NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheets and related condensed consolidated statements of comprehensive income and cash flows contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”), which are unaudited, include the accounts of AMN Healthcare Services, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. These entries consisted of all normal recurring items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year or for any future period.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. Please refer to the Company’s audited consolidated financial statements and the related notes for the fiscal year ended December 31,
2015
, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2015
, filed with the Securities and Exchange Commission on February 24, 2016 (“2015 Annual Report”).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, accruals for self-insurance, compensation and related benefits, accounts receivable, contingencies and litigation, earn-out liabilities, and income taxes. Actual results could differ from those estimates under different assumptions or conditions.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This standard provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for by the customer consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. This standard can be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company adopted this pronouncement prospectively beginning January 1, 2016 and the adoption did not have a material effect on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments.” This standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The standard also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those years. The Company adopted this pronouncement prospectively beginning January 1, 2016 and the adoption did not have a material effect on the Company’s consolidated financial statements.
2. BUSINESS COMBINATIONS
As set forth below, the Company completed
five
acquisitions from January 1, 2015 through March 31, 2016. The Company accounted for each acquisition using the acquisition method of accounting. Accordingly, it recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. For each acquisition, the Company did not incur any material acquisition-related costs.
HealthSource Global Staffing Acquisition
On January 11, 2016, the Company completed its acquisition of HealthSource Global Staffing (“HSG”), which provides labor disruption and rapid response staffing. The initial purchase price of
$9,379
included (1)
$2,727
cash consideration paid at acquisition, funded through cash-on-hand, net of cash received, and settlement of the pre-existing relationship between AMN and HSG, (2)
$2,122
cash holdback for potential indemnification claims, (3)
$940
cash holdback for the income tax payment paid on behalf of the sellers after the acquisition date, and (4) a tiered contingent earn-out payment of up to
$4,000
with an estimated fair value of
$3,590
as of the acquisition date. The contingent earn-out payment is comprised of (A) up to
$2,000
based on the operating results of HSG for the year ending December 31, 2016, and (B) up to
$2,000
based on the operating results of HSG for the year ending December 31, 2017. As the acquisition is not considered material, pro forma information is not provided. The results of HSG have been included in the Company’s nurse and allied solutions segment since the date of acquisition.
The preliminary allocation of the
$9,379
purchase price consisted of (1)
$1,670
of fair value of tangible assets acquired, (2)
$5,509
of liabilities assumed, (3)
$3,944
of identified intangible assets, and (4)
$9,274
of goodwill, none of which is deductible for tax purposes. The intangible assets include the fair value of trademarks, customer relationships, staffing databases, and covenants not to compete with a weighted average useful life of approximately
eight
years.
B.E. Smith Acquisition
On January 4, 2016, the Company completed its acquisition of B.E. Smith (“BES”), a full-service healthcare interim leadership placement and executive search firm, for
$162,232
in cash, net of cash received, and settlement of the pre-existing relationship between AMN and BES. BES places interim leaders and executives across all healthcare settings, including acute care hospitals, academic medical and children’s hospitals, physician practices, and post-acute care providers. The acquisition provides the Company additional access to healthcare executives and enhances its integrated services to hospitals, health systems and other healthcare facilities across the nation. To help finance the acquisition, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”), which provided
$125,000
of additional available borrowings to the Company. The First Amendment is more fully described in Note (7), “Notes Payable and Credit Agreement.” The results of BES have been included in the Company’s other workforce solutions segment since the date of acquisition.
The preliminary allocation of the
$162,232
purchase price consisted of (1)
$11,704
of fair value of tangible assets acquired, (2)
$7,630
of liabilities assumed, (3)
$65,900
of identified intangible assets, and (4)
$92,258
of goodwill, a portion of which is deductible for tax purposes. The intangible assets acquired have a weighted average useful life of approximately
fifteen
years. The following table summarizes the fair value and useful life of each intangible asset acquired:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
|
|
(in years)
|
Identifiable intangible assets
|
|
|
|
|
Tradenames and Trademarks
|
|
$26,300
|
|
20
|
|
Customer Relationships
|
|
25,700
|
|
|
12
|
|
Staffing Database
|
|
13,000
|
|
|
10
|
|
Non-Compete Agreements
|
|
900
|
|
|
5
|
|
|
|
$65,900
|
|
|
Approximately
$26,651
of revenue and
$3,890
of income before taxes of BES were included in the condensed consolidated statement of comprehensive income for the
three months ended March 31, 2016
. The following summary presents unaudited pro forma consolidated results of operations of the Company for the
three months ended March 31, 2015
as if the BES acquisition had occurred on January 1, 2015, which gives effect to certain adjustments, including the reduction of compensation expense related to non-recurring executive salary expense, acquisition-related costs and the amortization of intangible assets. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the date indicated, nor is it necessarily indicative of our future operating results.
