CROSS COUNTRY HEALTHCARE, INC. The purpose of the following Management's Discussion and Analysis (MD&A) is to help facilitate the understanding of significant factors influencing the quarterly operating results, financial condition, and cash flows of the Company. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events, or uncertainties that may impact future results. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our financial statements and the accompanying notes to our financial statements, as well as the Item 1A. Risk Factors contained herein. 19 --------------------------------------------------------------------------------
Business Overview
We provide total talent management services, including strategic workforce solutions, contingent staffing, permanent placement and other consultative services for healthcare clients. We recruit and place highly qualified healthcare professionals in virtually every specialty and area of expertise. Our diverse client base includes both clinical and nonclinical settings, servicing acute care hospitals, physician practice groups, outpatient and ambulatory-care centers, nursing facilities, both public schools and charter schools, rehabilitation and sports medicine clinics, government facilities, and homecare. Through our national staffing teams and network of office locations, we offer our workforce solutions and we are able to place clinicians on travel and per diem assignments, local short-term contracts and permanent positions. Our workforce solutions include managed service programs (MSPs), electronic medical record (EMR) transition staffing, recruitment process outsourcing (RPO), internal resource pool (IRP), and other outsourcing and consultative services as described in Item 1. Business in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . By utilizing our various solutions, clients are able to better plan their personnel needs, talent acquisition and management processes, strategically flex and balance their workforce, access quality healthcare personnel, and provide continuity of care for improved patient outcomes. We manage and segment our business based on the nature of the services we offer to our customers. As a result, in accordance with the Segment Reporting Topic of the FASB ASC, we report three business segments - Nurse andAllied Staffing ,Physician Staffing , and Search. ? Nurse andAllied Staffing - Nurse andAllied Staffing represented approximately 89% of our total revenue in the first quarter of 2020. The Nurse andAllied Staffing segment provides workforce solutions and traditional staffing, including temporary and permanent placement of travel nurses and allied professionals, as well as per diem and contract nurses and allied personnel. We also staff healthcare personnel and substitute teachers in public and charter schools. We provide flexible workforce solutions to our healthcare clients through diversified offerings designed to meet their unique needs, including: MSP, optimal workforce solutions (OWS), EMR, IRP and consulting services.
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? Search - Search represented approximately 2% of our total revenue in the first quarter of 2020. Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as RPO. Summary of Operations For the quarter endedMarch 31, 2020 , revenue from services increased 8% year-over-year to$210.1 million , primarily due to a higher volume of travel nurse staffing, and higher average bill rates. The increase in revenue was partially offset by revenue declines in our local staffing and education healthcare services primarily driven by the changing landscape in March from the COVID-19 pandemic. Profitability in the first quarter was impacted by$0.6 million of restructuring costs,$0.7 million of accelerated amortization expense in connection with our rebranding initiative, and$0.5 million of costs incurred related to our applicant tracking system replacement. Net loss attributable to common shareholders was$2.1 million , or a loss of$0.06 per share. For the three months endedMarch 31, 2020 , we generated cash flow from operating activities of$17.2 million and repaid a net of$3.3 million on our senior-secured asset-based credit facility (ABL). Due to the uncertainty from COVID-19, as a precautionary measure we opted to hold more cash than we might have otherwise. As ofMarch 31, 2020 , we had$12.6 million of cash and cash equivalents, and availability under the ABL of$119.0 million , with$67.6 million of borrowings drawn under our ABL, and$19.6 million of undrawn letters of credit outstanding, leaving$31.8 million available for borrowing.
