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CCRN > SEC Filings for CCRN > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for CROSS COUNTRY HEALTHCARE INC

Form 10-Q for CROSS COUNTRY HEALTHCARE INC


7-Nov-2013

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, 2012, 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 three business segments: (1) nurse and allied staffing, (2) physician staffing, and (3) other human capital management services. We believe we are one of the top two providers of nurse and allied staffing services; one of the top four providers of temporary physician staffing (locum tenens) services; and one of the top four providers of retained physician and healthcare executive search services. We are also a leading provider of education and training programs specifically for the healthcare marketplace.

We have a diversified revenue mix across business sectors and healthcare customers. For the quarter ended September 30, 2013, our nurse and allied staffing business segment which is comprised of travel and per diem nurse staffing, and allied health staffing represented approximately 63% of our revenue. Travel nurse staffing represented approximately 48% of our total revenue and 77% 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 29% of our third quarter 2013 revenue and consists of temporary physician staffing services (locum tenens). 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, 2013, our revenue was $108.0 million, and we had income from continuing operations of $1.5 million, or $0.05 per diluted share. Cash flow from operations for the nine months ended was $11.6 million. We used a portion of the net proceeds from the sale of our clinical trial services business to repay all $29.3 million of our then outstanding debt. We ended the third quarter of 2013 with $32.5 million of cash and cash equivalents and total debt of $0.3 million primarily related to capital lease obligations.

In general, we evaluate our financial condition and operating results by revenue, contribution income (see Segment Information), and net income (loss). 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 in the third quarter was generally soft across the board due to lower hospital admissions and delays in Electronic Medical Record (EMR) technology implementations. However, contribution income margins improved in the third quarter as a result of: 1) an increase in bill rates which are up 3% year over year; 2) a reduction in housing costs; and 3) an increase in bill/pay spread.

While we experienced a decline in demand for our nurse and allied staffing services early in the quarter, demand at the end of the quarter was up 13% from the beginning of the quarter and this positive trend has continued into the fourth quarter. Also, the number of our healthcare professionals working at our Managed Service Programs (MSP's) increased 18% in the quarter due to higher demand and a 4% increase in market share at our MSP customers. Our book to bill ratio was 111% for the quarter and averaged 123% in the last five weeks of the quarter. The general increase in demand, our recent strong book to bill ratio along with two MSP and four large EMR wins should benefit our fourth quarter somewhat but should mostly help us to get a good start in our nurse and allied business in 2014.


Physician Staffing

Our physician staffing business experienced a decrease in demand throughout the third quarter with revenue down 3.7% year-over-year and 4.5% sequentially. The decrease in demand was partly due to what we believe is an increase in the number of physicians willing to accept permanent opportunities. We experienced declines in many of our specialties. Primary care sub-specialties and OB/GYN were particularly weak, which was partially offset by growth in anesthesia and oncology.

We believe the future outlook for the physician staffing industry is positive as demand for physicians is projected to increase due to the demographics of a growing and aging population along with healthcare reform that is expected to increase utilization of our services. We believe our physician staffing services business is well positioned to respond to the current and future needs of its healthcare customers.

Results of Operations

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

                                                Three Months Ended          Nine Months Ended
                                                   September 30,              September 30,
                                                2013           2012         2013          2012
Revenue from services                          100.0  %       100.0  %     100.0  %      100.0  %
Direct operating expenses                       73.9           75.6         74.2          74.7
Selling, general and administrative expenses    23.6           23.9         24.1          24.9
Bad debt expense                                 0.2            0.2          0.2           0.2
Depreciation and amortization                    1.3            1.4          1.4           1.6
Restructuring costs                              0.1              -          0.1             -
Legal settlement charge                            -              -          0.2             -
Impairment charge                                  -              -            -           5.7
Income (loss) from operations                    0.9           (1.1 )       (0.2 )        (7.1 )
Foreign exchange (gain) loss                       -            0.1            -             -
Interest expense                                 0.2            0.6          0.2           0.6
Debt financing costs                               -              -            -             -
Loss on early extinguishment and
modification of debt                               -            0.1          0.4             -
Other (income) expense, net                        -           (0.1 )          -             -
Income (loss) from continuing operations
before income taxes                              0.7           (1.8 )       (0.8 )        (7.7 )
Income tax benefit                              (0.6 )         (2.4 )       (0.4 )        (2.3 )
Income (loss) from continuing operations         1.3            0.6         (0.4 )        (5.4 )
(Loss) income from discontinued operations,
net of income taxes                             (0.5 )        (16.3 )        0.6          (4.5 )

Net income (loss) 0.8 % (15.7 )% 0.2 % (9.9 )%

Dispositions

On February 15, 2013, we completed the sale of our clinical trial services business to ICON Clinical Research, Inc. and ICON Clinical Research UK Limited (the "Buyer") for an aggregate $52.0 million in cash, subject to certain adjustments. At closing, the total amount paid was reduced by $0.1 million for the amount the Targeted Net Working Capital exceeded the Estimated Net Working Capital. Subsequent to September 30, 2013, we paid an additional $0.2 million to the Buyer to finalize the Net Working Capital adjustment, pursuant to the agreement.