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
Revenue
|
$
|
346,789
|
|
|
Income from operations
|
$
|
25,195
|
|
|
Net income
|
$
|
11,677
|
|
|
Net income per common share:
|
|
|
Basic
|
$
|
0.25
|
|
|
Diluted
|
$
|
0.24
|
|
|
MillicanSolutions Acquisition
On October 5, 2015, the Company acquired MillicanSolutions, Inc. (“Millican”), a physician and executive leadership search firm. The total purchase price of
$3,985
included (1)
$2,985
cash consideration paid upon acquisition, funded by cash on-hand, (2)
$500
to be paid on December 31, 2016, and (3)
$500
to be paid on December 31, 2017. The acquisition enhances the Company’s ability to respond to the specialized leadership needs within academic pediatrics and children’s medical centers and expands its expertise in serving academic medical centers and teaching hospitals in physician and leadership search. As the acquisition is not considered material, pro forma information is not provided. The results of operations of Millican have been included in the Company’s other workforce solutions segment since the date of acquisition.
The preliminary allocation of the
$3,985
purchase price consisted of (1)
$261
of fair value of tangible assets acquired, (2)
$287
of liabilities assumed, (3)
$645
of identified intangible assets, and (4)
$3,366
of goodwill, a portion of which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, staffing databases, customer relationships, and a covenant not to compete. The weighted average useful life of the acquired intangible assets subject to amortization is approximately
five years
.
The First String Healthcare Acquisition
On September 15, 2015, the Company completed its acquisition of The First String Healthcare (“TFS”), a leading provider of interim staffing and permanent placement of nurse leaders and executives. The total purchase price of
$7,653
included (1)
$4,453
cash consideration paid upon acquisition, funded by cash-on-hand, net of cash received, (2)
$500
to be paid on the first anniversary of the acquisition date, and (3) a contingent earn-out with a fair value of
$2,700
as of the acquisition date. Also, the purchase agreement included an additional
$1,000
payment to be paid on the second anniversary of the acquisition date conditioned upon, subject to certain exceptions, continued employment of the selling shareholders, which is being recorded as compensation expense for post-combination services. The acquisition is intended to enhance the Company’s capabilities to provide interim and permanent nursing leadership. As the acquisition is not considered material, pro forma information is not provided. The results of operations of TFS are included in the other workforce solutions segment in the Company’s consolidated financial statements since the date of acquisition.
The acquisition agreement provides for a tiered contingent earn-out payment of up to
$4,000
, of which (1)
$1,000
was paid to the sellers in March 2016 based on the operating results of TFS for the 12-month period ended December 31, 2015, and (2) up to
$3,000
may be paid in 2017 based on the operating results of TFS for the 12-month period ending December 31, 2016. The preliminary allocation of the purchase price consisted of (A)
$919
of fair value of tangible assets acquired, (B)
$867
of liabilities assumed, (C)
$3,373
of identified intangible assets, and (D)
$4,228
of goodwill, which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, customer relationships, a staffing database, and covenants not to compete. The weighted average useful life of the acquired intangible assets subject to amortization is approximately
seven years
.
Onward Healthcare Acquisition
On January 7, 2015, the Company completed its acquisition of Onward Healthcare, including its
two
wholly-owned subsidiaries, Locum Leaders and Medefis (collectively, “OH”), for approximately
$76,643
in cash, funded by cash-on-hand and borrowings under the Company’s revolving credit facility. Onward Healthcare is a national nurse and allied healthcare staffing firm, Locum Leaders is a national locum tenens provider, and Medefis is a provider of a software-as-a-service (“SaaS”)-based vendor management system for healthcare facilities. The acquisition helps the Company to expand its service lines and its supply and placement capabilities of healthcare professionals to its clients. The results of Onward Healthcare are included in the Company’s nurse and allied solutions segment, the results of Locum Leaders are included in the Company’s locum tenens solutions segment, and the results of Medefis are included in the Company’s other workforce solutions segment since the date of acquisition.