COVID Response
Early in March, we experienced an increase in demand for crisis assignments from our customers as a result of the COVID-19 pandemic impacting theU.S. Beginning in March and continuing into the second quarter, we have placed more than a thousand nurses on COVID-19 assignments with the majority going to our MSP partners in hot spots such asNew York andWashington . As these assignments typically require higher compensation to the healthcare professionals, we have seen higher than normal average bill rates. Since late in the first quarter, the Company has experienced both positive and negative impacts on its business including a significant number of crisis assignments as well as the cancellation of non-COVID-19 assignments by 20 -------------------------------------------------------------------------------- certain facilities due to low census and deferred elective procedures. Additionally, sincemid-March 2020 , schools have remained closed and as a result we are seeing a sharp decline in revenue from our education business that is being partially offset by teletherapy services for the same clients. Overall, demand remains volatile, as orders initially surged due to the crisis needs, and have since trended downward as clients have reduced their contingent labor based on their unique situations. As part of our COVID-19 response, we established a cross-functional crisis team with representation from all parts of our business to ensure rapid response to our customers' needs. As a result of the mandated shelter in place orders, our more than 1,600 employees were successfully able to work from home with minimal disruption. Generally, travel has been suspended and we have altered the way we communicate through the increased use of videoconferencing. Our response to this pandemic has helped us identify better ways to execute our client-facing and back-office operations which we expect to benefit from as we move forward. While the impact on the first quarter was not considered significant for us, indications are that our second quarter's results will be subject to more volatility. Due to the uncertainty across the healthcare industry, we are unable to predict the overall impact on our business for the second quarter. As the country resumes normal operations as part of the phased in recovery, however, we expect demand for these services to rebound in the second quarter. We are proactively working with our customers to address their crisis needs, as well as to plan for the recovery of their normal operations. We believe our liquidity remains high as we have taken steps to preserve cash, ending the quarter with cash of$12.6 million and$31.8 million available for borrowing. In addition, we do not expect the future impacts of COVID-19 to have a significant impact on our ability to maintain compliance with our financial covenants under our revolving credit facility. We had a very successful experience with our employees working remotely while the shelter in place orders remain in effect with minimal disruption. We believe the combination of the successful first quarter launch ofCross Country Marketplace , our proprietary on-demand staffing platform, and the ability of our employees to efficiently work remotely will allow us to greatly reduce our office footprint throughout the country. We also remain on target for full implementation of our applicant tracking system in the third quarter of 2020, which we believe will create further efficiencies. Finally, we continue to evaluate our cost structure and have taken steps in the second quarter to realize additional cost savings through further centralization and automation efforts.
Refer to Item 1A. Risk Factors for further discussion about potential additional risks and uncertainties.
See Results of Operations, Segment Results, and Liquidity and Capital Resources sections that follow for further information.
Operating Metrics
We evaluate our financial condition by tracking operating metrics and financial results specific to each of our segments. Key operating metrics include hours worked, days filled, number of FTEs, revenue per FTE, and revenue per day filled. Other operating metrics include number of open orders, candidate applications, contract bookings, length of assignment, bill and pay rates, and renewal and fill rates, number of active searches, and number of placements. These operating metrics are representative of trends that assist management in evaluating business performance. Some of the segment financial results analyzed include revenue, operating expenses, and contribution income. In addition, we monitor cash flow as well as operating and leverage ratios to help us assess our liquidity needs. Business Segment Business Measurement Nurse andAllied Staffing FTEs represent the average number of Nurse andAllied Staffing contract personnel on a full-time equivalent basis. Average revenue per FTE per day is calculated by dividing the Nurse andAllied Staffing revenue per FTE by the number of days worked in the respective periods. Nurse andAllied Staffing revenue also includes revenue from the permanent placement of nurses.Physician Staffing Days filled is calculated by dividing the total hours invoiced during the period, including an estimate for the impact of accrued revenue, by 8 hours. Revenue per day filled is calculated by dividing revenue as reported by days filled for the period presented. 21
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Results of Operations
The following table summarizes, for the periods indicated, selected condensed
consolidated statements of operations data expressed as a percentage of revenue.
Our historical results of operations are not necessarily indicative of future
operating results.