The agreement included a provision for an earn-out of up to $3.75 million related to certain performance-based milestones. The maximum earn-out amount of $3.75 million was deposited in escrow by Buyer as security for the earn-out payment, if any. The $3.75 million earn-out related to certain performance-based milestones, has been treated as contingent consideration and we assigned no value to this earn-out as of September 30, 2013 based on recent information available to us including a revised revenue forecast for the Arena Contract (as defined in the agreement). In addition, the FTE earn-out (as defined in the agreement) was not earned, and as a result $1.5 million of the original escrow was released to the Buyer in the second quarter of 2013, leaving a


balance of $2.25 million as of September 30, 2013. (see Note 7 - Fair Value Measurements, to our condensed consolidated financial statements for more information).

Of the $52.0 million purchase price, paid at closing, $3.75 million was also placed in escrow for a period of 18 months following the closing to provide partial security to the Buyer in the event of any breach of the representations, warranties and covenants of the Company. We recorded the $3.75 million indemnity escrow funds as an escrow receivable, and will adjust the amount, each reporting period, based on any known information that may arise that would be reasonable and estimable.

We have provided certain transitional services to the Buyer since the sale date, which have substantially ceased as of September 30, 2013.

The sale was a result of an extensive review of our business and the changing competitive landscape in the pharmaceutical outsourcing industry. This segment consisted 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. As of September 30, 2013, our clinical trial services segment has been classified as discontinued operations and its results of operations have been classified for all periods presented.

Acquisitions

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, 2013, an indemnification escrow account of $3.6 million exists.

Goodwill, Trademarks and Other Identifiable Intangible Assets

Goodwill, trademarks and other intangible assets represented 58.4% of our stockholders' equity as of September 30, 2013. Goodwill, trademarks and other identifiable intangible assets from acquisitions were $62.7 million, $48.7 million and $12.8 million, respectively, net of accumulated amortization, at September 30, 2013. 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.

Other identifiable intangible assets, which are subject to amortization, are being amortized using the straight-line method over their estimated useful lives ranging from 8 to 15 years.

Segment Information

In accordance with the Segment Reporting Topic of the FASB ASC, we historically reported four business segments - nurse and allied staffing, clinical trial services, physician staffing, and other human capital management services. During the fourth quarter of 2012, we decided to divest our clinical trial services business segment. Their results of operations have been classified as discontinued operations for periods presented. See Note 2- Discontinued Operations. The remaining three business segments in continuing operations are described below:

? 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 and for-profit and not-for-profit healthcare 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.

? 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 income (loss) from operations for the periods indicated are as follows:

                                           Three Months Ended          Nine Months Ended
                                             September 30,               September 30,
                                           2013       2012 (a)        2013        2012 (a)
                                                       (amounts in thousands)
Revenues:
Nurse and allied staffing               $  67,448    $  69,750     $ 207,736     $ 206,904
Physician staffing                         31,485       32,681        92,506        92,879
Other human capital management services     9,115        9,827        28,890        31,122
                                        $ 108,048    $ 112,258     $ 329,132     $ 330,905

Contribution income (b):
Nurse and allied staffing (c)           $   5,156    $   2,511     $  14,192     $   7,771
Physicians staffing                         2,191        3,108         6,820         8,192
Other human capital management services        55           25           879         1,410
                                            7,402        5,644        21,891        17,373

Unallocated corporate overhead (c)          4,937        5,288        16,934        16,684
Depreciation                                  890        1,035         2,952         3,798
Amortization                                  552          566         1,684         1,698
Restructuring costs                           109            -           484             -
Legal settlement charge                         -            -           750             -
Impairment charge                               -            -             -        18,732
Income (loss) from operations           $     914    $  (1,245 )   $    (913 )   $ (23,539 )


(a) Prior periods have been restated to conform to the 2013 presentation of our former clinical trial services business segment from continuing operations to discontinued operations.

(b) We define contribution income or loss from operations before depreciation, amortization, restructuring costs, legal settlement charges, 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.

