5% of total consolidated revenues for the years ended December 31, 2012 and 2011, respectively. Through our physician permanent placement services segment, we assist hospitals, healthcare facilities and physician practice groups throughout the United States in identifying and recruiting physicians for permanent placement. We perform the vast majority of our services on a retained basis, through our Merritt
Hawkins® brand, for which we are generally paid through a blend of retained search fees and variable fees tied to work performed and successful placement. To a smaller degree, we also perform our services on a contingent basis, exclusively through our Kendall & Davis® brand, for which fees are paid once physician candidates are ultimately hired by our clients. Our broad specialty offerings include over 70 specialist and sub-specialist opportunities such as internal medicine, family practice and orthopedic surgery.
During the fourth quarter of 2011, we decided to divest our home healthcare services segment. Accordingly, we classified the home healthcare services segment as a disposal group held for sale as of December 31, 2011 and its results of operations as discontinued operations for the years ended December 31, 2012, 2011 and 2010. We completed the sale of this segment in January 2012.
Management Initiatives
Our growth strategy focuses on providing an innovative and differentiated value and experience to our clients, clinicians and physicians. To accomplish this, we have broadened our service offerings beyond our traditional core travel nurse and allied temporary staffing, locum tenens staffing, and physician permanent placement services, to include more strategic and recurring revenue sources from innovative workforce solutions offerings such as managed services programs and recruitment process outsourcing. Through these differentiated services, we have built strategic relationships with our clients to assist them in improving their financial, operational and patient care results through productivity and candidate quality enhancements. We continually seek strategic opportunities to expand into complementary service offerings that leverage our core capabilities of recruiting and credentialing clinicians and physicians, while providing a more recurring stream of revenues that reduces our exposure to economic cycle risk. At the same time, we continue to invest in our innovative workforce solutions, new candidate recruitment initiatives and technology infrastructure to ensure we are strategically ready in the long term to capitalize on the demand growth anticipated from the significant healthcare workforce shortages due to healthcare reform and the aging population. Recent Trends
Demand has rebounded in the travel nurse business from its low point in 2009, but still remains well below levels experienced in 2007 through 2008. Demand has been particularly strong for specialty nurses for which there is limited supply. While our demand is spread across a broad base of clients, we continue to see more of our clients migrate to managed services program relationships, and during 2012, revenue from these contracts represent approximately one-third of our nurse and allied healthcare staffing business, a substantial increase from 1% in 2008. As a result of these managed services relationships, we have an improved ability to fill more of the demand and create operational efficiencies. Early in 2013, we are continuing to experience growth in demand.
Within the allied staffing business, demand was strong in our therapy business throughout the first three quarters of 2012. Since the fourth quarter, however, we are experiencing a significant reduction in demand due to a variety of legislative changes in Medicare reimbursement. Our managed services program clients as well as our ability to shift our sales resources to other specialties have mitigated the financial impact of the reduced demand.
In our locum tenens staffing segment, we are seeing strong market demand in our primary care and hospitalist specialties, but continue to experience weaker demand in the anesthesia and radiology specialties, which historically represented two of our largest specialties in this segment. As a result of market demand and operational changes, we are experiencing improving margins due primarily to more favorable bill rates and improved bill to pay spreads, but our volume and margins continue to lag that of the sector.
Throughout 2012, we saw increased demand for our services within our physician permanent placement services segment. We have also seen an increase in our recruiter productivity completing those searches, which has translated into revenue growth.
The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, accounts receivable and contingencies and litigation, valuation and recognition of share-based payments and income taxes. We base these estimates on the information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these 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 and Indefinite-lived Intangible Assets
In accordance with accounting guidance on goodwill and other intangible assets,
we perform annual impairment analysis to assess the recoverability of the
goodwill and indefinite-lived intangible assets. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assignment of assets and liabilities to reporting units, assignment of
goodwill to reporting units, and determination of the fair value of each
reporting unit. Valuation techniques consistent with the market approach and
income approach are used to measure the fair value of each reporting unit.