The allocation of the
$76,643
purchase price consisted of (1)
$25,216
of fair value of tangible assets acquired (including
$21,313
of accounts receivable), (2)
$22,275
of liabilities assumed (including
$11,113
of accounts payable and accrued expenses), (3)
$30,219
of identified intangible assets, and (4)
$43,483
of goodwill, a portion of which is deductible for tax purposes. The intangible assets include the fair value of tradenames and trademarks, customer relationships, staffing database, acquired technologies, and non-compete agreements. The weighted average useful life of the acquired intangible assets is approximately
eleven
years. The following table summarizes the fair value and useful life of each intangible asset acquired:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
|
|
(in years)
|
Identifiable intangible assets
|
|
|
|
|
Tradenames and Trademarks
|
|
$
|
8,100
|
|
|
3 - 15
|
|
Customer Relationships
|
|
17,600
|
|
|
10 - 15
|
|
Staffing Database
|
|
2,600
|
|
|
5
|
|
Acquired Technologies
|
|
1,700
|
|
|
8
|
|
Non-Compete Agreements
|
|
219
|
|
|
2
|
|
|
|
$
|
30,219
|
|
|
|
Of the
$43,483
allocated to goodwill,
$23,032
,
$5,241
and
$15,210
were allocated to the Company’s nurse and allied solutions, locum tenens solutions and other workforce solutions segments, respectively.
3. REVENUE RECOGNITION
Revenue consists of fees earned from the temporary and permanent placement of healthcare professionals as well as from
the Company’s SaaS-based technology, including its vendor management systems and its scheduling software. Revenue from temporary staffing services is recognized as the services are rendered by the healthcare professional. Under the Company’s managed services program arrangements, the Company manages all or a part of a customer’s supplemental workforce needs utilizing its own pool of healthcare professionals along with those of third-party subcontractors. When the Company uses subcontractors, revenue is recorded net of the related subcontractor’s expense. Payables to subcontractors of
$50,225
and
$56,177
were included in accounts payable and accrued expenses in the unaudited condensed consolidated balance sheet as of
March 31, 2016
and the audited consolidated balance sheet as of
December 31, 2015
, respectively. Revenue from recruitment and permanent placement services is recognized as the services are provided and upon successful placements. The Company’s SaaS-based revenue is recognized ratably over the applicable arrangement’s service period. Fees billed in advance of being earned are recorded as deferred revenue.
4. NET INCOME PER COMMON SHARE
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. The following table sets forth the computation of basic and diluted net income per common share for the
three months ended March 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net income
|
$
|
25,869
|
|
|
$
|
12,209
|
|
|
|
|
|
Net income per common share - basic
|
$
|
0.54
|
|
|
$
|
0.26
|
|
Net income per common share - diluted
|
$
|
0.53
|
|
|
$
|
0.25
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
47,894
|
|
|
47,146
|
|
Plus dilutive effect of potential common shares
|
1,209
|
|
|
1,218
|
|
Weighted average common shares outstanding - diluted
|
49,103
|
|
|
48,364
|
|
Share-based awards to purchase
43
and
33
shares of common stock were not included in the above calculation of diluted net income per common share for the three months ended March 31, 2016 and 2015, respectively, because the effect of these instruments was anti-dilutive.