(c) In 2013, we refined our methodology for allocating certain corporate overhead expenses to our nurse and allied staffing segment expenses to more accurately reflect this segment's profitability. Prior year information has been reclassified to conform to current year presentation.

Comparison of Results for the Three Months Ended September 30, 2013 compared to the Three Months Ended September 30, 2012

Revenue from services

Revenue from services decreased 3.8%, to $108.0 million for the three months ended September 30, 2013, as compared to $112.3 million for the three months ended September 30, 2012. All three business segments experienced revenue declines.


Nurse and allied staffing

Revenue from our nurse and allied staffing business segment decreased 3.3%, to $67.4 million for the three months ended September 30, 2013, as compared to $69.8 million for the three months ended September 30, 2012. Lower staffing volume more than offset higher bill rates in the three months ended September 30, 2013.

The average number of nurse and allied staffing FTEs on contract during the three months ended September 30, 2013, decreased 6.9% from the three months ended September 30, 2012. The average nurse and allied staffing revenue per FTE per day increased 3.9% in the three months ended September 30, 2013 compared to the three months ended September 30, 2012, due to an increase in our average bill rates and more hours provided per FTE.

Physician staffing

Revenue from our physician staffing business decreased 3.7%, to $31.5 million for the three months ended September 30, 2013, as compared to $32.7 million for the three months ended September 30, 2012. The decrease in revenue is due to lower volume partially offset by higher bill rates in the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Physician staffing days filled is equivalent to total hours filled during the respective period divided by eight hours. Physician staffing days filled decreased 8.2%, to 20,788 days in the three months ended September 30, 2013, as compared to 22,647 days in the three months ended September 30, 2012. Revenue per day filled for the three months ended September 30, 2013 was $1,515, a 5.0% increase from the three months ended September 30, 2012. Revenue per day filled is calculated by dividing total physician staffing revenue by days filled for the respective period.

Other human capital management services

Revenue from other human capital management services decreased 7.2%, to $9.1 million for the three months ended September 30, 2013, as compared to $9.8 million for the three months ended September 30, 2012. The revenue decline was due to fewer seminars being held by our education business and fewer retained search sales in our physician 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 decreased $4.9 million or 5.8%, to $79.9 million for the three months ended September 30, 2013, as compared to $84.8 million for three months ended September 30, 2012. As a percentage of total revenue, direct operating expenses decreased to 73.9% in the three months ended September 30, 2013, compared to 75.6% for the three months ended September 30, 2012. This decrease is primarily due to lower field insurance expenses, lower housing costs and a continued expansion of our bill/pay spread in our nurse and allied staffing segment.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased 4.9%, to $25.5 million for the three months ended September 30, 2013, as compared to $26.8 million for the three months ended September 30, 2012. This decrease is primarily due to lower compensation expenses, health insurance costs, and direct mail expenses, partially offset by a change in our estimated sales tax liability in our physician staffing business. As a percentage of total revenue, selling, general and administrative expenses were 23.6% and 23.9%, for the three months ended September 30, 2013 and 2012, respectively.

Included in selling, general and administrative expenses are unallocated corporate overhead of $4.9 million for three months ended September 30, 2013, compared to $5.3 million for the three months ended September 30, 2012. As a percentage of consolidated revenue, unallocated corporate overhead was 4.6% for the three months ended September 30, 2013 and 4.7% for the three months ended September 30, 2012. Share-based compensation, included in unallocated corporate overhead, was $0.5 million and $0.6 million in the three months ended September 30, 2013 and 2012, respectively.

Bad debt expense

Bad debt expense totaled $0.2 million in the three months ended September 30, 2013, and $0.3 million in the three months ended September 30, 2012. Bad debt expense as a percentage of revenue was 0.2% in the three months ended September 30, 2013 and 2012.


Contribution income

Nurse and allied staffing

Contribution income from our nurse and allied staffing segment increased $2.6 million or 105.3%, to $5.2 million for the three months ended September 30, 2013, as compared to $2.5 million for the three months ended September 30, 2012. As a percentage of segment revenue, contribution income was 7.6% for the three months ended September 30, 2013, and 3.6% for the three months ended September 30, 2012. The margin improvement was due to to a combination of lower field insurance costs resulting from favorable claims development, lower selling, general, and administrative expenses, lower housing costs, and improved bill/pay spreads in the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Physician staffing

Contribution income from physician staffing decreased $0.9 million or 29.5%, to $2.2 million for the three months ended September 30, 2013, as compared to $3.1 million for the three months ended September 30, 2012. As a percentage of segment revenue, contribution income was 7.0% for the three months ended September 30, 2013 and 9.5% for the three months ended September 30, 2012. This decrease was primarily due to an increase of accrued sales tax liability based on a change in the estimate of the liability in the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Other human capital management services

Contribution income from other human capital management services was $0.1 million for the three months ended September 30, 2013, as compared to $0.03 million for the three months ended September 30, 2012. Contribution income as a percentage of segment revenue was 0.6% for the three months ended September 30, 2013 and 0.3% for the three months ended September 30, 2012. The increase in contribution income margin was primarily due to lower direct mail expenses in our education business, partly offset by negative operating leverage in both businesses.