Significant judgments are required to estimate the fair value of reporting units
including estimating future cash flows, and determining appropriate discount
rates, growth rates, company control premium and other assumptions. Changes in
these estimates and assumptions could materially affect the determination of
fair value for each reporting unit. Testing is required between annual tests if
events occur or circumstances change that would, more likely than not, reduce
the fair value of the reporting unit below its carrying value.
During the third quarter of 2010, due to the decline in our market
capitalization resulting in such market capitalization being below our book
equity value, we performed interim impairment testing at the reporting unit
level as of August 31, 2010, prior to the acquisition of NFI, and completed the
valuation during the fourth quarter of 2010. As a result, we recognized a
pre-tax goodwill impairment charge of $41.9 million in 2010. In addition, we
recognized a pre-tax impairment charge of $8.6 million and $0.3 million related
to certain indefinite-lived intangibles in the locum tenens staffing segment and
the physician permanent placement services segment, respectively. We also
performed annual impairment test at October 31, 2010 and determined there was no
further impairment of goodwill and indefinite lived tradenames and trademarks.
We experienced declines in home healthcare revenue subsequent to the acquisition
of NFI due to federal and state reimbursement rate and funding pressures, such
that during the third quarter of 2011, we lowered our projected near-term growth
rate in the home healthcare services segment. The revised growth rate triggered
interim impairment testing on the home healthcare services segment, which was
also the reporting unit, as of August 31, 2011. The performance of the test
involves a two-step process. The first step of the impairment test involves
comparing the fair value of the reporting unit with the reporting unit's
carrying amount, including goodwill. We determined the fair value of the
reporting unit using a combination of the income approach (using discounted
future cash flows) and the market valuation approach. If the carrying amount of
the reporting unit exceeds the reporting unit's fair value, we perform the
second step of the goodwill impairment test to determine the amount of
impairment loss. The second step of the goodwill impairment test involves
comparing the implied fair value of our reporting unit's goodwill based on a
number of factors, including the implied discount rate, with the carrying amount
of that goodwill. During the third quarter of 2011, we completed the first step
of our goodwill impairment testing, which indicated that the fair value of our
home healthcare services reporting unit was lower than its respective carrying
value. The decrease in value was due to lower projected near-term growth rates
in the home healthcare industry, lowering the anticipated growth trend used for
goodwill impairment testing. We recognized a preliminary pre-tax goodwill
impairment charge of approximately $24.5 million during the third quarter of
2011, which represented management's best estimate of the goodwill impairment
based on the fair value analysis completed to date. During the fourth quarter of
2011, we finalized the interim valuation of our identified tangible and
intangible assets and liabilities for purposes of determining the implied fair
value of goodwill and determined there was no further impairment of goodwill at
that time. We included the goodwill impairment charges in loss from discontinued
operations on the consolidated statement of operations for the year ended
December 31, 2011. During the fourth quarter of 2011, we performed our annual
impairment test as of October 31, 2011 and determined there was no impairment of
our goodwill. In addition, during the third quarter of 2011, as a result of
lowering our projected near-term growth rate in the home healthcare services
segment, we recorded a preliminary pre-tax impairment charge of $6.7 million,
which related to an indefinite-lived intangible asset shared by the nurse
staffing reporting unit and home healthcare services reporting unit. During the
fourth quarter of 2011, we performed our annual impairment testing and recorded
an additional impairment charge of $7.7 million as a result of the January 2012
sale of the home healthcare business, which further impaired the above
indefinite-lived asset. We included the intangible asset charges in loss from
discontinued operations on the consolidated statement of operations for the year
ended December 31, 2011.
We performed the annual impairment test at October 31, 2012 and determined there
was no impairment of goodwill. In order to evaluate the sensitivity of the fair
value calculation on the goodwill impairment test, we applied hypothetical
decreases to the fair value of each reporting unit. We determined that
hypothetical decreases in fair value of at least 22% would be required before
any reporting unit would have a carrying value in excess of its fair value.