Three Months Ended
March 31,
2020 2019
Revenue from services 100.0 % 100.0 %
Direct operating expenses 76.4 75.3
Selling, general and administrative expenses 21.8 23.6
Bad debt expense 0.3 0.1
Depreciation and amortization 1.6 1.5
Acquisition and integration-related costs - 0.2
Restructuring costs 0.3 0.6
Loss from operations (0.4) (1.3)
Interest expense 0.4 0.7
Loss on early extinguishment of debt - 0.2
Other income, net - -
Loss before income taxes (0.8) (2.2)
Income tax expense (benefit) - (1.5)
Consolidated net loss (0.8) (0.7)
Less: Net income attributable to noncontrolling interest in subsidiary
0.2 0.2
Net loss attributable to common shareholders (1.0) % (0.9) %
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Comparison of Results for the Three Months Ended
Three Months Ended March 31,
Increase
(Decrease) Increase (Decrease)
2020 2019 $ %
(Amounts in thousands)
Revenue from services $ 210,064 $ 195,171 $ 14,893 7.6 %
Direct operating expenses 160,461 146,917 13,544 9.2 %
Selling, general and administrative expenses 45,881 46,036 (155) (0.3) %
Bad debt expense 539 270 269 99.6 %
Depreciation and amortization 3,296 2,984 312 10.5 %
Acquisition and integration-related costs 77 512 (435) (85.0) %
Restructuring costs 564 1,140 (576) (50.5) %
Loss from operations (754) (2,688) 1,934 71.9 %
Interest expense 867 1,422 (555) (39.0) %
Loss on early extinguishment of debt - 360 (360) (100.0) %
Other income, net (31) (82) 51 62.2 %
Loss before income taxes (1,590) (4,388) 2,798 63.8 %
Income tax expense (benefit) 178 (3,012) 3,190 105.9 %
Consolidated net loss (1,768) (1,376) (392) (28.5)
Less: Net income attributable to noncontrolling
interest in subsidiary 321 391 (70) (17.9) %
Net loss attributable to common shareholders
(18.2) %
Revenue from services
Revenue from services increased 7.6%, to $210.1 million for the three months
ended March 31, 2020 , as compared to $195.2 million for the three months ended
March 31, 2019 , reflecting higher revenue growth in all three segments. Revenue
for the three months ended March 31, 2020 was negatively impacted by COVID-19
due to suspended services resulting from school closures and, to a lesser
extent, volume declines in local staffing. See further discussion in Segment
Results.
Direct operating expenses
Direct operating expenses are comprised primarily of field employee compensation
and independent contractor expenses, housing expenses, travel expenses, and
related insurance expenses. Direct operating expenses increased $13.5 million or
9.2%, to $160.5 million for the three months ended March 31, 2020 , as compared
to $146.9 million for the three months ended March 31, 2019 . As a percentage of
total revenue, direct operating expenses increased to 76.4% compared to 75.3% in
the prior year period primarily due to average pay rates rising faster than bill
rates in Nurse and Allied Staffing .
Selling, general and administrative expenses
Selling, general and administrative expenses decreased 0.3%, to$45.9 million for the three months endedMarch 31, 2020 , as compared to$46.0 million for the three months endedMarch 31, 2019 . As a percentage of total revenue, selling, general and administrative expenses decreased to 21.8% for the three months endedMarch 31, 2020 as compared to 23.6% for the three months endedMarch 31, 2019 , primarily as a result of improved operating leverage.
Depreciation and amortization expense
Depreciation and amortization expense for the three months endedMarch 31, 2020 increased to$3.3 million as compared to$3.0 million for the three months endedMarch 31, 2019 . Amortization expense increased due to accelerated amortization of trade names in our Nurse andAllied Staffing segment, associated with our rebranding initiatives. As a percentage of revenue, 23 --------------------------------------------------------------------------------
depreciation and amortization expense was 1.6% for the three months ended
Acquisition and integration-related costs
Acquisition and integration-related costs include costs for prior acquisitions, costs incurred for potential transactions, and accretion and valuation adjustments on our contingent consideration liability related to the Mediscan acquisition. In the first quarter of 2020, the final earnout amount related to the contingent consideration was determined. See Note 7 - Debt.
Restructuring costs
Restructuring costs were primarily comprised of employee termination costs, ongoing lease costs related to the Company's strategic reduction of its real estate footprint, and reorganization costs as part of our planned cost savings initiatives, and totaled$0.6 million during the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2019 , restructuring costs totaled$1.1 million and were primarily comprised of severance costs incurred in connection with our cost savings initiatives.
Interest expense
Interest expense was$0.9 million for the three months endedMarch 31, 2020 as compared to$1.4 million for the three months endedMarch 31, 2019 , due to lower average borrowings and a lower effective rate. The effective interest rate on our borrowings was 4.4% for the three month period endedMarch 31, 2020 compared to 5.8% for the three months endedMarch 31, 2019 .
Loss on early extinguishment of debt
Loss on early extinguishment of debt was$0.4 million for the three months endedMarch 31, 2019 , relating to the write-off of debt issuance costs in connection with a reduction in borrowing capacity under the revolving credit facility, and an optional principal prepayment of$7.5 million made on our term loan in the first quarter of 2019. There were no similar charges for the three months endedMarch 31, 2020 .