5. SEGMENT INFORMATION
The Company’s operating segments are identified in the same manner as they are reported internally and used by the Company’s chief operating decision maker for the purpose of evaluating performance and allocating resources. Effective as of January 1, 2016, the Company modified its reportable segments. The Company previously utilized
three
reportable segments, which it identified as follows: (1) nurse and allied healthcare staffing, (2) locum tenens staffing, and (3) physician permanent placement services. In light of the Company’s acquisitions over the past several years as well as its transition to a healthcare workforce solutions company, the Company’s management renamed the Company’s three reportable segments and also placed several of the Company’s business lines that were in the nurse and allied healthcare staffing segment into a different segment to better reflect how the business is evaluated by the chief operating decision maker. As of January 1, 2016, the Company began to disclose the following three reportable segments: (1) nurse and allied solutions, (2) locum tenens solutions, and (3) other workforce solutions. The nurse and allied solutions segment includes the Company’s travel nurse, allied, and local staffing businesses. The locum tenens solutions segment includes its locum tenens staffing business. The other workforce solutions segment includes its healthcare interim leadership staffing and executive search services business, physician permanent placement services business, recruitment process outsourcing business, vendor management systems business, workforce optimization services business, and its education business.
The Company’s chief operating decision maker relies on internal management reporting processes that provide revenue and operating income by reportable segment for making financial decisions and allocating resources. Segment operating income represents income before income taxes plus depreciation, amortization of intangible assets, share-based compensation, interest expense (net) and other, and unallocated corporate overhead. The Company’s management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed.
The following table, which includes reclassified prior period data to conform to the new segment reporting structure, provides a reconciliation of revenue and operating income by reportable segment to consolidated results and was derived from each segment’s internal financial information as used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
Nurse and allied solutions
|
$
|
297,724
|
|
|
$
|
216,992
|
|
Locum tenens solutions
|
102,738
|
|
|
86,692
|
|
Other workforce solutions
|
67,540
|
|
|
23,826
|
|
|
$
|
468,002
|
|
|
$
|
327,510
|
|
Segment operating income
|
|
|
|
Nurse and allied solutions
|
$
|
41,618
|
|
|
$
|
27,362
|
|
Locum tenens solutions
|
13,291
|
|
|
9,110
|
|
Other workforce solutions
|
17,586
|
|
|
7,810
|
|
|
72,495
|
|
|
44,282
|
|
Unallocated corporate overhead
|
15,039
|
|
|
12,025
|
|
Depreciation and amortization
|
6,765
|
|
|
5,095
|
|
Share-based compensation
|
3,381
|
|
|
2,377
|
|
Interest expense, net, and other
|
3,249
|
|
|
1,807
|
|
Income before income taxes
|
$
|
44,061
|
|
|
$
|
22,978
|
|
The following table summarizes the activity related to the carrying value of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nurse and Allied Solutions
|
|
Locum Tenens Solutions
|
|
Other Workforce Solutions
|
|
Total
|
Balance, January 1, 2016
|
$
|
95,309
|
|
|
$
|
19,743
|
|
|
$
|
89,727
|
|
|
$
|
204,779
|
|
Goodwill from BES acquisition
|
—
|
|
|
—
|
|
|
92,258
|
|
|
92,258
|
|
Goodwill from HSG acquisition
|
9,274
|
|
|
—
|
|
|
—
|
|
|
9,274
|
|
Goodwill adjustment for OH acquisition
|
850
|
|
|
—
|
|
|
—
|
|
|
850
|
|
Balance, March 31, 2016
|
$
|
105,433
|
|
|
$
|
19,743
|
|
|
$
|
181,985
|
|
|
$
|
307,161
|
|
Accumulated impairment loss as of December 31, 2015 and March 31, 2016
|
$
|
154,444
|
|
|
$
|
53,940
|
|
|
$
|
6,555
|
|
|
$
|
214,939
|
|
6. DERIVATIVE INSTRUMENTS
In April 2015, the Company entered into an interest rate swap agreement to minimize its exposure to interest rate fluctuations on
$100,000
of its outstanding variable rate debt under one of its term loans whereby the Company pays a fixed rate of
0.983%
per annum and receives a variable rate equal to floating one-month LIBOR. This agreement expires on March 30, 2018, and no initial investment was made to enter into this agreement.
At
March 31, 2016
, the interest rate swap agreement had a fair value of
$(592)
, which is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of
March 31, 2016
. At
December 31, 2015
, the interest rate swap agreement had a fair value of
$165
, which was included in other assets in the audited consolidated balance sheet as of
December 31, 2015
. The Company has formally documented the hedging relationship and accounts for this arrangement as a cash flow hedge. The Company recognizes all derivatives on the balance sheet at fair value based on quotes from an independent pricing service. Gains or losses resulting from changes in the values of the arrangement are recorded in other comprehensive income (loss), net of tax, until the hedged item is recognized in earnings. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instrument that is used in the hedging transaction is highly effective in offsetting changes in fair values or cash flows of the hedged item. When it is determined that a derivative instrument is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively and recognizes subsequent changes in market value in earnings.