However, changes in our estimates, such as forecasted cash flows and discount
rates, would affect the estimated fair value of our reporting units and could
have resulted in a goodwill impairment charge particularly for our physician
permanent placement reporting unit. The fair values of our nurse staffing
reporting unit, allied healthcare staffing reporting unit and locum tenens
staffing reporting unit significantly exceeded their respective book values.
However, the calculated fair value of our physician permanent placement services
reporting unit exceeded its respective carrying value by a narrower margin. No
events or circumstances have occurred subsequent to October 31, 2012 that
indicate that further impairment may have occurred.
We performed the annual impairment testing at October 31, 2012 and determined
there was no impairment of indefinite-lived intangible assets. The calculated
fair value of a tradename related to the locum tenens staffing segment exceeded
its respective carrying value of $51 million by a narrow margin of 12%. Changes
in our estimates, such as revenue growth rates and discount rate, would affect
the estimated fair value of our tradename related to the locum tenens staffing
segment and could have resulted in an impairment charge. All other tradenames
have the calculated fair value significantly exceeding their respective book
values. No events or circumstances have occurred subsequent to October 31, 2012
that indicate that further impairment may have occurred.
Intangible assets with estimable useful lives are required to be amortized over
their respective estimated useful lives and reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment evaluation is based on an undiscounted cash flow
analysis at the lowest level at which cash flows of the long-lived assets are
largely independent of other groups of assets and liabilities. We assess
potential impairments to intangible assets when there is evidence that events or
changes in circumstances indicate that the carrying amount of an asset or asset
group may not be recovered. Our judgments regarding the existence of impairment
indicators and future cash flows related to intangible assets are based on
operational performance of our businesses, market conditions and other factors.
Although there are inherent uncertainties in this assessment process, the
estimates and assumptions we use, including estimates of future cash flows,
volumes, market penetration and discount rates, are consistent with our internal
planning. If these estimates or their related assumptions change in the future,
we may be required to record an impairment charge on all or a portion of our
long-lived intangible assets. Furthermore, we cannot predict the occurrence of
future impairment-triggering events nor the impact such events might have on our
reported asset values. Future events could cause us to conclude that impairment
indicators exist and that long-lived intangible assets associated with our
acquired businesses are impaired. Any resulting impairment loss could have an
adverse impact on our results of operations. We have analyzed our amortizable
long-lived assets for impairment and determined that there is no impairment for
the years ended December 31, 2012 and 2011.
Valuation of Assets Held for Sale
We measure disposal groups classified as held for sale at the lower of their carrying amount or fair value less cost to sell, and we do not depreciate or amortize disposal groups. Classification of our disposal groups as held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale, an active program to sell the disposal group has been initiated and its sale is probable within one year. If at any time these criteria are no longer met, the disposal group would be reclassified as held and used. We evaluate the held for sale classification and the fair value of such disposal groups at each reporting period. We determine the fair value of assets held for sale by considering active bids from potential buyers and also using the income or the market valuation approaches or a combination thereof. The fair value analysis using the income or market approach for assets held for sale is similar to the fair value analysis of reporting units for goodwill impairment described above and requires significant judgment.
Professional Liability Reserve
We maintain an accrual for professional liability self-insured retention limits that we include in accounts payable and accrued expenses and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of this undiscounted accrual by evaluating our historical experience and trends, loss reserves established by our insurance carriers, management and third party administrators, as well as by analyzing independent actuarial studies. We obtain actuarial studies on a semi-annual basis that use our historical claims data and industry data to assist us in determining the appropriate reserves.
In November 2012, we established a captive insurance subsidiary, which provides coverage, on an occurrence basis, for professional liability within our nurse and allied healthcare staffing segment. Liabilities include provisions for estimated losses incurred but not yet reported ("IBNR"), as well as provisions for known claims. IBNR reserve estimates involve the use of assumptions and are primarily based upon historical loss experience, industry data and other actuarial assumptions. We maintain excess insurance coverage for losses above the per occurrence retention.