Income tax expense
Income tax expense was$0.2 million for the three months endedMarch 31, 2020 , including immaterial discrete items. For the three months endedMarch 31, 2019 , we recorded an income tax benefit of$3.0 million , including the impact of discrete items, and$3.2 million excluding discrete items. As a result of the Company's valuation allowance on substantially all of its domestic deferred tax assets, income tax expense for the three months endedMarch 31, 2020 was primarily impacted by international and state taxes. The Company did not maintain a material valuation allowance during the three months endedMarch 31, 2019 and as a result, income tax expense for the three months endedMarch 31, 2019 was primarily impacted by the non-deductibility of certain per diem expenses, the officers' compensation limitation, and international and state taxes. See Note 13 - Income Taxes to our condensed consolidated financial statements. 24
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Segment Results
Information on operating segments and a reconciliation to (loss) income from operations for the periods indicated are as follows:
Three Months Ended
March 31,
2020 2019
(amounts in thousands)
Revenue from services:
Nurse and Allied Staffing $ 188,233 $ 175,637
Physician Staffing 18,181 16,159
Search 3,650 3,375
$ 210,064 $ 195,171
Contribution income (loss):
Nurse and Allied Staffing $ 14,157 $ 14,296
Physician Staffing 631 405
Search (335) (423)
14,453 14,278
Corporate overhead 11,270 12,330
Depreciation and amortization 3,296 2,984
Acquisition and integration-related costs 77 512
Restructuring costs 564 1,140
Loss from operations $ (754) $ (2,688)
In the second quarter of 2019, the Company merged its permanent search
recruitment brands. As a result, for the three months ended March 31, 2019 , $0.4
million of revenue and $0.1 million of contribution income were reclassified
from Nurse and
Allied Staffing to Search to conform to the current period presentation.
Certain statistical data for our business segments for the periods indicated are
as follows:
Three Months Ended
March 31, March 31, Percent
2020 2019 Change Change
Nurse and Allied Staffing statistical data:
FTEs 7,145 7,017 128 1.8 %
Average Nurse and Allied Staffing revenue
per FTE per day $ 290 $ 278 12 4.3 %
Physician Staffing statistical data:
Days filled 10,199 10,280 (81) (0.8) %
Revenue per day filled $ 1,783 $ 1,572 211 13.4 %
See definition of Business Measurement under the Operating Metrics section of our Management's Discussion and Analysis.
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Segment Comparison - Three Months Ended
Nurse andAllied Staffing Revenue from Nurse andAllied Staffing increased$12.6 million , or 7.2%, to$188.2 million for the three months endedMarch 31, 2020 , compared to$175.6 million for the three months endedMarch 31, 2019 , primarily due to the continued increase in the number of FTEs and average bill rates throughout the quarter. Revenue for the three months endedMarch 31, 2020 was negatively impacted by COVID-19 due to suspended services resulting from school closures and, to a lesser extent, volume declines in local staffing. Contribution income from Nurse andAllied Staffing decreased$0.1 million or 1.0%, to$14.2 million for the three months endedMarch 31, 2020 , compared to$14.3 million for the three months endedMarch 31, 2019 . As a percentage of segment revenue, contribution income margin was 7.5% for the three months endedMarch 31, 2020 , compared to 8.1% for the three months endedMarch 31, 2019 . The average number of Nurse and Allied Staffing FTEs on contract during the three months endedMarch 31, 2020 increased 1.8% from the three months endedMarch 31, 2019 , reflecting an increase in travel nurse staffing partially offset by local staffing. The average Nurse andAllied Staffing revenue per FTE per day increased 4.3%, reflecting higher average bill rates related to increased pricing.
Revenue fromPhysician Staffing increased$2.0 million , or 12.5%, to$18.2 million for the three months endedMarch 31, 2020 , compared to$16.2 million for the three months endedMarch 31, 2019 , primarily due to higher bill rates due to mix as well as one additional day in the quarter. Contribution income fromPhysician Staffing increased$0.2 million , or 55.8% to$0.6 million for the three months endedMarch 31, 2020 , compared to$0.4 million for the three months endedMarch 31, 2019 . As a percentage of segment revenue, contribution income was 3.5% for the three months endedMarch 31, 2020 , compared to 2.5% for the three months endedMarch 31, 2019 , driven by higher revenue and lower selling, general and administrative expenses. Total days filled forPhysician Staffing for the three months endedMarch 31, 2020 were 10,199 as compared with 10,280 in the prior year. Revenue per day filled was$1,783 as compared with$1,572 in the prior year, due to a shift in the mix of business. Search Revenue from Search increased$0.3 million , or 8.1%, to$3.7 million for the three months endedMarch 31, 2020 , compared to$3.4 million for the three months endedMarch 31, 2019 , due to an increase in executive search and RPO revenue, partially offset by declines in physician search.