7. NOTES PAYABLE AND CREDIT AGREEMENT
On April 18, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with several lenders to provide for
two
credit facilities to replace its prior credit facilities, including (1) a
$225,000
secured revolving credit facility (the “Revolver”) that includes a
$40,000
sublimit for the issuance of letters of credit and a
$20,000
sublimit for swingline loans and (2) a
$150,000
secured term loan credit facility (the “Term Loan”). On January 4, 2016, the Company entered into the First Amendment (together with the Credit Agreement, the “Amended Credit Agreement”) with several lenders to provide for, among other things, (A) a
$50,000
increase to the Revolver to
$275,000
, and (B) an additional
$75,000
secured term loan (the “Additional Term Loan”). Additionally, the Amended Credit Agreement no longer requires the Company to make mandatory prepayments under any of the credit facilities provided thereunder with the proceeds of extraordinary receipts and excess cash flow. The Amended Credit Agreement provides that the Company may from time to time obtain an increase in the Revolver or the Term Loan or both in an aggregate principal amount not to exceed
$125,000
subject to, among other conditions, the arrangement of additional commitments with financial institutions reasonably acceptable to the Company and the administrative agent. The obligations of the Company under the Amended Credit Agreement are secured by substantially all of the assets of the Company and the common stock or equity interests of its domestic subsidiaries. The payment obligations under the Amended Credit Agreement may be accelerated upon the occurrence of defined events of default.
The Company used the proceeds from the Additional Term Loan, together with a drawdown of a portion of the Revolver, to complete its acquisition of BES, as more fully described in Note (2), “Business Combinations.” The Additional Term Loan is subject to amortization of principal of
5.00%
per year of the original Additional Term Loan amount, payable in equal quarterly installments. The maturity date of the Additional Term Loan is January 4, 2021.
The Amended Credit Agreement contains various customary affirmative and negative covenants, including restrictions on incurrence of additional indebtedness, declaration and payment of dividends, dispositions of assets, consolidation into another entity, and allowable investments. Additionally, there are financial covenants based on the Company’s consolidated leverage ratio and interest coverage ratio as calculated in accordance with the Amended Credit Agreement.
In connection with the First Amendment, the Company incurred
$632
in fees paid to lenders and other third parties, of which
$448
was capitalized and amortized to interest expense over the remaining term of the Amended Credit Agreement and the remaining amount was recorded as interest expense during the
three months ended March 31, 2016
.
8. FAIR VALUE MEASUREMENT
The Company’s valuation techniques and inputs used to measure fair value and the definition of the three levels (Level 1, Level 2 and Level 3) of the fair value hierarchy are disclosed in Part II, Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4—Fair Value Measurement” of the 2015 Annual Report. The Company has not changed the valuation techniques or inputs it uses for its fair value measurement during the
three months ended March 31, 2016
.
Assets and Liabilities Measured on a Recurring Basis
The Company’s restricted cash equivalents that serve as collateral for the Company’s outstanding letters of credit
typically consist of money market funds that are measured at fair value based on quoted prices, which are Level 1 inputs.
The Company’s interest rate swap is measured at fair value using a discounted cash flow analysis that includes the contractual terms, including the period to maturity, and Level 2 observable market-based inputs, including interest rate curves. The fair value of the swap is determined by netting the discounted future fixed cash receipts payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate yield curves. The valuation also considers credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company, which are considered Level 3 inputs; however, as of
March 31, 2016
, the credit risk adjustments, including nonperformance risk, were considered insignificant to the total fair value of the interest rate swap.
The Company’s contingent consideration liabilities are measured at fair value using probability-weighted discounted cash flow analysis for the acquired companies, which are Level 3 inputs.