Depreciation and amortization expense

Depreciation and amortization expense totaled $1.4 million for the three months ended September 30, 2013, as compared to $1.6 million for the three months ended September 30, 2012. As a percentage of consolidated revenue, depreciation and amortization expense was 1.3% for the three months ended September 30, 2013 and 1.4% for the three months ended September 30, 2012.

Restructuring Costs

In the second quarter we initiated a restructuring plan to reduce operating costs. During the three months ended September 30, 2013, we incurred additional restructuring charges of $0.1 million, pretax, primarily related to severance pay. Severance costs are included as restructuring costs in the condensed consolidated statements of operations. No similar charges were recorded in the three months ended September 30, 2012.

Interest expense

Interest expense totaled $0.2 million for the three months ended September 30, 2013, as compared to $0.7 million for the three months ended September 30, 2012. The decrease in interest expense was primarily due to lower average borrowings. The effective interest rate on our borrowings was 2.1% through February 15, 2013 (the day we repaid our outstanding debt with proceeds from the sale of clinical trial services business). The effective interest rate on our borrowings was 2.3% for the three month periods ended September 30, 2012. See Note 6- Debt, to our condensed consolidated financial statements for more information.

Income tax benefit

Income tax benefit from continuing operations totaled $0.6 million for the three months ended September 30, 2013, as compared to $2.8 million for the three months ended September 30, 2012. The income tax benefit included $1.0 million from discrete items, the most significant of which related to a reversal of accrued U.S. taxes on foreign earnings made possible by the divestiture of the Company's clinical trial services business. Excluding discrete items, income tax expense was $0.3 million


in the three months ended September 30, 2013, representing a 43.1% effective tax rate, which is higher than statutory rates due to the partial non-deductibility of certain per diem payments. The effective tax rate excluding discrete items in the three months ended September 30, 2012, was 133.2%. The effective tax rate in the three months ended September 30, 2012 is greater than statutory rate primarily due to foreign taxes and the impact of certain non-deductible per diem payments, which reduced our income tax benefit.

Loss from discontinued operations, net of income taxes

Loss from discontinued operations, net of income taxes includes the results from the sale of the clinical trial services business which is classified as discontinued in the three months ended September 30, 2013. The clinical trial services business had a loss from operations before income taxes of $22.4 million in the quarter ended September 30, 2012, primarily related to impairment of goodwill and certain trademarks. See Note 2 -Discontinued Operations, to our condensed consolidated financial statements for more information.

Comparison of Results for the Nine Months Ended September 30, 2013 compared to the Nine Months Ended September 30, 2012

Revenue from services

Revenue from services decreased 0.5%, to $329.1 million for the nine months ended September 30, 2013, as compared to $330.9 million for the nine months ended September 30, 2012. The decrease was due to decreases in revenue from our other human capital management services and physician staffing businesses, partially offset by an increase in revenue from our nurse and allied staffing business segment.

Nurse and allied staffing

Revenue from our nurse and allied staffing business segment increased 0.4%, to $207.7 million for the nine months ended September 30, 2013, as compared to $206.9 million for the nine months ended September 30, 2012. The increase is due to higher average bill rates partially offset by lower volume in the nine months ended September 30, 2013.

The average number of nurse and allied staffing FTEs on contract during the nine months ended September 30, 2013, decreased 2.5% from the nine months ended September 30, 2012. The average nurse and allied staffing revenue per FTE per day increased 3.2% in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, due to the increase in our average bill rates.

Physician staffing

Revenue from our physician staffing business decreased 0.4%, to $92.5 million for the nine months ended September 30, 2013, as compared to $92.9 million for the nine months ended September 30, 2012. The decrease in revenue is primarily due to lower volume, partially offset by higher revenue per days filled in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Physician staffing days filled is equivalent to total hours filled during the respective period divided by eight hours. Physician staffing days filled decreased 4.8%, to 61,589 days in the nine months ended September 30, 2013, as . . .

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