Contribution loss from Search was
Corporate Overhead
Corporate overhead includes unallocated executive leadership and other centralized corporate functional support costs such as finance, IT, legal, human resources, and marketing, as well as public company expenses and corporate-wide projects (initiatives). Corporate overhead decreased to$11.3 million for the three months endedMarch 31, 2020 , from$12.3 million for the three months endedMarch 31, 2019 , due to lower consulting and other professional service fees, as well as the impact of our cost savings initiatives. As a percentage of consolidated revenue, corporate overhead was 5.4% for the three months endedMarch 31, 2020 and 6.3% for the three months endedMarch 31, 2019 .
Transactions with Related Parties
See Note 14 - Related Party Transactions to our condensed consolidated financial statements.
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Liquidity and Capital Resources
AtMarch 31, 2020 , we had$12.6 million in cash and cash equivalents and$67.6 million of borrowings drawn under our senior secured asset-based revolving credit facility. Working capital decreased by$6.3 million to$91.6 million as ofMarch 31, 2020 , compared to$97.9 million as ofDecember 31, 2019 . As ofMarch 31, 2020 , our days' sales outstanding, net of amounts owed to subcontractors, was 56 days representing a 2 day improvement fromDecember 31, 2019 . Our operating cash flow constitutes our primary source of liquidity, and historically, has been sufficient to fund our working capital, capital expenditures, internal business expansion, and debt service, including our commitments as described in the Commitments table in our Form 10-K for the year endedDecember 31, 2019 . Although there is uncertainty related to the anticipated impact of COVID-19 on our future results, we expect to meet our future needs from a combination of cash on hand, operating cash flows, and funds available through the ABL. See debt discussion which follows.
Net cash provided by operating activities was
Net cash used in investing activities was$1.0 million in the three months endedMarch 31, 2020 , compared to$1.2 million in the three months endedMarch 31, 2019 . Net cash used in both periods was for capital expenditures, primarily related to the project to replace our applicant tracking system for our travel nurse staffing and for acquisition-related settlements in the three months endedMarch 31, 2019 . Net cash used in financing activities during the three months endedMarch 31, 2020 was$4.6 million , compared to$9.3 million during the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , we used cash to repay our ABL of$3.3 million ,$0.6 million for income taxes on share-based compensation,$0.6 million for noncontrolling shareholder payments, and$0.1 million of contingent consideration. During the three months endedMarch 31, 2019 , we used cash to make an optional principal prepayment on our term loan of$7.5 million and paid$0.6 million in debt issuance related to an amendment to our prior senior credit facility. We also used cash to pay$0.8 million for income taxes on share-based compensation,$0.3 million for noncontrolling shareholder payments, and$0.1 million of contingent consideration.
Debt
2019 ABL Credit Agreement
At
As ofMarch 31, 2020 , the interest rate spreads and fees under the Loan Agreement were based on LIBOR plus 2.00% for the revolving portion of the borrowing base and LIBOR plus 4.00% on the Supplemental Availability. The Base Rate (as defined by the Loan Agreement) margins would have been 1.00% and 3.00%, respectively, for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on our excess availability under the revolving credit facility. In addition, the facility is subject to an unused fee, letter of credit fees, and an administrative fee. The Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum fixed charge coverage ratio. We were in compliance with the fixed charge coverage ratio covenant as ofMarch 31, 2020 . Stockholders' Equity
See Note 12 - Stockholders' Equity to our condensed consolidated financial statements.
Commitments and Off-Balance Sheet Arrangements
As ofMarch 31, 2020 , we do not have any off-balance sheet arrangements. Our commitments over the next five years did not change materially fromDecember 31, 2019 . See Note 12 - Contingencies to our condensed consolidated financial statements. Critical Accounting Policies and Estimates
Our critical accounting policies and estimates remain consistent with those
reported in our Annual Report on Form 10-K for the year ended
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Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
as discussed in Note 2 - Summary of Significant Accounting Policies and Note 3 -
Customer Contracts to our condensed consolidated financial statements.
Recent Accounting Pronouncements
See Note 15 - Recent Accounting Pronouncements to our condensed consolidated financial statements.
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