The following tables present information about the above-referenced assets and liabilities and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of March 31, 2016
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Money market funds
|
$
|
5,627
|
|
|
$
|
5,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap liability
|
(592
|
)
|
|
—
|
|
|
(592
|
)
|
|
—
|
|
Acquisition contingent consideration earn-out liabilities
|
(6,459
|
)
|
|
—
|
|
|
—
|
|
|
(6,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Money market funds
|
$
|
5,627
|
|
|
$
|
5,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap asset
|
165
|
|
|
—
|
|
|
165
|
|
|
—
|
|
Acquisition contingent consideration earn-out liabilities
|
(3,770
|
)
|
|
—
|
|
|
—
|
|
|
(3,770
|
)
|
Level 3 Information
The following table sets forth reconciliations of changes in the fair value of contingent consideration liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Balance as of January 1,
|
$
|
(3,770
|
)
|
|
$
|
(1,400
|
)
|
Settlement of TFS earn-out for year ended 12/31/15
|
1,000
|
|
|
—
|
|
Additional contingent consideration earn-out liability from HSG acquisition on 1/11/16
|
(3,590
|
)
|
|
—
|
|
Change in fair value of contingent consideration earn-out liability from Avantas acquisition
|
660
|
|
|
—
|
|
Change in fair value of contingent consideration earn-out liability from TFS acquisition
|
(697
|
)
|
|
—
|
|
Change in fair value of contingent consideration earn-out liability from HSG acquisition
|
(62
|
)
|
|
—
|
|
Balance as of March 31,
|
$
|
(6,459
|
)
|
|
$
|
(1,400
|
)
|
Assets Measured on a Non-Recurring Basis
The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to its goodwill, indefinite-lived intangible assets, long-lived assets, and equity method investment.
The Company evaluates goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. The Company determines the fair value of its reporting units based on a combination of inputs including the market capitalization of the Company as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. The Company determines the fair value of its indefinite-lived intangible assets using the income approach (relief-from-royalty method) based on Level 3 inputs.
There were no triggering events identified and no indication of impairment of the Company’s goodwill, indefinite-lived intangible assets, long-lived assets, or equity method investment during the
three months ended March 31, 2016
and
2015
.
Fair Value of Financial Instruments
The carrying amount of the Company’s notes payable and revolving credit facility approximate their fair value as the instruments’ interest rates are variable and comparable to rates currently offered for similar debt instruments of comparable maturity. The fair value of the Company’s long-term self-insurance accruals cannot be estimated as the Company cannot reasonably determine the timing of future payments.
9. INCOME TAXES
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of March 31, 2016, the Company is no longer subject to state, local or foreign examinations by tax authorities for years before 2006, and the Company is no longer subject to U.S. federal income or payroll tax examinations for years before 2011. The Company’s tax years 2007, 2008, 2009 and 2010 had been under audit by the Internal Revenue Service (“IRS”) for several years and in 2014, the IRS issued the Company its Revenue Agent Report (“RAR”) and an Employment Tax Examination Report (“ETER”). The RAR proposed adjustments to the Company’s taxable income for 2007-2010 and net operating loss carryforwards from 2005-2006, resulting from the proposed disallowance of certain per diems paid to the Company’s healthcare professionals, and the ETER proposed assessments for additional payroll tax liabilities and penalties for 2009 and 2010 related to the Company’s treatment of certain non-taxable per diem allowances and travel benefits. The positions in the RAR and ETER were mutually exclusive, and contained multiple tax positions, some of which were contrary to each other. The Company filed a Protest Letter for both the RAR and ETER positions in 2014 and the Company received a final determination from the IRS in July 2015 on both the RAR adjustments and ETER assessments, effectively settling these audits with the IRS for
$7,200
(including interest) during the third quarter of 2015. As a result of the settlement, the Company recorded federal income tax benefits of approximately
$12,200
during the quarter ended September 30, 2015 and expects to record the state income tax benefits of approximately
$1,500
by fiscal year 2019, when the various state statutes are projected to lapse.