Workers Compensation Reserve
We maintain an accrual for workers compensation self-insured retention limits, which we include in accrued compensation and benefits and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of these undiscounted accruals by evaluating our historical experience and trends, loss reserves established by our insurance carriers and third party administrators, as well as through the use of independent actuarial studies. We obtain updated actuarial studies on a semi-annual basis that use our payroll and actual claims data, as well as industry data, to determine the appropriate
reserves for each policy year. The actuarial study for workers compensation provides us with the estimated losses for prior policy years and an estimated percentage of payroll compensation to be accrued for the current year. We record our accruals based on the amounts provided in the actuarial study, which we believe is the best estimate of our liability. Self-Insured Health Benefit Claims Reserve
We maintain an accrual for self-insured health benefits we provide to our corporate employees and certain clinicians, which we include in accrued compensation and benefits in our consolidated balance sheets. We determine the adequacy of this undiscounted accrual by evaluating our historical experience and trends related to both health insurance claims and payments, information provided to us by our insurance broker and third party administrator, and industry experience and trends. If such information indicates that our accruals are overstated or understated, we reduce or provide for additional accruals. Our accrual is based on (i) a monthly average of our actual historical health insurance claim amounts and (ii) the average period of time from the date the claim is incurred to the date that it is reported to us and paid. We believe this is the best estimate of the amount of incurred, but not reported, self-insured health benefit claims at year-end. Historically, our accrual for health insurance has fluctuated with increases or decreases in the average number of plan participants, changes in our claims experience and changes in the reporting and payment processing time for claims.
Revenue Recognition
Revenue consists of fees earned from the permanent and temporary placement of clinicians and physicians. We recognize revenue when earned and realizable. We have entered into certain contracts with healthcare organizations to provide managed services programs. Under these contract arrangements, we use our temporary clinicians along with those of third party subcontractors to fulfill customer orders. If we use subcontractors, we record revenue net of related subcontractors expense. The resulting net revenue represents the administrative fee we charge for our managed services programs. We generally pay the subcontractor after we receive payment from the customer. We included payables to subcontractors in accounts payable and accrued expenses in the consolidated balance sheets.
Accounts Receivable
We record accounts receivable at the invoiced amount. Accounts receivable are non-interest bearing. We maintain an allowance for doubtful accounts for estimated credit losses resulting from collection risk, including the inability of our customers to make required payments under contractual agreements. We report the allowance for doubtful accounts as a reduction of accounts receivable in our consolidated balance sheets. We determine the adequacy of this allowance by evaluating historical delinquency and write-off trends, the financial condition and credit risk and history of each customer, historical payment trends as well as the current economic conditions and the impact of such conditions on our customers' liquidity and overall financial condition. If the financial condition of our customers deteriorates, affecting their ability to make payments, additional allowances would be provided. We also maintain a sales allowance to reserve for potential credits issued to customers. We determine the amount of the reserve based on historical credits issued.
Contingent Liabilities
We are subject to various claims and legal actions in the ordinary course of our
business. Some of these matters relate to professional liability, tax, payroll,
contract and employee-related matters and include individual and collective
lawsuits, as well as inquiries and investigations by governmental agencies
regarding our employment practices. The most significant matter of which we are
currently the defendant is a class action related to wage and hour claims, in
which we have accrued an immaterial amount for potential losses at December 31,
2012. The ability to predict the ultimate outcome of such matters involves
judgments, estimates and inherent uncertainties. The range of possible losses
for such matters cannot be reasonably estimated at this stage and could differ
materially from amounts already accrued by us. We currently are not aware of any
other pending or threatened litigation that we believe is reasonably possible to
have a material adverse effect on our results of operations, financial position
or liquidity.
Additionally, some of our clients may also become subject to claims,
governmental inquiries and investigations and legal actions relating to services
provided by our clinicians and physicians. From time to time, and depending upon
the particular facts and circumstances, we may be subject to indemnification
obligations under our contracts with such clients relating to these matters.
Staff Care, Inc., an indirect wholly-owned subsidiary of the Company, was the
subject of an assessment by the California Employment Development Department
("EDD") with respect to the payment of certain payroll related taxes in
connection with locum tenens and allied providers, for the period between
April 1, 2001 and June 30, 2007. We appealed the EDD's assessment, but made a
. . .
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