The IRS has been conducting a separate audit of the Company’s 2011 and 2012 tax years that is focused on income and employment tax issues similar to those raised in the 2007 through 2010 examination. During the quarter ended March 31, 2015, the IRS completed its 2011 and 2012 examination and issued its RAR and ETER to the Company with proposed adjustments to the Company’s taxable income for 2011 and 2012 and net operating loss carryforwards from 2010 and assessments for additional payroll tax liabilities and penalties for 2011 and 2012 related to the Company’s treatment of certain non-taxable per diem allowances and travel benefits. The positions in the RAR and ETER for the 2011 and 2012 years are mutually exclusive and contain multiple tax positions, some of which are contrary to each other. The Company filed a Protest Letter for both the RAR and ETER in April 2015 and expects the 2011 and 2012 years to be at IRS Appeals in 2016. The IRS began an audit of the Company’s 2013 tax year in the quarter ended June 30, 2015. The Company believes its reserves are adequate with respect to all open years.
10. COMMITMENTS AND CONTINGENCIES: LEGAL
From time to time, the Company is involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. Additionally, some of its clients may also become subject to claims, governmental inquiries and investigations and legal actions relating to services provided by the Company’s healthcare professionals. Depending upon the particular facts and circumstances, the Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters. The Company records a liability when management believes an adverse outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated. Significant judgment is required to determine both probability of loss and the estimated amount. The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or other new information, as deemed necessary. With regards to outstanding loss contingencies as of
March 31, 2016
, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations or cash flows.
11. BALANCE SHEET DETAILS
The consolidated balance sheets detail is as follows as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Other current assets:
|
|
|
|
|
Restricted cash
|
|
$
|
11,577
|
|
|
$
|
11,995
|
|
Income taxes receivable
|
|
—
|
|
|
3,687
|
|
Other
|
|
10,071
|
|
|
8,041
|
|
Other current assets
|
|
$
|
21,648
|
|
|
$
|
23,723
|
|
|
|
|
|
|
Fixed assets:
|
|
|
|
|
Furniture and equipment
|
|
$
|
25,345
|
|
|
$
|
23,380
|
|
Software
|
|
101,895
|
|
|
97,962
|
|
Leasehold improvements
|
|
5,599
|
|
|
5,472
|
|
|
|
132,839
|
|
|
126,814
|
|
Accumulated depreciation and amortization
|
|
(79,108
|
)
|
|
(76,680
|
)
|
Fixed assets, net
|
|
$
|
53,731
|
|
|
$
|
50,134
|
|
|
|
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
Trade accounts payable
|
|
$
|
47,419
|
|
|
$
|
53,261
|
|
Subcontractor payable
|
|
50,225
|
|
|
56,177
|
|
Professional liability reserve
|
|
8,075
|
|
|
7,962
|
|
Overdraft
|
|
2,191
|
|
|
124
|
|
Other
|
|
1,211
|
|
|
1,298
|
|
Accounts payable and accrued expenses
|
|
$
|
109,121
|
|
|
$
|
118,822
|
|
|
|
|
|
|
Accrued compensation and benefits:
|
|
|
|
|
Accrued payroll
|
|
$
|
42,602
|
|
|
$
|
21,058
|
|
Accrued bonuses
|
|
14,213
|
|
|
24,476
|
|
Accrued travel expense
|
|
2,969
|
|
|
2,740
|
|
Accrued health insurance reserve
|
|
3,299
|
|
|
3,225
|
|
Accrued workers compensation reserve
|
|
8,242
|
|
|
7,701
|
|
Deferred compensation
|
|
25,933
|
|
|
23,044
|
|
Other
|
|
791
|
|
|
1,457
|
|
Accrued compensation and benefits
|
|
$
|
98,049
|
|
|
$
|
83,701
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
Income taxes payable
|
|
$
|
13,269
|
|
|
$
|
—
|
|
Earn-out liabilities
|
|
4,712
|
|
|
1,660
|
|
Holdback liabilities
|
|
2,297
|
|
|
825
|
|
Other
|
|
3,720
|
|
|
2,889
|
|
Other current liabilities
|
|
$
|
23,998
|
|
|
$
|
5,374
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
Workers’ compensation reserve
|
|
$
|
18,140
|
|
|
$
|
16,899
|
|
Professional liability reserve
|
|
40,168
|
|
|
37,369
|
|
Deferred rent
|
|
12,050
|
|
|
11,826
|
|
Unrecognized tax benefits
|
|
8,166
|
|
|
8,081
|
|
Other
|
|
4,552
|
|
|
3,959
|
|
Other long-term liabilities
|
|
$
|
83,076
|
|
|
$
|
78,134
|
|